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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2001
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)
984 Southford Road Middlebury, CT 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 598-0387
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 22, 2002, was $53,790,047. On that date 8,391,583
shares of Common Stock, $1.00 par value, were outstanding, the only class of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2002 annual meeting - Part III.
Exhibit index appears on page 65. Report consists of 68 pages.
PART I
Item 1. BUSINESS
Katy Industries, Inc. (Katy or the Company) was organized as a Delaware
corporation in 1967. We carry on our business through two principal operating
groups: Electrical/Electronics and Maintenance Products. Our other businesses
comprise of a waste-to-energy facility and a minority interest in a seafood
harvesting company. Each majority-owned company operates within a broad
framework of policies and corporate goals. Katy's corporate management is
responsible for overall planning, financial management, acquisitions,
dispositions, and other related administrative and corporate matters.
Recapitalization
On June 28, 2001, we completed a recapitalization of the Company. Katy
reached a definitive agreement on June 2, 2001 with KKTY Holding Company, LLC.
(KKTY), an affiliate of Kohlberg Investors IV, L.P. (Kohlberg), regarding the
recapitalization. On June 28, 2001, 1) our stockholders approved proposals to
effectuate the recapitalization 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 (the
New Credit Agreement) to finance the future operations of Katy. Under the terms
of the recapitalization, directors designated by KKTY represent a majority of
our 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 an initial term of one year. These directors include C. Michael Jacobi, the
new President and CEO, and three directors who were not designated by KKTY. The
Class I directors elected at the 2002 stockholders' meeting, and their
successors, will serve two year terms. Five of the elected directors are
considered Class II directors, and will serve terms of two years. All of the
Class II directors are designees of KKTY.
Under the terms of the recapitalization, KKTY purchased 700,000 shares of
newly issued preferred stock, $100 par value per share (Convertible Preferred
Stock), which is convertible into 11,666,666 common shares, for an aggregate
purchase price of $70.0 million. More information regarding the Convertible
Preferred Stock can be found in Note 9 to Consolidated Financial Statements of
Katy included in Part II, Item 8. The recapitalization allowed us to retire
obligations we had under our former revolving credit agreement (Former Credit
Agreement), which was agented by Bank of America. In connection with the
recapitalization, we entered into the New Credit Agreement, agented by Bankers
Trust Company. More information regarding the New Credit Agreement can be found
in Note 8 to Consolidated Financial Statements of Katy included in Part II, Item
8, and in the Liquidity and Capital Resources section of Management's Discussion
and Analysis of Financial Condition and Results of Operations, included in Part
II, Item 7.
Also in connection with the recapitalization, we entered into an agreement
with the holder of the preferred interest in our Contico International, L.L.C.
subsidiary (Contico) 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. See Note 12 to Consolidated Financial
Statements. We 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, plus the tax effect of $0.1 million) was recognized as
an increase to Additional Paid in Capital on the Condensed Consolidated Balance
Sheets. The holder of the remaining preferred interest will retain approximately
50% of the original preferred interest, or a stated value of $16.4 million.
Following is a summary of the sources and uses of funds from, and in connection
with, the recapitalization:
(Thousands of Dollars)
Sources:
Sale of Convertible Preferred Stock $ 70,000
Borrowings under the New Credit Agreement 93,211
--------
$163,211
========
Uses:
Paydown of principal obligations under the Former Credit Agreement $144,300
Payment of accrued interest under the Former Credit Agreement 624
Purchase of one-half of preferred interest of Contico at a discount 9,900
Payment of accrued distributions on one-half of preferred interest of subsidiary 322
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
2
Operations
Selected operating data for each operating group can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Part II, Item 7. Information regarding foreign and
domestic operations and export sales can be found in Note 18 to Consolidated
Financial Statements of Katy included in Part II, Item 8. Set forth below is
information about our operating groups and investments and about our business in
general:
Maintenance Products Group
The maintenance products group's principal business is the manufacturing,
distribution, packaging and sale of sanitary maintenance supplies, professional
cleaning products, consumer products, abrasives and stains. The group accounted
for 65% of the Company's consolidated sales in 2001. Duckback Products, Inc.
(Duckback) is the only business in this group that is subject to significant
seasonal sales trends. The seven business units comprising this group are:
Contico International, L.L.C. (Contico) Contico is based in St. Louis,
Missouri and manufactures and distributes consumer storage, home and automotive
products, as well as janitorial and food service equipment and supplies.
Products are sold primarily to the consumer storage, home, automotive, food
service and sanitary maintenance markets, under both the Contico and Continental
brand names.
Glit/Disco, Inc. (Disco) Disco is located in McDonough, Georgia. Disco is
a manufacturer and distributor of cleaning and specialty products sold to the
restaurant/food service industry.
Duckback Products, Inc. (Duckback) Duckback, located in Chico, California,
is a manufacturer of high quality exterior transparent stains, coatings and
water repellents. These products are sold primarily under the trade names
Superdeck, Mason's Select, Supershade and Fightback. Duckback's revenues and
operating income are subject to seasonal trends, with low sales levels in the
fourth quarter.
Glit/Microtron Abrasives (Glit/Microtron) Glit/Microtron is headquartered
in Wrens, Georgia, and has additional manufacturing and sales facilities in
Pineville, North Carolina, and Mississauga, Ontario, Canada. Glit/Microtron
manufactures nonwoven floor maintenance pads, scouring pads and specialty
abrasive products for cleaning and finishing. Products are sold primarily to the
sanitary maintenance, restaurant supply and consumer markets. In addition,
Glit/Microtron manufactures a line of wood sanding products which are sold
through retail stores across the United States and Canada. Consumer products are
marketed through supermarkets and drug and variety stores under various brand
names, including Kleenfast.
Glit/Gemtex, Ltd. (Gemtex) Gemtex is headquartered in Etobicoke, Ontario,
Canada. Gemtex is a manufacturer and distributor of fiber disks and coated
abrasives for the automotive, industrial and consumer markets.
Loren Products (Loren) Loren is headquartered in Lawrence, Massachusetts.
Loren is a manufacturer and distributor of cleaning and abrasive products for
industrial markets and building products for consumer markets. Loren markets its
institutional products primarily under such brand names as Brillo and
manufactures certain products under private labels.
Wilen Products, Inc. (Wilen) Wilen is headquartered in Atlanta, Georgia.
Wilen is a manufacturer and distributor of a wide variety of professional
cleaning products, including mops, brooms and plastic cleaning accessories for
both the industrial and consumer markets.
