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: June 30, 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 August 14, 2001
Common stock, $1 par value 8,393,783
KATY INDUSTRIES, INC.
FORM 10-Q
June 30, 2001
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets June 30, 2001
and December 31, 2000 (unaudited) 2,3
Condensed Consolidated Statements of Operations Three
and Six Months Ended June 30, 2001 and 2000
(unaudited) 4
Condensed Consolidated Statements of Stockholders'
Equity Six Months ended June 30, 2001 and Twelve
Months ended December 31, 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows Six
Months Ended June 30, 2001 and 2000 (unaudited) 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Discussion about
Market Risk 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
-1-
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
June 30, December 31,
2001 2000
--------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,522 $ 1,810
Accounts receivable, net 74,037 84,896
Inventories 89,023 103,068
Deferred income taxes 7,800 7,544
Other current assets 7,318 5,769
Net current assets of operations to be disposed of 170 941
--------- ---------
Total current assets 179,870 204,028
--------- ---------
OTHER ASSETS:
Cost in excess of net assets acquired 15,743 39,500
Other intangibles 34,241 47,214
Deferred income taxes 1,902 --
Miscellaneous 11,487 6,900
Net noncurrent assets of operations to be disposed of 18,038 16,471
--------- ---------
Total other assets 81,411 110,085
--------- ---------
PROPERTIES:
Land and improvements 3,711 3,789
Buildings and improvements 23,203 23,273
Machinery and equipment 170,387 166,414
--------- ---------
Accumulated depreciation (73,460) (61,922)
--------- ---------
Net properties 123,841 131,554
--------- ---------
$ 385,122 $ 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
June 30, December 31,
2001 2000
--------- ------------
CURRENT LIABILITIES:
Accounts payable $ 45,985 $ 53,553
Accrued compensation 7,120 6,038
Accrued expenses 34,357 36,112
Accrued interest and taxes 1,787 3,523
Current maturities, long term debt 6,066 133,067
--------- ---------
Total current liabilities 95,315 232,293
--------- ---------
LONG TERM DEBT, less current maturities - Note 4 83,847 771
--------- ---------
OTHER LIABILITIES 6,792 7,609
--------- ---------
EXCESS OF ACQUIRED NET
ASSETS OVER COST 940 1,792
--------- ---------
DEFERRED INCOME TAXES -- 19,969
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 7
PREFERRED INTEREST OF SUBSIDIARY 16,400 32,900
--------- ---------
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock, $100 par value,
authorized 1,200,000 shares, issued 700,000 shares - Note 5 65,992 --
Common stock, $1 par value; authorized
35,000,000 and 25,000,000 shares, respectively;
issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 57,837 51,127
Accumulated other comprehensive income (4,103) (2,757)
Other adjustments (373) (518)
Retained earnings 72,709 112,697
Treasury stock, at cost, 1,428,421
and 1,427,446 shares, respectively (20,056) (20,038)
--------- ---------
Total stockholders' equity 181,828 150,333
--------- ---------
$ 385,122 $ 445,667
========= =========
See Notes to Condensed Consolidated Financial Statements.
-3-
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 117,499 $ 134,617 $ 233,184 $ 268,766
Cost of goods sold 100,840 107,736 199,748 212,181
--------- --------- --------- ---------
Gross profit 16,659 26,881 33,436 56,585
Selling, general and administrative 21,877 24,704 44,535 48,871
Impairment of long-lived assets 35,111 -- 35,957 --
Severance & restructuring charges 2,719 -- 4,036 --
--------- --------- --------- ---------
Operating (loss) income (43,048) 2,177 (51,092) 7,714
Equity in income (loss) of operations
to be disposed of 210 17 (564) (627)
Interest and other, net (3,328) (3,510) (6,730) (6,756)
--------- --------- --------- ---------
(Loss) income before provision for income taxes, distributions on
preferred interest of subsidiary, and extraordinary loss on
early extinguishment of debt (46,166) (1,316) (58,386) 331
Benefit from (provision for) income taxes 16,159 460 20,435 (117)
--------- --------- --------- ---------
(Loss) income before distributions on
preferred interest of subsidiary and extraordinary
loss on early extinguishment of debt (30,007) (856) (37,951) 214
Distributions on preferred interest of
subsidiary (net of tax) (427) (426) (855) (851)
--------- --------- --------- ---------
Loss from continuing operations before extraordinary
loss on early extinguishment of debt (30,434) (1,282) (38,806) (637)
Extraordinary loss on early extinguishment of debt (net of tax) (1,182) -- (1,182) --
--------- --------- --------- ---------
Net loss ($ 31,616) $ (1,282) ($ 39,988) ($ 637)
========= ========= ========= =========
Earnings per share - Basic
Loss from continuing operations ($ 2.84) ($ 0.15) ($ 3.84) ($ 0.08)
Extraordinary loss on early extinguishment of debt (0.14) -- (0.14) --
--------- --------- --------- ---------
Net loss ($ 2.98) ($ 0.15) ($ 3.98) ($ 0.08)
========= ========= ========= =========
Earnings per share - Diluted
Loss from continuing operations ($ 2.84) ($ 0.15) ($ 3.84) ($ 0.08)
Extraordinary loss on early extinguishment of debt (0.14) -- (0.14) --
--------- --------- --------- ---------
Net loss ($ 2.98) ($ 0.15) ($ 3.98) ($ 0.08)
========= ========= ========= =========
Average shares outstanding (thousands)
Basic 8,394 8,405 8,394 8,410
========= ========= ========= =========
Diluted 8,394 8,405 8,394 8,410
========= ========= ========= =========
Dividends paid per share - common stock $ 0.000 $ 0.075 $ 0.075 $ 0.150
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
-4-
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of dollars, except per share data)
(Unaudited)
Convertible Common
Preferred Stock Stock Other Compre-
Additional Compre- Accumulated hensive
Number of Par Number of Par Paid in hensive Other Retained Treasury Income
Shares Value Shares Value Capital Loss Adjustments Earnings Stock (Loss)
--------- --------- --------- ------- ------- -------- ------------ -------- -------- ---------
Balance, January 1, 2000 - - 9,822,204 $9,822 $51,127 $ (434) $(1,010) $120,689 $(19,883)
Net loss - - - - - - - (5,458) - $ (5,458)
Foreign currency
translation
adjustment - - - - - (2,323) - - - (2,323)
--------
Comprehensive income $ (7,781)
========
Common stock dividends - - - - - - - (2,520) -
Issuance of shares under
Stock Option Plan - - - - - - - - 63
Other issuance of shares - - - - - - 492 (14) 44
Purchase of Treasury
Shares - - - - - - - - (262)
-------- -------- --------- ------ ------- ------- ------- -------- --------
Balance, December 31,
2000 - - 9,822,204 $9,822 $51,127 $(2,757) $ (518) $112,697 $(20,038)
- - - - - - - - -
Net loss - - - - - - - (39,988) - $(39,988)
--------
Foreign currency
translation
adjustment - - - - - (1,346) - - - (1,346)
--------
Comprehensive loss $(41,334)
========
Issuance of convertible
preferred stock 700,000 70,000 - - - - - - -
Direct costs related to
issuance of convertible
preferred stock - (4,008) - - - - - - -
Redemption of preferred
interest in subsidiary - - - - 6,710 - - - -
Other issuance of shares - - - - - - 145 - (18)
-------- -------- --------- ------ ------- ------- ------- -------- --------
Balance, June 30, 2001 700,000 $ 65,992 9,822,204 $9,822 $57,837 $(4,103) $ (373) $ 72,709 $(20,056)
======== ======== ========= ====== ======= ======= ======= ======== -=======
See Notes to Consolidated Financial Statements
-5-
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Thousands of Dollars)
(Unaudited)
2001 2000
--------- ---------
Cash flows from operating activities:
Net (loss) income $ (39,988) $ (637)
Depreciation and amortization 12,280 11,906
Impairment of long-lived assets 35,957 --
Net changes in assets and liabilities, other (9,747) (17,328)
--------- ---------
Net cash flows (used in) provided by
operating activities (1,498) (6,059)
--------- ---------
Cash flows from investing activities:
Capital expenditures (5,844) (8,464)
Proceeds from sale of assets 194 11
Collections of notes receivable 90 127
Proceeds from sale of subsidiaries 1,576
--------- ---------
Net cash flows used in investing activities (3,984) (8,326)
--------- ---------
Cash flows from financing activities:
Net borrowings on Former Credit Agreement, prior to Recapitalization 11,300 9,965
Repayment of borrowings under Former Credit Agreement at Recapitalization (144,300) --
Proceeds on initial borrowings from New Credit Agreement at Recapitalization 93,211 --
Net borrowings on New Credit Agreement, following Recapitalization (4,100) --
Fees and costs associated with New Credit Agreement (6,507) --
Proceeds from issuance of Convertible Preferred Stock 70,000 --
Direct costs related to issuance of Convertible Preferred Stock (4,008) --
Redemption of preferred interest of subsidiary (9,900)
Payment of dividends (630) (1,262)
Purchase of treasury shares -- (262)
Other -- 83
--------- ---------
Net cash flows provided by financing activities 5,066 8,524
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 3 (81)
Net decrease in cash and cash equivalents (413) (5,942)
Cash and cash equivalents, beginning of period 2,459 10,643
--------- ---------
Cash and cash equivalents, end of period 2,046 4,701
Cash of discontinued operations and operations
to be disposed of (524) (745)
--------- ---------
Cash and cash equivalents of continuing operations $ 1,522 $ 3,956
========= =========
See Notes to Condensed Consolidated Financial Statements.
-6-
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
(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 does exercise significant influence are reported using the equity
method. The condensed consolidated financial statements at June 30, 2001 and
December 31, 2000 and for the three and six month periods ended June 30, 2001
and June 30, 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 and notes thereto, should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
Recently Issued Accounting Pronouncement
- ----------------------------------------
In June 2001, the Financial Accounting Standards Board authorized the
issuance of Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001. SFAS No. 141 requires
intangible assets to be recognized if they arise from contractual or legal
rights or are "separable", i.e., it is feasible that they may be sold,
transferred, licensed, rented, exchanged or pledged. As a result, it is likely
that more intangible assets will be recognized under SFAS No. 141 than its
predecessor, APB Opinion No.16 although in some instances previously recognized
intangibles will be subsumed into goodwill.
Under SFAS No. 142, goodwill will no longer be amortized on a straight
line basis over its estimated useful life, but will be tested for impairment on
an annual basis and whenever indicators of impairment arise. The goodwill
impairment test, which is based on fair value, is to be performed on a reporting
unit level. A reporting unit is defined as an operating segment determined in
accordance with SFAS No. 131 or one level lower. Goodwill will no longer be
allocated to other long-lived assets for impairment testing under SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Additionally, goodwill on equity method investments will no
longer be amortized; however, it will continue to be tested for impairment in
accordance with Accounting Principles Board Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. Under SFAS No. 142 intangible assets
with indefinite lives will not be amortized. Instead they will be carried at the
lower cost or market value and tested for impairment at least annually. All
other recognized intangible assets will continue to be amortized over their
estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 although goodwill on business combinations consummated after July 1, 2001
will not be amortized. On adoption the company may need to record a cumulative
effect adjustment to reflect the impairment of previously recognized intangible
assets. In addition, goodwill on prior business combinations will cease to be
amortized. Had the company adopted SFAS No. 142 at January 1, 2000 the company
would not have recorded a goodwill amortization charge of $1.3 million, which
excludes impairments of goodwill recognized during 2001 of $33.8 million and
amortization of negative goodwill of $0.9 million. The Company is unable at this
time to determine the impact that these Statements will have on intangible
assets at the time of adoption in the first quarter of 2002, or whether a
cumulative effect adjustment will be required upon adoption. During the second
quarter of 2001, the Company recorded an impairment of $33.0 million on the
long-lived assets of it mop, broom and brush division, as discussed in Note 3.
However, even considering this impairment, the terms of the recently completed
Recapitalization indicate that the fair value of the Company may be less than
the carrying value represented on the condensed consolidated balance sheets.
Therefore, the Company recognizes the possibility of impairments of goodwill and
certain intangibles upon adoption in the first quarter of 2002.
-7-
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.
Reclassifications
- -----------------
Certain amounts from prior years have been reclassified to conform to
the 2001 financial statement presentation.
In May 2000, the Emerging Issues Task Force ("EITF), a subcommittee of
the FASB, issued EITF No. 00-10 "Accounting for Shipping and Handling Fees and
Costs." EITF No. 00-10 requires that amounts billed to customers related to
shipping and handling costs be classified as revenue and all expenses related to
shipping and handling be classified as cost of goods sold. Historically, the
Company has in general classified freight out expenses and certain warehousing
costs as selling costs. Net Sales, Cost of Goods Sold and Selling General and
Administrative have been reclassified to effect this change. The impact of the
reclassificaiton is as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- -------------------------
(Thousands of dollars)
2001 2000 2001 2000
-------- -------- -------- --------
Sales (96) (132) (146) (273)
Cost of goods sold 10,843 11,539 21,709 23,747
Selling, General and Administrative (10,747) (11,407) (21,563) (23,474)
Operations to be Disposed Of
- ----------------------------
The historical operating results for "Operations to be Disposed Of"
have been segregated as "Equity in income (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" or "Net noncurrent assets of 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:
June 30, December 31,
2001 2000
-------- ------------
(Thousands of Dollars)
Raw materials $35,890 $ 38,736
Work in process 3,300 3,269
Finished goods 49,833 61,063
------- --------
$89,023 $103,068
======= ========
At June 30, 2001 and December 31, 2000, 37% and 33% respectively, of
the Company's inventories were 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 June 30, 2001 and $1.7
million at December 31, 2000.