Electrical/Electronics Group
The electrical/electronics group's principal business is the
manufacturing, distribution, packaging and sale of consumer electric corded
products, electrical and electronic accessories, electronic components and
nonpowered hand tools and specialty metals. The group accounted for 34% of the
Company's consolidated sales in 2001. Woods Industries, Inc. (Woods) and Woods
Industries (Canada), Inc. (Woods Canada) are subject to seasonal sales trends.
The five business units comprising this group are described below:
GC/Waldom Electronics, Inc. (GC/Waldom) GC/Waldom is headquartered in
Rockford, Illinois. GC/Waldom is a leading value-added distributor of high
quality, brand name electrical and electronic parts, components and accessories.
In addition, the company produces a full line of home entertainment component
parts and service technician products. GC/Waldom distributes primarily to the
electronic, automotive and communication industries. A significant portion of
GC/Waldom's products is sourced from Asia.
3
Hamilton Metals, L.P. (Hamilton) Hamilton, located in Lancaster,
Pennsylvania, re-rolls a wide range of precision metal strip and foil for the
medical, electronics, aerospace and computer industries. The company's products
are used in a wide range of high-tech applications.
Thorsen Tools, Inc. (Thorsen) Thorsen was headquartered in Carmel,
Indiana. Thorsen is a value-added distributor of nonpowered hand tools, and its
products are sourced from Asia. During the quarter ended March 31, 2001, the
Company determined that it would dispose of its investment in the Thorsen
business. The Company completed the sale on May 3, 2001.
Woods Industries (Canada), Inc. Woods Canada is headquartered in Toronto,
Ontario, Canada. Woods Canada designs, manufactures and markets a wide variety
of consumer corded products including low voltage garden lighting, extension
cords, multiple outlet and surge strips, specialty corded products, automotive
products and electronic timers.
Woods Industries, Inc. (Woods) Woods is headquartered in Carmel, Indiana
and has additional warehousing, distribution and manufacturing facilities in
Jasonville, Mooresville and Worthington, Indiana. Woods manufactures and
distributes consumer electric corded products, supplies and
electrical/electronics accessories. These products are sold to retailers located
principally in the United States and Canada. A significant portion of Woods'
products is sourced from Asia.
Other Operations
The companies in this group include a shrimp harvesting and farming
operation and a waste-to-energy facility. The two businesses comprising this
group are described below:
Sahlman Holding Company, Inc. (Sahlman) Sahlman harvests shrimp off the
coast of South and Central America and owns shrimp farming operations in
Nicaragua. Sahlman has a number of competitors, some of which are larger and
have greater financial resources. Katy's interest in this company is an equity
investment.
Savannah Energy Systems Company (SESCO). SESCO owns and operates a
waste-to-energy facility in Savannah, Georgia. SESCO's profitability is seasonal
in that its fourth quarter results tend to be higher as a result of the
contractual nature of its business with a local municipality. On March 15, 2002,
we signed agreements with a third party that would effectively turn over
operation of the facility to them. We anticipate a final closing on these
agreements during April of 2002. This party would essentially assume SESCO's
position in various contracts relating to the facility's operation. See Note 22
to Consolidated Financial Statements.
Customers
We have several large customers in the mass merchant/discount/home
improvement retail markets. Two customers, Wal*Mart/Sam's Club and Home Depot,
accounted for 8% and 7% of consolidated net sales, respectively. A significant
loss of business at any of these retail outlets would have an adverse impact on
our Company's results.
Backlog
Electrical/Electronics:
Our aggregate backlog position for the electrical/electronics segment was
$9.1 million and $13.1 million as of December 31, 2001 and 2000, respectively.
The orders placed in 2001 are firm and are expected to be shipped during 2002.
Maintenance Products:
Our aggregate backlog position for the maintenance products segment was
$9.7 million and $11.1 million as of December 31, 2001 and 2000, respectively.
The orders placed in 2001 are firm and are expected to be shipped during 2002.
Markets and Competition
Electrical/Electronics:
We market branded electrical and electronics products primarily in North
America through a combination of direct sales personnel, manufacturers' sales
representatives and wholesale distributors. Our primary customer base consists
of major
4
national retail chains that service the home improvement, hardware, mass
merchant, discount and automotive markets, smaller regional concerns serving a
similar customer base and a variety of electrical and electronic distributors.
Electrical and electronic products sold by the Company are generally used
by consumers and include such items as extension cords, work lights, surge
suppressors, power taps and strips, computer connectivity devices, telephone
accessories, outdoor lights and timers and a variety of electronic connectors
and switches. We have entered into license agreements pursuant to which we
market certain of our products using certain other companies' proprietary brand
names. Overall demand for our products is highly correlated with consumer
demand, the performance of the general economy and to a lesser extent home
construction and resale activity.
The markets for our electrical and electronic products are highly
competitive. Competition is based primarily on price and the ability to provide
superior customer service in the form of complete on-time product delivery.
Other competitive factors include brand recognition, product design, quality and
performance. Foreign competitors, especially from Asia, provide an increasing
level of competition. In the retail extension cord market, there are two major
competitors who collectively, with us, account for the major share of the United
States market.
The markets in our remaining product lines are significantly more
fragmented and typically 5-8 primary competitors are competing for market share.
The basis for competition in these product categories is similar to the
extension cord market with brand identification representing a much greater
factor. In general, we believe we are competitive with respect to each of the
factors affecting each of the respective markets in which we compete.
Maintenance Products:
We market branded consumer storage, sanitary maintenance supplies,
professional cleaning products, abrasives and stains primarily in North America
and Europe through a combination of direct sales personnel, manufacturers' sales
representatives and wholesale distributors. Our maintenance products group
services the home improvement, hardware, sanitary maintenance, industrial, food
service and automotive markets.
Maintenance products sold by the Company include such items as plastic
storage containers, floor maintenance pads, scouring pads, sponges, specialty
abrasive products for cleaning and finishing; brooms, mops, buckets and other
plastic cleaning products; high quality exterior transparent stains, coating and
water repellents; and cleaning and specialty products for the restaurant/food
service industry.
The markets for our maintenance products are highly competitive.
Competition is based primarily on price and the ability to provide superior
customer service in the form of complete on-time product delivery. Other
competitive factors include brand recognition and product design, quality and
performance.