During the second quarter of 2001, Katy recorded $2.1 million of
inventory valuation adjustments, which resulted from the impact of lower sales
or product discontinuances during the first half of 2001, and management
strategies to reduce SKU's and monetize aged inventory. During the first quarter
of 2001, Katy recorded $3.3 million of inventory valuation adjustments
associated with the exit from the electrical licensed branded product lines.
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 and convertible preferred stock, have been included in the
calculation of weighted average shares outstanding under the treasury stock
method. There was no dilutive impact on earnings for the three and six
-8-
months periods ended June 30, 2001 and June 30, 2000, respectively, as a result
of net losses reported for those periods.
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(Thousands of Dollars, Except Per Share Data)
2001 2000 2001 2000
-------- -------- -------- --------
Loss before extraordinary item ($30,434) ($ 1,282) ($38,806) ($ 637)
Gain on early redemption of preferred interest
of subsidiary 6,600 -- 6,600 --
-------- -------- -------- --------
Loss before extraordinary item, available to
to common shareholders (23,834) (1,282) (32,206) (637)
Extraordinary loss on early extinguishment
--------
of debt (net of tax) (1,182) -- (1,182) --
-------- -------- -------- --------
Net loss available to common shareholders ($25,016) ($ 1,282) ($33,388) ($ 637)
======== ======== ======== ========
Earnings Per Share - Basic
Weighted average shares (thousands) 8,394 8,405 8,394 8,410
Per share amount:
Loss before extraordinary item ($ 2.84) ($ 0.15) ($ 3.84) ($ 0.08)
Extraordinary loss on early extinguishment
of debt (0.14) -- (0.14) --
-------- -------- -------- --------
Net loss available to common shareholders ($ 2.98) ($ 0.15) ($ 3.98) ($ 0.08)
======== ======== ======== ========
Effect of potentially dilutive securities
Options -- -- -- --
Convertible Preferred Stock -- N/A -- N/A
Earnings Per Share - Diluted
Weighted average shares (thousands) 8,394 8,405 8,394 8,410
Per share amount:
Loss before extraordinary item ($ 2.84) ($ 0.15) ($ 3.84) ($ 0.08)
Extraordinary loss on early extinguishment
of debt (0.14) -- (0.14) --
-------- -------- -------- --------
Net loss available to common shareholders ($ 2.98) ($ 0.15) ($ 3.98) ($ 0.08)
======== ======== ======== ========
(2) Recapitalization
On June 28, 2001, Katy announced that it had completed a
recapitalization of the Company (referred to as the "Recapitalization"). Katy
had reached a definitive agreement on June 2, 2001 with KKTY Holding Company,
LLC. ("KKTY"), an affiliate of Kohlberg Investors IV, L.P. ("Kohlberg") for the
recapitalization. On June 28, 2001, 1) Katy shareholders approved proposals to
effectuate the transaction at their annual meeting, including classification of
the board of directors into two classes with staggered terms, and 2) Katy, KKTY
and a syndicate of banks agreed to a new credit facility (referred to as the"New
Credit Agreement") to finance the transaction and the future operations of Katy.
Under the terms of the Recapitalization, directors designated by KKTY represent
a majority of Katy's Board of Directors. Pursuant to the shareholder vote at the
annual meeting, four of the elected directors are considered Class I directors,
and were elected for one year terms. These directors include C. Michael Jacobi,
the new President and CEO, and three directors who were not designated by KKTY.
Five of the elected directors are considered Class II directors, and will serve
a two year term. All of the Class II directors are designees of KKTY.
Under the terms of the Recapitalization, KKTY purchased from Katy
700,000 shares of newly issued preferred stock, $100 par value per share
(referred to as the "Convertible Preferred Stock"), which is convertible into
11,666,666 common shares, for an aggregate purchase price of $70.0 million. See
Note 5, Convertible Preferred Stock, for a description of these securities. The
Recapitalization allowed Katy to retire obligations it had under its former
revolving credit agreement (referred to as the "Former Credit Agreement"), which
was agented by Bank of America. In connection with the Recapitalization, Katy
entered into a new credit facility
-9-
(referred to as the "New Credit Agreement"), agented by Bankers Trust Company.
Also in connection with the Recapitalization, the Company 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, plus accrued distributions thereon, which had a stated value prior to
the Recapitalization of $32.9 million. Katy utilized approximately $10.2 million
of the proceeds from the issuance of the Convertible Preferred Stock for this
purpose. The difference between the amount paid on redemption and the stated
value of preferred interest redeemed ($6.6 million) was recognized as increase
to Additional Paid in Capital on the Condensed Consolidated Balance Sheets at
June 30, 2001. The holder of the remaining preferred units will retain
approximately 50% of the preferred interest, or a stated value of $16.4 million.
Following is summary of the sources and uses of funds involved at the
consummation of the Recapitalization:
(Thousands of dollars)
Sources:
-------
Purchase of Convertible Preferred Stock $ 70,000
Borrowings under the New Credit Agreement 93,211
--------
$163,211
========
Uses:
----
Paydown of obligations under the Former Credit Agreement $144,924
Purchase of one-half of preferred interest of subsidiary
at a discount 10,222
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
(3) Impairments of Long-Lived Assets
During the second quarter of 2001, the Company recorded an impairment
of certain long-lived assets, including goodwill and certain intangible assets,
of its mop, broom and brush division. The division has experienced consistently
worsening operating results for a number of periods, causing the Company to
evaluate the division for impairment. While the Company has plans to improve the
division's performance, current sales levels and operating results do not
support the pre-impairment carrying value of certain long-lived assets and would
not be recoverable through forecasted future cash flows. A determination of the
division's fair value was made using the income approach, specifically, a
discounted cash flow analysis using the same cash flow stream used to initially
determine that an impairment existed. The adjustment to record at fair value
amounted to a reduction of goodwill amounting to $21.6 million and a reduction
to other intangible assets of $11.4 million, for a total reduction of the
division's carrying value of $33.0 million.
Also during the second quarter of 2001, the Company recorded other
impairments of property, plant and equipment totaling $2.1 million. These
impairments were the result of management decisions regarding the discontinuance
of utilization of certain capitalized assets. During the first quarter of 2001,
the Company recorded a $0.9 million impairment on the goodwill of the Thorsen
Tools business, which sold during the second quarter of 2001.
(4) Indebtedness
In connection with the Recapitalization, Katy refinanced its
outstanding debt obligations under the Former Credit Agreement with a secured,
asset-based lending arrangement. The New Credit Agreement, which provides for a
total borrowing facility of $140.0 million, has a $30.0 million Term Loan
portion with a final maturity date of June 30, 2006, and quarterly repayments of
$1,500,000, beginning September 30, 2001. The Term Loan is based on orderly
liquidation values of the Company's property, plant and equipment. The remaining
portion of the New Credit Agreement is a $110.0 million Revolving Credit
Facility that also has a final maturity date of June 30, 2006. The borrowing
base of the Revolving Credit Facility is determined by eligible inventory and
accounts receivable of the Company. All extensions of credit to the Company are
secured by a first priority perfected security interest in and lien upon the
capital stock of each material domestic subsidiary (65% of the capital stock of
each material foreign subsidiary), and all present and future assets and
properties of the Company. Customary financial covenants apply to the New Credit
Agreement. Interest accrues on these obligations at prime plus 175 basis points
on base rate loans and 275 basis points on Eurodollar rate loans until the close
of the second quarter of 2002. Following that, interest will be based on the
Company's consolidated leverage ratio, as defined in the New Credit Agreement.
-10-
June 30, December 31,
(Thousands of dollars) 2001 2000
-------- ------------
Revolving loans payable under Former
Credit Agreement, interest At
various LIBOR rates (7.41%-8.75%),
Due through 2001, unsecured $ - $ 133,000
Term loans payable under New Credit
Agreement, interest based on Prime
Rate (8.50%), due through 2006 30,000 -
Revolving loans payable under New
Credit Agreement, interest based on
Prime Rate (8.50%), due through 2006 59,180
Real estate and chattel mortgages, with
Interest at fixed rates (7.14%), due
Through 2013 733 838
Less current maturities (6,066) (133,067)
------- ---------
Long term debt $83,847 $ 771
======= =========
The Company incurred approximately $6.5 million of direct costs
associated with the New Credit Agreement, including $1.4 million paid to
Kohlberg (who worked on behalf of KKTY) for consulting fees and out-of-pocket
expenses relating to negotiation of terms and covenants associated with the New
Credit Agreement. These costs have been capitalized and are being amortized over
the five year length of the agreement.
(5) Convertible Preferred Stock
As discussed in Note 2, the Recapitalization, above, KKTY purchased from
Katy 700,000 shares of newly issued convertible preferred stock, $100 par value
per share (referred to as the "Convertible Preferred Stock"), which is
convertible into 11,666,666 common shares, for an aggregate purchase price of
$70.0 million. If converted, the 11,666,666 common shares would represent 58.2%
of the outstanding shares of common stock as of June 30, 2001, excluding
outstanding options. The Convertible Preferred shares are entitled to a 15%
payment in kind ("PIK") dividend (that is, dividends in the form of additional
shares of Convertible Preferred Stock), compounded annually, which begin
accruing on August 1, 2001, and are payable on the first day in August of 2002.
No dividends will accrue or be payable after December 31, 2004. If the holder
continues to hold the Convertible Preferred Stock for the three year and five
month period, it will receive an aggregated total of 431,555 shares of
Convertible Preferred Stock, which would be convertible into an additional
7,192,598 shares of common stock. The shares of common stock issuable on the
conversion of the Convertible Preferred Stock issued at closing, together with
the shares of common stock issuable on the conversion of the Convertible
Preferred Stock issuable through the PIK dividend, would represent 69.2% of the
outstanding common shares of common stock, excluding outstanding options.
The Convertible Preferred Stock is convertible at the option of the
holder at any time after the earlier of 1) June 28, 2006, 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. The preferred shares 1) are non-voting (with limited
exceptions), 2) are non-redeemable, except in whole, but not in part, at the
Company's option at any time after June 30, 2021, 3) are entitled to receive
cumulative payment in kind dividends, as mentioned above, at a rate of 15%
percent, 4) have no preemptive rights with respect to any other securities or
instruments issued by the Company, and 5) have registration rights with respect
to any common shares issued upon conversion of the Convertible Preferred Stock.
The Convertible Preferred Stock has a liquidation preference of $100.00 per
share, par value, before any distribution could be made to common shareholders.
The Company incurred approximately $4.0 million of direct costs related
to the issuance of the Convertible Preferred Stock, including $1.7 million paid
to Kohlberg (who worked on behalf of KKTY) for consulting fees and out-of-pocket
expenses relating to due diligence and structuring of the Recapitalization.
These costs have been netted against the stated amount of the Convertible
Preferred Stock on the condensed consolidated balance sheets.
(6) Employment Agreement and Stock Option Grant
On June 28, 2001, the Company entered into an employment agreement with C.
Michael Jacobi, President and Chief Executive
-11-
Officer. To induce Mr. Jacobi to enter into the employment agreement, on June
28, 2001, the Compensation Committee of the Board of Directors approved the Katy
Industries, Inc. 2001 Chief Executive Officer's Plan. Under this plan, Mr.
Jacobi will be granted 978,572 stock options. Mr. Jacobi will also be granted
71,428 stock options under the Company's 1997 Incentive Plan. All stock options
granted to Mr. Jacobi will vest over a three year period provided that certain
performance measures are met in each year.
(7) 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.
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 June 30, 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.
(8) 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, electrical and electronic components, and nonpowered
hand tools. 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.