We compete for market share with several competitors in this industry. We
believe that we have established long standing relationships with our major
customers based on high quality products and service, while continuing our
position of being a low cost provider in this industry. Our ability to remain a
low cost provider in the industry is highly dependent on the price of our raw
materials, primarily resin. Resin prices are influenced to a certain degree by
market prices for natural gas and crude oil, as well as supply and demand
factors within the plastics manufacturing industry.
Raw Materials
Our operations have not experienced significant difficulties in obtaining
raw materials, fuels, parts or supplies for their activities during the most
recent fiscal year, but no prediction can be made as to possible future supply
problems or production disruptions resulting from possible shortages. We are
also subject to uncertainties involving labor relations issues at entities
involved in our supply chain, both at suppliers and in the transportation and
shipping area. Our Contico subsidiary (and some others to a lesser extent) uses
polyethylene, polypropylene and other thermoplastic resins as raw materials in a
substantial portion of its products. Prices of resin have declined gradually
over the course of 2001, compared to the relatively higher price levels in 2000
and the latter part of 1999. We have not employed an active hedging program
related to the commodity price risk, but are evaluating potential strategies for
doing so. In a climate of high resin costs, we experience difficulty in raising
prices to shift the higher costs of raw materials to consumers. We also use
copper, corrugated packaging materials, and other materials that may involve
commodity price risks. Our future earnings may be negatively impacted to the
extent increased costs for its raw materials cannot be recovered or offset.
5
Employees
As of December 31, 2001, we employed 2,922 people. Approximately 657 of
these employees were members of various unions. One union contract covering 40
employees was scheduled to expire on May 13, 2001, and was renewed without any
material effect on our operations. Our labor relations are generally
satisfactory and there have been no strikes in recent years. Our operations can
be impacted by labor relations issues involving other entities in our supply
chain.
Regulatory and Environmental Matters
We do not anticipate that federal, state or local environmental laws or
regulations will have a material adverse effect on our consolidated operations
or financial position. We anticipate making additional expenditures for
environmental matters during 2002, in accordance with terms agreed upon with the
United States Environmental Protection Agency and various state environmental
agencies. See Part II, Item 7 - Environmental and Other Contingencies.
Licenses, Patents and Trademarks
The success of our products historically has not depended largely on
patent, trademark and license protection, but rather on the quality of our
products, proprietary technology, contract performance, customer service and the
technical competence and innovative ability of our personnel to develop and
introduce salable products. However, we do rely on patent protection and
licensing arrangements in the marketing of certain products. Examples include
licensed branding programs involving Woods, Woods Canada and Loren, and the
development of patented products and technology at most of our operations.
6
Item 2. PROPERTIES
As of December 31, 2001, our total building floor area owned or leased was
4,651,302 square feet, of which 1,081,933 square feet were owned and 3,569,369
square feet were leased. The following table shows by industry segment a summary
of the size (in square feet) and character of the various facilities included in
the above totals together with the location of the principal facilities.
Industry Segment Owned Leased Total
- ---------------- ----- ------ -----
(In thousands of square feet)
Electrical/Electronics - primarily plant and
office facilities with principal facilities
located in Rockford, Illinois;
Taipei, Taiwan; Carmel,
Jasonville, Mooresville,
and Worthington, Indiana; Lancaster,
Pennsylvania; and Toronto, Ontario, Canada 524 554 1,078
Maintenance Products - primarily
plant and office facilities with principal
facilities located in Chico, Norwalk and
Santa Fe Springs, California; Wrens, Thomson,
McDonough, Atlanta, Georgia; Bridgeton,
Creve Coeur, Earth City and
Hazelwood, Missouri;
Pineville, North Carolina; Buffalo, New York;
Lawrence, Massachusetts; Winters, Texas;
Etobicoke and Mississauga, Ontario, Canada; and
Redruth, Cornwall, England 558 3,010 3,568
Corporate - office facility in Middlebury, Connecticut 5 5
We believe that our current facilities meet our needs in our existing
markets for the foreseeable future. During late 2001, we moved our corporate
headquarters to Middlebury, Connecticut, thereby prematurely terminating our
lease agreement for our previous corporate office facility in Englewood,
Colorado and an adjunct corporate office facility in Chicago, Illinois. We also
closed a warehouse facility related to our Wilen division in Phoenix, Arizona,
and consolidated certain administrative functions related to the Wilen business
to our Contico subsidiary in St. Louis, Missouri, over the course of 2001. Our
Disco subsidiary closed warehouse facilities in Texas and California during
2001, as well. During the first quarter of 2001, our Woods subsidiary undertook
a restructuring effort that involved facility closings in Bloomington and
Loogootee, Indiana.
7
Item 3. LEGAL PROCEEDINGS
Except as set forth below, no cases or legal proceedings are pending
against Katy, other than ordinary routine litigation incidental to Katy and our
businesses and other non-material cases and proceedings.
1. Environmental Claims - Administrative Order on Consent - W.J. Smith Wood
Preserving Company (W.J. Smith) and Katy Industries, Inc., U.S. EPA Docket No.
RCRA-VI-7003-93-02 and Texas Water Commission Administrative Enforcement Action.
The W. J. Smith case originated in the 1980s when the United States and
the State of Texas, through the Texas Water Commission, initiated environmental
enforcement actions against W.J. Smith alleging that certain conditions on the
W.J. Smith property violated environmental laws. Following these enforcement
actions, W.J. Smith engaged in a series of cleanup activities on its property
and implemented a groundwater monitoring program.
In 1993, the Texas Water Commission referred the entire matter to the
United States Environmental Protection Agency (EPA), which initiated a
Unilateral Administrative Order Proceeding under Section 7003 of the Resource
Conservation and Recovery Act against W.J. Smith and Katy. The proceeding
requires certain actions at the site and certain off-site areas, as well as
development and implementation of additional cleanup activities to mitigate
off-site releases. In December 1995, W.J. Smith, Katy and USEPA agreed to
resolve the proceeding through an Administrative Order on Consent under Section
7003 of RCRA. Pursuant to the Order, W.J. Smith is currently implementing a
cleanup.
Since 1990, we have spent approximately $7.0 million undertaking cleanup
and compliance activities in connection with this matter. While the ultimate
costs with respect to this matter is not easily determinable, we have recorded
and accrued amounts that we deem reasonable for prospective costs with respect
to this matter and we believe that any additional costs with respect to this
matter in excess of the accrual will not be material.