-12-
The tables below summarize the key factors in the year-to-year changes
in operating results.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands of Dollars)
Electrical/Electronics
Net external sales $31,703 $40,307 $64,449 $80,243
Net intercompany sales 8,588 8,517 17,619 21,503
Income from operations (1,790) 1,078 (4,433) 2,472
Operating margin (5.7%) 2.7% (6.9%) 3.1%
Depreciation & amortization 509 715 1,081 1,440
Impairment of long-lived assets 564 - 564 -
Identifiable assets 94,817 119,349 94,817 119,349
Capital expenditures 395 627 852 1,185
Maintenance Products
Net external sales 85,796 94,310 168,735 188,523
Net intercompany sales 3,327 2,132 7,031 4,549
Income from operations (38,015) 3,352 (37,512) 9,630
Operating margin (44.3%) 3.6% (22.2%) 5.1%
Depreciation & amortization 5,404 5,187 10,856 10,401
Impairment of long-lived assets 34,547 - 34,547 -
Identifiable assets 254,778 320,284 254,778 320,284
Capital expenditures 2,048 2,586 4,497 6,524
Operations to be Disposed Of
Net external sales $1,707 $806 $4,964 $1,636
Net intercompany sales - - 2 -
Loss from operations (93) (485) (1,609) (1,019)
Operating margin (5.5%) (60.1%) (32.4%) (62.2%)
Depreciation & amortization 72 32 127 37
Impairment of long-lived assets - - 846 -
Identifiable assets 20,327 18,615 20,327 18,615
Equity investments 7,105 7,358 7,105 7,358
Capital expenditures 42 691 495 755
Corporate
Corporate expenses (3,240) (2,253) (8,300) (4,388)
Depreciation & amortization 176 14 216 28
Identifiable assets 17,319 17,809 17,319 17,809
Capital expenditures - - - 187
Company
Net external sales 119,206 135,423 238,148 270,402
Net intercompany sales 11,915 10,649 24,652 26,052
Income from operations (43,138) 1,692 (51,854) 6,695
Operating margin (36.2%) 1.3% (21.8%) 2.5%
Depreciation & amortization 6,161 5,948 12,280 11,906
Impairment of long-lived assets 35,111 - 35,957 -
Identifiable assets 387,241 476,057 387,241 476,057
Capital expenditures 2,484 3,904 5,844 8,464
-13-
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.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands of Dollars)
Revenues
Total net sales for reportable segments $131,121 $146,072 $262,800 $296,454
Elimination of net intercompany sales (11,915) (10,649) (24,652) (26,052)
Net sales included in equity in income
of operations to be disposed of (1,707) (806) (4,964) (1,636)
-------- -------- -------- --------
Total consolidated net sales $117,499 $134,617 233,184 $268,766
======== ======== ======== ========
-14-
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(Thousands of Dollars)
Operating income
Total income from operations for
reportable segments ($43,138) $ 1,692 ($51,854) $ 6,695
Operating loss included in equity in income
of operations to be disposed of 90 485 762 1,019
-------- -------- -------- --------
-------- -------- -------- --------
Total consolidated operating income ($43,048) $ 2,177 ($51,092) $ 7,714
======== ======== ======== ========
Assets
Total assets for reportable segments $387,241 $476,057 $387,241 $476,057
Liabilities included in net assets from
operations to be disposed of (2,119) (957) (2,119) (957)
-------- -------- -------- --------
Total consolidated assets $385,122 $475,100 $385,122 $475,100
======== ======== ======== ========
(9) Comprehensive (Loss) Income
Comprehensive income (loss) for the six months ended June 30, 2001 and 2000 are
as follows:
June 30, June 30,
2001 2000
-------- --------
(Thousands of Dollars)
Net loss $(39,988) $(637)
Foreign currency translation adjustments (1,346) (170)
-------- -----
Comprehensive loss $(41,334) $(807)
======== =====
(10) Restructuring Charges
During the second quarter of 2001, the Company's consumer and
institutional plastics division undertook restructuring efforts that resulted in
severance payments to various individuals. Forty three employees, including two
members of Contico and Katy executive management, received severance benefits.
Total severance costs were $1.6 million. Approximately 53% of these costs were
paid through the end of the second quarter.
Also during the second quarter, the Company recognized severance and
exit costs associated with the closing of a warehouse facility and consolidation
of certain administrative functions, both of which relate to the mop, broom and
brush business. Seven warehouse employees and 19 administrative employees are
being affected by these actions. Total severance and exit costs associated with
these efforts are $0.3 million. None of these costs had been paid through the
end of the second quarter, although all of the costs are expected to be paid by
the end of 2001.
Katy incurred charges for non-cancelable rent and other exit costs
associated with the planned closure of its Englewood, Colorado corporate office.
Total costs recognized in the second quarter were $0.7 million, none of which
have been paid through the end of the second quarter. Katy did not take charges
in the second quarter for certain anticipated employee costs associated with the
Recapitalization and the closure of the Englewood office. The Company expects to
pay out approximately $6.4 million during the last half of 2001 for completion
bonuses related to the Recapitalization, executive
-15-
severance and related costs, and severance for certain other corporate
employees. These costs were not accrued because of certain uncertainties
involved in the amounts, and the fact that there is a signficant retention, or
"stay bonus" feature, to the expected costs. Katy expects to recognize these
costs during the third and fourth quarters as they are paid.
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 shown separately on the Consolidated
Statements of Operations. As of June 30, 2001, accrued severance and exit costs
totaled $2.9 million, which will be paid through the year 2009. The table below
summarizes the future obligation for the programs described:
(Thousands of Dollars)
2001 $1,784
2002 766
2003 264
2004 55
2005 55
Thereafter 22
------
Total payments $2,964
-16-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
Three months Ended June 30, 2001
- --------------------------------
Following are summaries of sales and operating income (loss) for the
three months ended June 30, 2001 and 2000 by industry segment (Thousands of
Dollars):
Net Sales Increase (Decrease)
- --------- --------------------
2001 2000 Amount Percent
------- ------- -------- -------
Electrical/Electronics $31,703 $40,307 ($8,604) (21.3)%
Maintenance Products 85,796 94,310 (8,514) (9.0)%
Operations to be Disposed Of 1,707 806 901 111.8%
Operating Income (Loss) Increase (Decrease)
- ----------------------- ----------------------
2001 2000 Amount Percent
--------- ------- --------- ----------
Electrical/Electronics $ (1,790) $ 1,078 $ (2,868) (266.0)%
Maintenance Products (38,015) 3,352 (41,367) (1,234.1)%
Operations to be Disposed Of (93) (485) 392 80.8%
The Electrical/Electronics Group's sales decreased as a result of lower
sales at the consumer electric corded business and the electrical parts and
accessories business. The weaker market for electronic products contributed to
this decrease.
The Group's operating income decreased as a result of lower gross
margins and several unusual adjustments recorded in the second quarter. Margins
were significantly lower in both the consumer electric corded business and the
electrical parts and accessories business, with a reduction in volume being a
prime contributor to these shortfalls. Significant unusual adjustments that
impacted operating income included increases to inventory reserves at the two
divisions ($0.9 million) mentioned above, an impairment of capitalized software
costs of $0.5 million, and a charge for additional reserves for contingent
liabilities of $0.5 million.
Sales from the Maintenance Products Group decreased as a result of
lower sales at the mop, broom and brush business and the consumer and
institutional plastics business. The reductions were due primarily to softer
demand in both consumer markets and janitorial/sanitation markets. Specific
customer losses have impacted the mop, broom and brush business, which is
recovering from operational difficulties experienced during 2000.
The Group's operating income decreased primarily due to lower margins
and volume in the mop,broom and brush business and consumer and institutional
plastics business, with sales volume pressures mentioned above being a primary
contributor to lower gross profit and operating income. Significant unusual
adjustments impacted operating income of the group during the second quarter,
including impairments of long-lived assets ($34.5 million), severance and
restructuring charges ($2.0 million), inventory valuation adjustments ($1.1
million), and reserves for exposure relating to a bankrupt former customer ($0.2
million).
-17-
Sales from Operations to be Disposed Of increased as a result of higher
sales at the waste-to-energy facility. Operating income was higher in 2001 due
to reduced maintenance costs at the facility.
Expenses in the corporate segment were higher only because of the
incurrence of costs associated with the Recapitalization and certain
restructuring costs associated with the relocation of the corporate office.
Excluding these items, corporate expenses were lower year over year.
Excluding certain unusual items, many of which were mentioned above,
selling, general and administrative costs as a percentage of net sales improved
slightly from 2000, even as sales decreased significantly, evidencing the
Company's efforts to control costs.
Interest and other, net decreased primarily as a result of lower
interest costs due to lower rates applied to borrowings under the Former Credit
Agreement, which was based on LIBOR rates. These improvements were offset by
write-offs of certain amounts owed to the Company related to former investments
($0.3 million). The Company recognized an extraordinary loss on early
extinguishment of debt of $1.2 million, net of tax, representing the write-off
of previously capitalized debt costs associated with the Former Credit
Agreement.
Six months Ended June 30, 2001
- ------------------------------
Following are summaries of sales and operating income for the six
months ended June 30, 2001 and 2000 by industry segment (In thousands):
Net Sales Increase (Decrease)
- --------- -----------------------
2001 2000 Amount Percent
-------- -------- --------- ---------
Electrical/Electronics $ 64,449 $ 80,243 $(15,794) (19.7)%
Maintenance Products 168,735 188,523 (19,788) (10.5)%
Operations to be Disposed Of 4,964 1,636 3,328 203.4%
Operating Income Increase (Decrease)
- ------------- -----------------------
2001 2000 Amount Percent
-------- -------- --------- ---------
Electrical/Electronics $ (4,433) $ 2,472 $ (6,905) (279.3)%
Maintenance Products (37,512) 9,630 (47,142) (489.5)%
Operations to be Disposed Of (1,609) (1,019) (590) (57.9)%
The Electrical/Electronics Group's sales decreased as a result of lower
sales at the consumer electric corded business and the electrical parts and
accessories business. The Company's Canada division of the consumer electric
corded business was unusually impacted during the first quarter by low retail
sales, but sales have since rebounded closer to plan levels. The weaker market
for electronic products contributed to these decreases.
The Group's operating income decreased as a result of lower gross
margins in the divisions mentioned in the previous paragraph, with volume being
a prime contributor to the decreases. In addition to the unusual items mentioned
in the three month discussion, the consumer electric corded business incurred
unusual first quarter charges, including severance and restructuring charges
relating to the closing of two satellite facilities ($0.7 million), and
inventory losses incurred relating to the exit of certain licensed branded
product lines ($3.3 million).
The sales from the Maintenance Products Group decreased primarily as a
result of lower sales at the mop, broom
-18-
and brush business and the consumer and institutional plastics business. The
reductions were due primarily to softer demand in both retail markets and
janitorial/sanitation markets. The consumer side of the plastics business was
especially hurt in the first quarter by lower retail sales. Specific customer
losses have impacted the mop, broom and brush business, which is recovering from
operational difficulties experienced during 2000.
The Group's operating income decreased due to the recognition of a
number of unusual charges, as well as margin pressures in the underlying
businesses. Volume-related margin declines in the mop, broom and brush business
and the consumer and institutional plastics businesses were the primary reasons
for the decline from an operating standpoint. Pricing pressures in the abrasives
business also contributed to the decline. In addition to the unusual items
mentioned in the three month discussion, during the first quarter the plastics
business recorded a charge to increase its LIFO inventory accounting reserve
($1.3 million).
Income from Operations to be Disposed Of was lower as a result of
impairments recorded in the first quarter related to the Thorsen Tools business,
which was sold during the second quarter.
The corporate group incurred significant costs during the first six
months of the year ($3.0 million) related to the Recapitalization. It should be
noted that other costs were incurred related to the Recapitalization that were
not recognized as part of operating income. Approximately $4.0 million of costs
were netted against preferred equity, $6.5 million of costs related to the New
Credit Agreement were capitalized to the balance sheet and will be amortized,
and $1.8 million (pre-tax) of previously capitalized debt costs related to the
Former Credit Agreement were written off as an extraordinary charge.
Excluding certain unusual items, many of which were mentioned above,
selling, general and administrative costs as a percentage of net sales improved
from 2000, even as sales decreased significantly, evidencing the Company's
efforts to control costs.
Interest and other, net was flat to 2000, as lower interest rates were
offset by unusual charges to write off amounts owed to the Company related to
former investments ($0.3 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources were impacted significantly
by the end of the second quarter as a result of the completion of the
Recapitalization. As a result of the Recapitalization, the Company had
borrowings outstanding under the New Credit Agreement at June 30, 2001 of $89.2
million, $6.0 million of which is due within one year, compared to borrowings
under the Former Credit Agreement at December 31, 2000 of $133.0 million, all of
which was due within one year. Following is a summary of the sources and uses of
funds involved at the consummation of the Recapitalization:
(Thousands of dollars)
Sources:
--------
Purchase of Convertible Preferred Stock $ 70,000
Borrowings under the New Credit Agreement 93,211
--------
$163,211
========
Uses:
-----
Paydown of obligations under the Former
Credit Agreement $144,924
Purchase of one-half of preferred interest
of subsidiary at a discount 10,222
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
The Company feels that its liquidity and financial strength will be
increased as a result of the cash infusion by the purchaser of the Convertible
Preferred Stock and borrowing availability under the New Credit Agreement. The
New Credit Agreement, which provides for a total borrowing facility of $140.0
million, has a $30.0 million Term Loan portion with a final maturity date of
five years after the closing of the transaction and quarterly repayments of
$1,500,000, beginning September 30, 2001. The Term Loan is based on orderly
liquidation values of the Company's property, plant and equipment. The New
Credit Agreement has a $110.0 million Revolving Credit Facility that also has a
final maturity date of five years after the closing date. The borrowing base of
the Revolving Credit Facility is determined by eligible inventory and accounts
receivable of the Company. All extensions of credit to the Company are 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
-19-
all present and future assets and properties of the Company. Customary financial
covenants apply to the New Credit Agreement. Interest accrues on these
obligations at prime plus approximately 175 basis points until September 28,
2001. Following that, interest will accrue at approximately 275 basis points
over a Eurodollar rate. Total debt was 30.0% of total capitalization at June 30,
2001
As the result of an agreement related to the Recapitalization, the
Company reduced the amount outstanding of the preferred interest in the Contico
subsidiary by acquiring approximately one-half of such interest at a significant
discount. This will result in a reduction of preferred distributions required to
be made annually by approximately $1.3 million.