In addition to the claim specifically identified above, Katy and certain
of our current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by USEPA, state environmental
agencies and private parties as potentially responsible parties at a number of
waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) or equivalent state laws, and, as such,
may be liable for the costs of cleanup and other remedial activities at these
sites. The costs involved in these matters are, by nature, difficult to estimate
and subject to substantial change as litigation or negotiations with the United
States, states and other parties proceed. While ultimate liability with respect
to these matters is not easily determinable, we have recorded and accrued
amounts that we deem reasonable for prospective liabilities and we believe that
any costs with respect to such matters in excess of the accruals will not be
material.
2. Banco del Atlantico, S.A. v. Woods Industries, Inc., et al., Civil Action No.
L-96-139 (U.S. District Court, Southern District of Texas).
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of Katy, 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 (RICO) 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 our 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 RICO. Because certain procedural issues have not yet been fully
adjudicated in this litigation, it is not possible at this time for the Company
to reasonably determine an outcome or accurately estimate the range of potential
exposure. We 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 we 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.
3. General
We also have a number of product liability and worker's compensation
claims pending against us and our 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
worker's compensation claims, we have provided for our share of expected losses
beyond the applicable insurance coverage, including those incurred but not
reported. Such accruals are developed using currently available claim
information, and represent our best estimates. The ultimate cost of any
individual
8
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of 2001.
9
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange (NYSE). The
following table sets forth high and low sales prices for the common stock in
composite transactions as reported on the NYSE composite tape for the prior two
years and dividends declared during the respective periods.
Cash
Dividends
Period High Low Declared
- ------ ---- --- --------
2001
First Quarter $ 8.00 $ 5.60 $ .000
Second Quarter 7.35 4.05 .000
Third Quarter 4.80 2.95 .000
Fourth Quarter 3.55 3.00 .000
2000
First Quarter $ 11 5/8 $ 7 7/8 $ .075
Second Quarter 14 8 3/8 .075
Third Quarter 11 15/16 6 11/16 .075
Fourth Quarter 9 7/8 5 1/16 .075
Dividends are paid at the discretion of the Board of Directors. On March
30, 2001, our Board of Directors determined to suspend quarterly dividends in
order to preserve cash for operations. Additionally, under the restrictions
related to our New Credit Agreement, the payment of dividends has been suspended
through the term of that agreement.
As of March 22, 2002, there were 770 holders of record of our Common Stock
and there were 8,391,583 shares of Common Stock outstanding.
Sale of Unregistered Securities
On June 28, 2001, we sold 700,000 shares of preferred stock, $100
par value per share, to KKTY Holding Company, L.L.C. (KKTY) for a total purchase
price of $70,000,000. These shares were sold to KKTY based on exemption from
registration under Section 4(2) of the Securities Act of 1933 since the stock
was not sold in a public offering. The preferred stock is convertible into
11,666,666 shares of our common stock at the option of KKTY 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 Katy, or a sale of
all or substantially all of the assets or liquidation of Katy, 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 (as approved by the Class I
directors) at any time after June 30, 2021, 3) are entitled to receive
cumulative payment in kind (PIK) dividends through December 31, 2004, 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.
As discussed above, the preferred shares are entitled to a 15% PIK
dividend (that is, dividends in the form of additional shares of preferred
stock), compounded annually, which started 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 KKTY continues to hold the preferred stock
through December 31, 2004, it will receive an additional 431,555 shares of
preferred stock through PIK dividends, which would be convertible into an
additional 7,192,598 shares of common stock.
10
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Thousands of Dollars, except per share data and ratios)
Net sales $ 505,960 $ 579,629 $ 598,045 $ 382,041 $ 333,493
(Loss) income from continuing operations (62,080) (5,458) 12,155 13,082 9,643
Discontinued operations [a] -- -- (1,700) -- 1,959
Extraordinary loss on early extinguishment of debt (1,182) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (63,262) $ (5,458) $ 10,455 $ 13,082 $ 11,602
============ ============ ============ ============ ============
(Loss) earnings per share - Basic:
(Loss) income from continuing operations (7.14) (.65) 1.45 1.58 1.16
Discontinued operations [a] -- -- (.20) -- .24
Extraordinary loss on early extinguishment of debt (.14) -- -- -- --
------------ ------------ ------------ ------------ ------------
(Loss) earnings per common share $ (7.28) $ (0.65) $ 1.25 $ 1.58 $ 1.40
============ ============ ============ ============ ============
(Loss) earnings per share - Diluted:
(Loss) income from continuing operations (7.14) (.65) 1.38 1.55 1.15
Discontinued operations [a] -- -- (.17) -- .23
Extraordinary loss on early extinguishment of debt (.14) -- -- -- --
------------ ------------ ------------ ------------ ------------
(Loss) earnings per common share $ (7.28) $ (.65) $ 1.21 $ 1.55 $ 1.38
============ ============ ============ ============ ============
Total assets [b] $ 347,955 $ 446,723 $ 493,104 $ 294,131 $ 237,160
Total liabilities and preferred interest 190,091 296,390 332,793 144,815 97,989
Stockholders' equity 157,864 150,333 160,311 149,316 139,171
Long-term debt, excluding current portion [b] 12,474 771 150,835 39,908 9,948
Current portion of long-term debt 14,619 133,067 67 72 --
Revolving credit agreement, classified current 57,000 -- -- -- --
Depreciation and amortization [b] 22,468 23,598 20,172 7,162 4,568
Capital expenditures 12,566 14,196 21,066 15,921 10,699
Working capital [b] 2,357 (28,265) 120,893 100,971 103,252
Ratio of debt to capitalization 32.5% 42.2% 43.8% 21.1% 7.1%
Weighted average common shares outstanding - Basic 8,393,210 8,403,701 8,366,178 8,289,915 8,272,836
Weighted average common shares outstanding -Diluted 8,393,210 8,403,701 10,015,238 8,443,591 8,405,131
Number of employees 2,922 3,509 3,834 2,472 1,907
Cash dividends declared per common share $ 0.00 $ 0.30 $ 0.30 $ 0.30 $ 0.30
[a] Loss from operations for Discontinued Operations has been recorded in the
line item Loss from operations of discontinued businesses (net of tax) on the
1999 Consolidated Statement of Operations. See Note 5 to the Consolidated
Financial Statements.
[b] Total assets include $15,328 of net assets from Discontinued Operations for
1998 and $15,552 of net assets from Discontinued Operations for 1997.