Excluding current maturities of indebtedness, working capital decreased
$14.8 at June 30, 2001 from December 31, 2000. Inventories decreased
approximately $14.0 million during this time frame. Approximately $5.4 million
of this decrease was attributable to valuation adjustments, and $1.3 million of
the decrease was due to an increase to the LIFO reserve. The remaining decrease
was due to operational reactions to lower sales levels and focus on monetizing
aged inventory. Accounts receivable decreased approximately $10.9 million due
mainly to lower sales. These decreases in working capital were offset by lower
accounts payable compared to year-end 2000.
Katy expects to commit an additional $10.0 million for capital projects
in the continuing businesses during the remainder of the year for a total of
$15.8 million during 2000. Funding for these expenditures and for working
capital needs is expected to be accomplished through the use of available cash
under the New Credit Agreement and internally generated funds. While a total of
$140.0 million is available under the New Credit Agreement. Katy's borrowing
base is limited under the Revolving Credit Facility by eligible accounts
receivable and inventory. However, Katy feels that the New Credit Agreement
provides sufficient liquidity for the Company's operations going forward.
RESTRUCTURING CHARGES
- ---------------------
During the second quarter of 2001, the Company's consumer and
institutional plastics division undertook restructuring efforts that resulted in
severance payments to various individuals. Forty three employees, including two
members of Contico and Katy executive management, received severance benefits.
Total severance costs were $1.6 million. Approximately 53% of these costs were
paid through the end of the second quarter.
Also during the second quarter, the Company recognized severance and
exit costs associated with the closing of a warehouse facility and the
consolidation of certain administrative functions, both of which relate to the
mop, broom and brush business. Seven warehouse employees and 19 administrative
employees are being affected by these actions. Total severance and exit costs
associated with these efforts are $0.3 million. None of these costs had been
paid through the end of the second quarter, although all of the costs are
expected to be paid by the end of 2001.
Katy incurred charges for non-cancelable rent and other exit costs
associated with the planned closure of its Englewood, Colorado corporate office.
Total costs recognized in the second quarter were $0.7 million, none of which
have been paid through the end of the second quarter. Katy did not take charges
in the second quarter for certain anticipated employee costs associated with the
Recapitalization and the closure of the Englewood office. The Company expects to
pay out approximately $6.4 million during the last half of 2001 for completion
bonuses related to the Recapitalization, executive severance and related costs,
and severance for certain other corporate employees. These costs were not
accrued because of certain uncertainties involved in the amounts, and the fact
that there is a signficant retention, or "stay bonus" feature, to the expected
costs. Katy expects to recognize these costs during the third and fourth
quarters as they are paid.
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.
-20-
Severance expenses and exit costs are shown separately on the Consolidated
Statements of Operations. As of June 30, 2001, accrued severance and exit costs
totaled $2.9 million, which will be paid through the year 2009. The table below
summarizes the future obligation for the programs described:
(Thousands of Dollars)
2001 $1,784
2002 766
2003 264
2004 55
2005 55
Thereafter 22
------
Total payments $2,946
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board authorized the
issuance of Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001. SFAS No. 141 requires
intangible assets to be recognized if they arise from contractual or legal
rights or are "separable", i.e., it is feasible that they may be sold,
transferred, licensed, rented, exchanged or pledged. As a result, it is likely
that more intangible assets will be recognized under SFAS No. 141 than its
predecessor, APB Opinion No.16 although in some instances previously recognized
intangibles will be subsumed into goodwill.
Under SFAS No. 142, goodwill will no longer be amortized on a straight
line basis over its estimated useful life, but will be tested for impairment on
an annual basis and whenever indicators of impairment arise. The goodwill
impairment test, which is based on fair value, is to be performed on a reporting
unit level. A reporting unit is defined as an operating segment determined in
accordance with SFAS No. 131 or one level lower. Goodwill will no longer be
allocated to other long-lived assets for impairment testing under SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Additionally, goodwill on equity method investments will no
longer be amortized; however, it will continue to be tested for impairment in
accordance with Accounting Principles Board Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. Under SFAS No. 142 intangible assets
with indefinite lives will not be amortized. Instead they will be carried at the
lower cost or market value and tested for impairment at least annually. All
other recognized intangible assets will continue to be amortized over their
estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 although goodwill on business combinations consummated after July 1, 2001
will not be amortized. On adoption the company may need to record a cumulative
effect adjustment to reflect the impairment of previously recognized intangible
assets. In addition, goodwill on prior business combinations will cease to be
amortized. Had the company adopted SFAS No. 142 at January 1, 2000 the company
would not have recorded a goodwill amortization charge of $1.3 million, which
excludes impairments of goodwill recognized during 2001 of $33.8 million and
amortization of negative goodwill of $0.9 million. The Company is unable at this
time to determine the impact that these Statements will have on intangible
assets at the time of adoption in the first quarter of 2002, or whether a
cumulative effect adjustment will be required upon adoption. During the second
quarter of 2001, the Company recorded an impairment of $33.0 million on the
long-lived assets of it mop, broom and brush division, as discussed in Note 3.
However, even considering this impairment, the terms of the recently completed
Recapitalization indicate that the fair value of the Company may be less than
the carrying value represented on the Condensed Consolidated Balance Sheets.
Therefore, the Company
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
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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 June 30,
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.
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OUTLOOK
Net sales have during 2001 have trailed sales levels from 2000, and are
expected to decrease year over year. Katy divisions continue to experience a
slower economy and struggling market sectors, especially in the retail sector,
where sales have been impacted significantly by customer efforts to reduce
inventories, and in the electronics distribution market, which has been
negatively impacted by the slowdown in the technology and telecommunications
sectors. 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 on its ability
to retain and improve relationships with these customers. The Company faces the
continuing challenge of recovering cost increases for items such as raw
materials given the market power of these customers.
The Company is aggressively working on specific programs to reduce
costs associated with manufacturing, sourcing of products, freight, and other
operating costs. Headcount at many Katy operations has been reduced
significantly since year-end as a result of reductions in force implemented by
the divisions. Also, two divisions have closed satellite manufacturing and
warehouse operations since the beginning of the year. Katy expects to see
benefits from these actions during the second half of the year. The Company
continues to be exposed to prices for thermoplastic resins, a significant raw
material used in the consumer and industrials plastics business, although these
costs have leveled during 2001 after increasing significantly beginning in
mid-1999 and throughout 2000. 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.
Selling, general and administrative costs as a percentage of sales in
the aggregate are expected to improve 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. Also,
significant reductions in force took place at Contico. 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 has begun the process 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 is expected to be significantly lower in 2001 due to
significantly lower debt balances as a result of the Recapitalization that took
place on June 28, 2001.
The Company continues to evaluate the annualized effective income tax
rate, taking into account the tax and book treatment of costs associated with
the Recapitalization, as well as other potential permanent differences between
tax and book income. Katy feels that deferred tax assets will be realized
through the generation of future taxable income. However, the Company will
continue to asses the realizability of deferred tax assets, and will consider
the need for valuation allowances as future circumstances dictate.