Depreciation includes $454, $631 and $681 from Discontinued Operations for 1999,
1998 and 1997 respectively. Working capital includes $10,959 and $10,588 of net
current assets from Discontinued Operations for 1998 and 1997 respectively. See
Note 5 to the Consolidated Financial Statements.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For purposes of this discussion and analysis section, reference is made to
the table below and the Company's Consolidated Financial Statements (included in
Part II, Item 8). We have two principal operating groups: Electrical/Electronics
and Maintenance Products. Through one of our subsidiaries, we also operate a
waste-to-energy facility, and we also have a minority equity investment in a
seafood harvesting and farming company. We have disposed of our entire
previously reported Machinery Manufacturing Group and, accordingly, that group
has been reported as "Discontinued Operations" in our Consolidated Financial
Statements.
The table below and the narrative that follows summarize the key factors
in the year-to-year changes in operating results.
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
(Thousands of dollars)
Electrical/Electronics Group
Net external sales $ 173,661 $ 210,187 $ 232,384
Net intercompany sales 52,864 64,793 59,992
Income (loss) from operations [a] 856 8,055 8,303
Operating margin (deficit) 0.5% 3.8% 3.6%
Total assets 81,924 103,676 126,090
Depreciation and amortization [b] 3,524 2,800 2,557
Capital expenditures 1,944 1,709 3,434
Maintenance Products Group
Net external sales $ 327,714 $ 365,752 $ 361,761
Net intercompany sales 13,950 9,062 11,141
Income (loss) from operations [a] (39,699) 10,298 29,458
Operating margin (deficit) (12.1%) 2.8% 8.1%
Total assets 231,179 299,292 318,906
Depreciation and amortization [b] 56,013 20,638 17,065
Capital expenditures 10,060 11,732 16,936
Other
Net external sales $ 4,585 $ 3,690 $ 3,900
Net intercompany sales 0 2 --
Income (loss) from operations (9,782) (889) (190)
Operating margin (deficit) (213.3%) (24.0%) (4.9%)
Total assets 8,995 18,468 17,903
Depreciation and amortization [b] 10,042 116 5
Capital expenditures 524 755 429
Discontinued Operations
Net external sales $ -- $ -- $ 10,025
Net intercompany sales -- -- --
Income (loss) from operations -- -- (190)
Operating margin (deficit) -- -- (1.9%)
Total assets -- -- --
Depreciation and amortization [b] -- -- 454
Capital expenditures -- -- 80
12
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Corporate
Corporate expenses $ 21,239 $ 9,258 $ 9,989
Total assets 25,857 25,287 30,205
Depreciation and amortization [b] 358 44 91
Capital expenditures 38 -- 187
Company
Net external sales [a] $ 505,960 $579,629 $608,070
Net intercompany sales 66,814 73,857 71,133
Income (loss) from operations [a] (69,864) 8,206 27,392
Operating margin (deficit) [a] (13.8%) 1.4% 4.5%
Total assets [a] 347,955 446,723 493,104
Depreciation and amortization [a] [b] 69,937 23,598 20,172
Capital expenditures 12,566 14,196 21,066
[a] Company balances include amounts from "Discontinued Operations" in the
consolidated financial statements for 1999. The (Loss) from operations for
Discontinued Operations has been recorded in the line item "Loss from operations
of discontinued businesses (net of tax)" on the 1999 Consolidated Statement of
Operations. See Note 5 to the Consolidated Financial Statements.
[b] Depreciation and amortization includes amounts recorded for impairments of
long-lived assets.
2001 Compared to 2000
Electrical/Electronics Group
The Electrical/Electronics Group's sales decreased $36.5 million or 17.4%
due to decreased volumes at Woods, Woods Canada and GC/Waldom. Sales at Hamilton
were also lower, but to a lesser extent than the other three businesses. We sold
Thorsen Tools during the second quarter of 2001, which accounted for $7.3
million of the sales decrease. Excluding the impact of Thorsen Tools, sales in
the group were lower by 13.9%. The sales decreases are primarily attributable to
slower economic conditions during 2001, especially as those conditions caused
retailers to reduce inventory levels during the early portion of 2001. Sales at
GC/Waldom were hurt specifically by softness in the telecommunications and
high-tech sectors
The group's operating income decreased $7.2 million or 89.4%. Operating
results were negatively impacted by unusual items of $9.5 million including $6.1
million of inventory lower of cost or market adjustments, the largest occurring
at Woods relating to exiting licensed branded product lines ($3.3 million) and
at GC/Waldom ($1.8 million). Other significant unusual items impacting operating
results include severance and restructuring charges of $1.8 million and related
impairments of long-lived assets of $0.7 million, and other items of $0.8
million. Unusual items impacted operating results in 2000 as well, including a
$0.8 million product recall and $0.4 million severance charge at Woods, and a
$0.5 million inventory valuation adjustment at GC/Waldom. Operating results
excluding the items detailed above improved in 2001, with operating income
increasing $1.6 million, or 16.5%, and operating margin increasing from 4.6% to
6.5%. Significant reductions in selling, general and administration costs at
Woods and Woods Canada in 2001 as compared to 2000. SG&A costs as a percentage
of sales for the two entities combined dropped from 10.6% to 8.9%, excluding the
unusual items discussed above.
Identifiable assets for the group decreased $21.8 million or 21.0% during
the year mainly as a result of lower working capital levels at Woods, Woods
Canada and GC/Waldom. These reductions were the result of aggressive efforts to
reduce inventories, as well as lower levels of capital expenditures. Also,
assets of Thorsen Tools, which were sold during 2001, accounted for
approximately $6.9 million of the reduction.
Maintenance Products Group
Sales from the Maintenance Products Group decreased $38.0 million or
10.4%. Sales decreased in 2001 at Contico and Wilen, and to a lesser extent at
Duckback, Gemtex and Disco. Sales increased at Glit/Microtron and Loren. The
group experienced weakness in both the retail and institutional sectors to which
it sells. Retailers' efforts to reduce inventories, especially in early 2001,
led to softer sales for Contico and Duckback, and a slower economy contributed
to softer sales in the
13
janitorial/sanitation markets.
The group's operating income decreased $50.0 million. We recorded an
impairment charge of $33.0 million at Wilen because consistently poor operating
performance led us to conclude that the carrying values of certain long-lived
assets were not recoverable through future cash flows. In addition to the
impairment at Wilen, an additional $3.1 million of impairment charges were
taken, related primarily to management decisions regarding the discontinuance of
certain property, plant and equipment. Additional items that negatively impacted
operating results during 2001 include severance and restructuring charges of
$3.5 million, primarily at Contico and Wilen, and valuation reserve adjustments
for inventory and receivables of $3.5 million. Operating results in 2000 were
negatively impacted by unusual items of $2.7 million, including $1.2 million in
severance and restructuring charges, a $0.7 million increase to its LIFO
inventory reserve at Contico and an inventory write down at Wilen of $0.9
million. Excluding the impact of unusual items, operating income for the group
declined $9.4 million, or 72%, and operating margin declined from 3.6% to 1.1%.
Selling, general and administrative expenses declined as a percentage of sales
from 15.5% to 15.0%, with improvements at Contico, Glit/Microtron, Loren and
Disco offset by higher percentages of SG&A at Wilen, Duckback and Gemtex. The
overall improvement in SG&A (excluding the unusual items) was offset by reduced
gross margins at all businesses, led by Contico. Decreased volumes and the
inability to reduce overhead accordingly was the main cause of the margin
decreases. The group saw its overall gross margin decrease from 19% to 16%,
excluding unusual items. Offsetting these factors were prices paid for various
resins, a key raw material for plastic products produced by Contico, which were
lower in 2001 than in 2000, especially for polypropylene. The lower prices for
resins taken alone accounted for approximately $4.7 million in lower cost goods
sold during 2001 versus 2000.
Identifiable assets for the group decreased $68.1 million, or 22.8%, in
part due to a $33.0 million write-off of long-lived assets in the mop, broom and
brush business. An inventory reduction effort on a company-wide basis resulted
in lower working capital levels at each division in 2001. Lower levels of
capital expenditures also contributed to the decline.
Other
Sales from other operations increased modestly as a result of higher sales
at the waste-to-energy facility.
Operating income from other operations decreased $8.9 million, primarily
as a result of a $9.8 million impairment of our investment in the
waste-to-energy facility and related property, plant and equipment. Excluding
the effect of the write-off, operating income increased $0.9 million as a result
of improved profitability at the waste-to-energy facility.
Identifiable assets for our other operations decreased $9.5 million in
connection with the write-off of Katy's investment in the waste-to-energy
facility.
Discontinued Operations
All of the companies included in Discontinued Operations were disposed of
as of December 31, 1999.
Corporate
Corporate expenses increased $12.0 million, or 129%; however, corporate
incurred $12.7 million of unusual charges, consisting primarily of restructuring
and severance charges and other costs incurred in connection with the
recapitalization. We recorded $8.7 million of severance and restructuring
charges, the majority of which relate to payments made in connection with
management transition. Included in this amount is approximately $1.0 million of
charges that relate to outside consultants working with Katy to modify operating
and financial strategies, and $0.7 million of non-cancelable rent and other exit
costs associated with the premature termination of our leased office facility in
Englewood, Colorado. We also incurred approximately $3.0 million of costs
associated with the recapitalization, such as non-capitalizable legal fees and
investment banker fees, board and committee fees and other internal incremental
costs. Other unusual items included increases to claims and environmental
reserves of $0.7 million and other items totaling $0.3 million. Operating
results in 2000 were negatively impacted by $0.6 million in unusual items,
including $0.9 million of severance and restructuring charges and $0.2 million
of costs associated with the recapitalization, partially offset by proceeds of
$0.5 million related to a previously written-off investment. Excluding these
unusual items, corporate costs decreased slightly from $8.7 million to $8.5
million, or 2%.
Identifiable assets at corporate increased primarily as a result of higher
cash levels at year-end relative to 2000, and a net long-term deferred tax asset
position at December 31, 2001 versus year end 2000, when a net long-term
deferred tax liability position existed.
Interest expense decreased $3.8 million, or 25.3%, due primarily to
reduced borrowings outstanding, especially during the second half of 2001 as a
result of the recapitalization. We also paid lower rates of interest during 2001
as a result of lower rates of interest available for our variable rate debt
facilities.
14
The income tax benefit from continuing operations (excluding the tax
effect of distributions on preferred securities) for 2001 is $20.4 million,
yielding an effective tax rate of 25.1%, compared to a rate of 35% in 2000. The
reduced effective tax rate is the result of valuation allowances applied to
certain net operating loss carryforwards created during 2000 and 2001.
2000 Compared to 1999
Electrical/Electronics
The Electrical/Electronics Group's sales decreased $22.6 million or 9.7%
primarily due to decreased volumes at Woods, GC/Waldom, and Thorsen Tools,
partially offset by increased volumes at Hamilton, and to a lesser extent, Woods
Canada. Sales decreases at Woods occurred partially as a result of 1999 sales
including final sales to a single large customer that withdrew its commitment to
purchase Woods products, as announced on November 4, 1998. Sales were also lower
late in 2000 compared to 1999 as a result of retail customers reducing orders
and inventory levels. Sales at GC/Waldom softened in 2000 to a certain extent
due to operational problems experienced primarily in 1999 as a result of the
consolidation of GC Electronics and Waldom Electronics, which in turn affected
those divisions' customer service.
The group's operating income decreased $0.3 million or 3.0%. Operating
results were negatively impacted by unusual items of $1.7 million including:
$0.4 million in restructuring and severance charges at Woods, a $0.8 million
product recall at Woods and a $0.5 million inventory valuation at GC/Waldom. The
group's 1999 operating income was negatively impacted by $0.6 million
restructuring charge, primarily for severance costs at Woods. Excluding these
items operating income increased $0.8 million or 4.7%. Operating results,
excluding unusual items, were positively affected by significant reductions in
selling, general and administration costs at Woods in 2000 as compared to 1999
Identifiable assets for the group decreased $22.4 million or 17.8% during
the year mainly as a result of lower working capital levels at Woods, Woods
Canada and GC Waldom, and lower levels of capital expenditures.
Maintenance Products
Sales from the Maintenance Products Group increased $4.0 million or 1.1%.
Sales remained relatively flat in 2000 as increased sales at Contico and to a
lesser extent at Disco were partially offset by decreased sales at
Glit/Microtron and Wilen, and to a lesser extent by lower sales at Gemtex,
Duckback and Loren.