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, 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:
- Increases in the cost of, or in some cases continuation of the current
price levels of, plastic resins, copper, paper
-23-
board packaging, and other raw materials.
- The Company's inability to reduce product costs, including
manufacturing, sourcing, freight, and other product costs.
- The Company's inability to reduce administrative costs though
consolidation of functions and systems improvements.
- 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 prim
rate and Eurodollar rate-based credit facility.
- The Company's inability to meet covenants associated with the Credit
Agreement.
- 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.
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Item 3. 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
currently indexed to the prime rate, and its temporary cash investments earn
rates of interest available on securities with maturities of three months or
less. Book value approximates fair value for both the debt obligations and
temporary cash investments. 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. It should be noted that in connection with the Recapitalization,
the Company acquired approximately one-half of the outstanding preferred
interest at a 40% discount from its stated value.
Expected Maturity Dates
-----------------------
(Thousands of Dollars)
ASSETS
2001 2002 2003 2004 2005 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- -------- ----------
Temporary cash investments
Fixed rate $ 599 $ - $ - $ - $ - $ - $ 599 $ 599
Average interest rate 3.8% - - - - - 3.8%
LONG-TERM DEBT
- --------------
Fixed rate debt 28 $ 72 $ 699 $ - $ - $ - 799 $ 799
Average interest rate 7.14% 7.14% 7.14% 7.14% - - 7.14%
Variable rate debt $3,000 $6,000 $6,000 $6,000 $6,000 $74,180 $89,180 $89,180
Average interest rate 7.58% 6.65% 6.65% 6.65% 6.65% 6.65% 6.65%
PREFERRED INTEREST OF SUBSIDIARY
- --------------------------------
Fixed rate obligation $ - $ - $ - $ - $ - $16,400 $16,400 $16,400
Average interest rate 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
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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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Stockholders of Katy Industries, Inc. was held at The
Hotel Inter-Continental Central Park South, 112 Central Park South, New York,
NY, at 9:00 AM on June 28, 2001. Stockholders voted on six proposals, summarized
below with the accompanying number of votes in favor, opposed, or abstained.
PROPOSAL No. 1: To approve the issuance and sale of 700,000 shares of Katy's
convertible preferred stock, $100.00 par value per share, to KKTY Holding
Company, L.L.C. and the issuance of shares of common stock to the holder of the
convertible preferred stock in accordance with the terms of the convertible
preferred stock. Approval of Proposal No. 1 was contingent on approval of
Proposal 2, Proposal 3 and Proposal 6.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
4,720,486 2,468,184 3,942
PROPOSAL No. 2: To amend Katy's Restated Certificate of Incorporation to
authorize 1,200,000 shares of convertible preferred stock. Approval of this
proposal was contingent on approval of Proposal 1, Proposal 3 and Proposal 6.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
4,722,187 2,466,542 3,883
PROPOSAL No. 3: To amend Katy's Restated Certificate of Incorporation to
establish a classified Board of Directors. Approval of this proposal was
contingent on approval of Proposal 1, Proposal 2 and Proposal 6.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
4,531,299 2,658,117 3,196
PROPOSAL No. 4: Election of Directors
CLASS I DIRECTORS
Name Votes For Votes Withheld
---- --------- --------------
C. Michael Jacobi 4,682,058 2,510,554
Robert M. Baratta 4,689,658 2,502,954
Daniel B. Carroll 4,639,459 2,553,153
Wallace E. Carroll, Jr. 4,639,459 2,553,153
CLASS II DIRECTORS
Name Votes For Votes Withheld
---- --------- --------------
Christopher Anderson 4,774,408 2,418,204
William F. Andrews 4,777,408 2,415,204
Samuel P. Frieder 4,774,408 2,418,204
James A. Kohlberg 4,774,408 2,418,204
Christopher Lacovara 4,776,408 2,416,204
PROPOSAL No. 5: Ratify the appointment of Arthur Andersen LLP as the company's
independent auditors
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Votes For Votes Against Votes Abstained
--------- ------------- ---------------
5,360,706 1,824,906 7,000
PROPOSAL No. 6: To amend Katy's Restated Certificate of Incorporation to
increase the number of shares of common stock that Katy is authorized to issue
from 25,000,000 to 35,000,000. Approval of this proposal was contingent on
approval of Proposal 1, Proposal 2 and Proposal 6.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
4,765,463 2,423,707 3,442
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Exhibit Title
------ -------------
2.1 Termination Agreement dated as of June 2, 2001, terminating the
Preferred Stock Purchase and Recapitalization Agreement dated as of
March 29, 2001, incorporated by reference to Annex E to the Company's
Proxy Statement on Schedule 14A filed June 8, 2001.
2.2 Preferred Stock Purchase and Recapitalization Agreement, dated as of
June 2, 2001, incorporated by reference to Annex B to the Company's
Proxy Statement on Schedule 14A filed June 8, 2001.
3 The Amended and Restated Certificate of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 of the Company's Current
Report on Form 8-K filed on July 13, 2001.
10.1 Credit Agreement dated as of June 28, 2001, filed herewith.
10.2 Employment Agreement dated as of June 28, 2001 between C. Michael
Jacobi and the Company, filed herewith.
10.3 Katy Industries, Inc. 2001 Chief Executive Officer's Plan, filed
herewith.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K 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.
The Company filed a Current Report on Form 8-K on July 13, 2001,
reporting a potential change of control of the registrant as a result of the
Recapitalization and resulting purchase of 700,000 shares of convertible
preferred stock by KKTY Holding Company, L.L.C., an affiliate of Kohlberg &
Company, L.L.C.
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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: August 14, 2001 By /s/ Stephen P. Nicholson
---------------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
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INDEX OF EXHIBITS
Exhibit
Number Exhibit Title
- ------ -------------
2.1 Termination Agreement dated as of June 2, 2001, terminating the
Preferred Stock Purchase and Recapitalization Agreement dated as of
March 29, 2001, incorporated by reference to Annex E to the Company's
Proxy Statement on Schedule 14A filed June 8, 2001.
2.2 Preferred Stock Purchase and Recapitalization Agreement, dated as of
June 2, 2001, incorporated by reference to Annex B to the Company's
Proxy Statement on Schedule 14A filed June 8, 2001.
3 The Amended and Restated Certificate of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 of the Company's Current
Report on Form 8-K on July 13, 2001.
10.1 Credit Agreement dated as of June 28, 2001, filed herewith.
10.2 Employment Agreement dated as of June 28, 2001 between C. Michael
Jacobi and the Company, filed herewith.
10.3 Katy Industries, Inc. 2001 Chief Executive Officer's Plan, filed
herewith.
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