The group's operating income decreased $19.2 million or 65.0%. Operating
results in 2000 were negatively impacted by unusual items of $2.8 million
including: $1.2 million in severance and restructuring charges, a $0.7 million
increase to its LIFO inventory reserve at Contico and an inventory write down at
Wilen of $0.9 million. The group's 1999 operating income was negatively impacted
by a $1.0 million increase to its LIFO inventory reserve at Contico, and a $0.3
million charge related to the restructuring of Contico's marketing
representative group. Excluding these items, operating income decreased by $17.7
million, or 58%. Higher costs for plastic resins resulted in reduced margins at
Contico. We estimate that resin costs negatively impacted 2000 results versus
prior year by $10.0 million, due to an inability to recover or offset higher
costs for raw materials. Also contributing to the decreased operating income
levels were poor performance at Wilen, which experienced systems and other
operational problems throughout 2000. Operating income was also lower, albeit to
lesser extents, at Glit/Microtron and Duckback. Most of our consolidated foreign
currency translation adjustment resulted from the translation of maintenance
products operations in Canada and the United Kingdom.
Identifiable assets for the group decreased $19.6 million or 6.2%
primarily as a result of lower working capital levels at Contico, Glit/Gemtex
and Wilen and lower levels of capital expenditures.
Other
Sales from other operations remained relatively stable compared to prior
year, decreasing $0.2 million or 5.4%.
Operating income attributable to other operations decreased $0.7 million
or 363.2% primarily as a result of increased maintenance costs coupled with
fixed revenue contracts.
Identifiable assets for other operations remained relatively stable
between years.
Discontinued Operations
All of the companies included in Discontinued Operations have been
disposed of as of December 31, 1999.
15
Corporate
Corporate expenses decreased $0.7 million or 7.3%. Operating results were
negatively impacted by $0.6 million in unusual items including: $0.9 million in
severance and restructuring charges, $0.2 million of costs associated with the
recapitalization, offset by proceeds of $0.5 million related to a previously
written-off investment. Corporate expenses in 1999 were impacted by an unusual
charge of $0.3 million associated with the attempted sale of the
Electrical/Electronics group. Excluding these items, Corporate expenses
decreased $1.0 million or 11.9%. This decrease is attributable to reduced
headcount and other salary related expenditures.
Identifiable assets at Corporate decreased primarily as a result of lower
cash levels at year end.
Interest expense increased $1.9 million or 14.7%, due primarily to higher
interest rates paid by Katy under the Former Credit Agreement during 2000 as
opposed to 1999. Interest income decreased $0.3 million as the Company
maintained lower average cash and cash equivalent balances during 2000 compared
to 1999. "Other, net" in 2000 was income of $0.4 million versus income of $1.6
million in 1999. The amounts in both years resulted from us receiving past due
balances on previously written-off notes and investments.
The income tax benefit in 2000 is $2.0 million, yielding an effective tax
rate of 35%. The provision for income taxes in 1999 was $3.2 or an effective tax
rate of 18.9%. The reduced 1999 effective tax rate resulted from the resolution
of specific income tax matters with the relevant tax authorities.
16
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources were improved at the end of the second
quarter of 2001 as a result of the completion of the recapitalization. Following
the recapitalization, we had borrowings outstanding under the New Credit
Agreement at June 30, 2001 of $89.2 million, which was reduced to $83.3 million
at December 31, 2001. $6.1 million of the borrowings under the New Credit
Agreement are 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. We have also determined that an additional $8.6 million of
borrowings will be prepaid on or around April 1, 2002 (see below). Following is
a summary of the sources and uses of funds involved in consummating the
recapitalization:
(Thousands of Dollars)
Sources:
Sale of Convertible Preferred Stock $ 70,000
Borrowings under the New Credit Agreement 93,211
--------
$163,211
========
Uses:
Paydown of principal obligations under the Former Credit Agreement $144,300
Payment of accrued interest under the Former Credit Agreement 624
Purchase of one half of preferred interest of Contico at a discount 9,900
Payment of accrued distributions on one-half of preferred interest of subsidiary 322
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
We believe that our liquidity and financial strength has been 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 (Term Loan) with a final maturity date of June
28, 2006 and quarterly repayments of $1.5 million, the first of which was made
on 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 (Revolving Credit
Facility) that also has an expiration date of June 28, 2006. The borrowing base
of the Revolving Credit Facility is determined by eligible inventory and
accounts receivable. Unused borrowing availability on the Revolving Credit
Facility was $16.8 million at December 31, 2001. Borrowing availability would
have been higher at year end if not for several factors, including the
duplication of a significant letter of credit (letters of credit are added to
funded debt in determining availability) and an unusually high cash balance, due
in part to over-committed borrowings. All extensions of credit under the New
Credit Agreement 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 Katy. Customary financial covenants and restrictions on
the payment of dividends apply under the New Credit Agreement. Among other
financial covenants, the Company was required to generate earnings before
interest, taxes, depreciation and amortization and other adjustments (EBITDA, as
defined the in the New Credit Agreement) in excess of $26.0 million for the
twelve months ended December 31, 2001. The Company's actual EBITDA for 2001 in
this regard was $31.1 million. The minimum EBITDA covenant adjusts to $28.0
million for the twelve months periods ending September 30 and December 31, 2002.
Interest accrues on borrowings at approximately 275 basis points over the
Eurodollar rate for Eurodollar rate loans and 175 basis points over the prime
rate for base rate loans until the close of the second quarter of 2002.
Following that, interest will be based on our consolidated leverage ratio, as
defined in the New Credit Agreement. Total debt was 32.5% of total
capitalization at December 31, 2001.
In connection with the Revolving Credit Facility, the New Credit Agreement
requires lockbox agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements, combined with the existence of
a Material Adverse Effect (MAE) clause in the New Credit Agreement, cause the
Revolving Credit Facility to be classified as a current liability, per guidance
in the FASB's Emerging Issues Task Force 95-22, Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement. However, the Company
does not expect to repay, or be required to repay, within one year, the balance
of the Revolving Credit Facility classified as a current liability. The MAE
clause, which is a typical requirement in commercial credit agreements, allows
the lender to require the loan to become due if it determines there has been a
material adverse effect on our operations, business, properties, assets,
liabilities, condition or prospects. The classification of the Revolving Credit
Facility as a current liability is a result only of the combination of the two
aforementioned factors: the lockbox agreements and the MAE clause. However, the
Revolving Credit Facility does not expire or have a maturity date within one
year, but rather has a final expiration date of June 28, 2006. Also, we were in
compliance with the applicable financial covenants at December 31, 2001,
17
the lender has not notified us of any indication of a MAE at December 31, 2001,
and to our knowledge, we were not in default of any provision of the New Credit
Agreement at December 31, 2001.
The New Credit Agreement calls for scheduled repayments of Term Loans of
$6.0 million during 2002. However, the New Credit Agreement also has a provision
requiring the Company to repay Term Loans by a percentage of excess cash flow
("Consolidated Excess Cash Flow" as calculated under the New Credit Agreement)
generated during each annual reporting period. As a result of this provision,
and the calculation per the New Credit Agreement of Consolidated Excess Cash
Flow generated during fiscal 2001, we expect to repay Term Loans in the
approximate amount of $8.6 million on or around April 1, 2002. Much of the
Consolidated Excess Cash Flow was generated by improved working capital during
2001. This repayment would require us to convert Term Loans to Revolving Loans.
The most recently available calculations of our borrowing base (eligible
accounts receivable and inventory) performed as of the end of the February 2002
reporting period indicated that we had unused borrowing availability of $24.9
million. The prepayment would reduce this unused availability.
As the result of an agreement related to the recapitalization, we reduced
the amount outstanding of the preferred interest in Contico by acquiring
approximately one-half of such interest at a significant discount. This will
result in a reduction of preferred cash distributions by approximately $1.3
million annually.
Key components of working capital (excluding cash, current portion of
deferred taxes, current maturities of debt, and the Revolving Credit Facility)
decreased from December 31, 2000 by $37.4 million. The decrease was due in large
part to a $37.1 million reduction in inventories. Reductions in accounts
receivable and accounts payable roughly offset each other. Included in the
inventory decrease was $9.0 million of valuation adjustments for excess and
obsolete inventory. Lower sales levels also contributed to the decrease.
However, a significant portion of the decrease was due to management efforts to
operate the business with reduced stock levels and to monetize aged inventory.
We expect to commit $12.0 million for capital projects in the continuing
businesses over the course of 2002. 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. While a maximum of $140.0 million
is available under the New Credit Agreement, our borrowing base is limited under
the Revolving Credit Facility to eligible accounts receivable and inventory. We
feel that the New Credit Agreement provides sufficient liquidity for the
Company's operations going forward. Our borrowing availability at December 31,
2001, based on eligible accounts receivable and inventory, exceeded our
outstanding borrowings at year end by approximately $16.8 million. Borrowing
availability would have been higher at year end if not for several factors,
including the duplication of a significant letter of credit (letters of credit
are added to funded debt in determining availability) and an unusually high cash
balance, due in part to over-committed borrowings.
We are continually evaluating alternatives relating to divestitures of
certain of our businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
Off-Balance Sheet Arrangements
An indirect wholly-owed subsidiary of Katy, Savannah Energy Systems
Company (SESCO), owns a waste-to-energy facility, in Savannah, Georgia. SESCO is
under contract with the Resource Recovery Development Authority (the Authority)
for the City of Savannah (the City) to receive and dispose of the City's solid
waste through 2007 under a service agreement (the Service Agreement). The
Authority issued $55.0 million of Industrial Revenue Bonds in 1984 and lent the
proceeds to SESCO for the acquisition and construction of the facility under a
loan agreement between SESCO and the Authority (the Loan Agreement). SESCO's
ability to repay under the Loan Agreement is dependent upon money it receives as
a result of contract obligations of the City to deliver minimum quantities of
waste and for the Authority to pay a related disposal fee, a component of which
is the debt service for the loan. As of December 31, 2001, $40.3 million of the
bonds remained outstanding.
On March 15, 2002, the Company and SESCO signed agreements that would
effectively turn over operation of the facility to a third party. We anticipate
a final closing on these agreements during April of 2002. This party would
essentially assume SESCO's position in various contracts relating to the
facility's operation. See the caption below entitled Joint Venture Arrangement
Involving SESCO.
Under the Service Agreement, SESCO is obligated to receive and process a
certain amount of waste generated by the City each year, and to produce certain
amounts of steam and energy. The Authority is obligated to deliver a certain
tonnage of waste generated by the City during each year and to pay a monthly
disposal fee, notwithstanding delivery of less than minimum amounts of waste
during a given period. The Authority must pay the disposal fee whether or not
the Facility is operating unless 1) SESCO and Katy are insolvent, and 2) the
facility is deemed incapable of incinerating the required amount of waste. SESCO
is liable for liquidated damages if it fails to accept the minimum amount of
waste or to meet other performance standards under the Service Agreement. The
liquidated damages, an off balance sheet risk for Katy, are equal to the amount
of the bonds outstanding, less $4.0 million maintained in a debt service reserve
trust. We do not expect non-performance by the other parties.
SESCO's obligations under the Service Agreement are, except in limited
circumstances relating to a default by the Authority, guaranteed by Katy. The
obligation of SESCO to repay the loan is dependent upon debt service payments
received from the Authority as part of the monthly disposal fee. The obligation
of the Authority to provide for debt service payments is expected to be
fulfilled from money derived from the City under a waste disposal contract. If
all other parties fail to fulfill their respective obligations to provide funds
for payments of principal and interest and premium on the bonds under the
contract documents, the City is unconditionally obligated to provide the funds
for such payments (even during periods of force majeure), unless 1) SESCO and
Katy are insolvent, and 2) the facility is deemed to be incapable of
incinerating the required amount of
18
waste. The obligation of the City to make such payments constitutes a general
obligation of the City for which its full faith and credit are irrevocably
pledged.
With the consent of the City and other parties to the contracts (and
without the approval of the holders of the bonds), 1) SESCO may be replaced as
operator of the facility if the experience of the substitute operator in
operating mass-burn resource recovery facilities similar to the facility equals
or exceeds that of Katy and SESCO, and 2) Katy may be replaced as guarantor of
SESCO's performance under the Service Agreement by a third party, whose senior
unsecured long-term debt is rated investment grade or better. To the extent the
above qualifications are not met, the consent of the majority of bondholders
would be required to authorize the replacement.
Based on consultations with outside legal counsel, SESCO has a legally
enforceable right to offset amounts it owes to the Authority under the Loan
Agreement against amounts that are owed from the Authority under the Service
Agreement. Accordingly, the amounts owed to and due from SESCO have been netted
for financial reporting purposes and are not shown on the consolidated
statements of financial position.
Following are scheduled principal repayments on the Loan Agreement (and
the Industrial Revenue Bonds) (in thousands):
2002 $ 4,445
2003 5,385
2004 6,765
2005 8,370
2006 15,300
-------
Total $40,265
=======
Joint Venture Arrangement Involving SESCO
On March 15, 2002, the Company and SESCO signed agreements that would
effectively turn over operation of the facility to a third party. The closing of
the agreements is contingent upon receipt of certain consents from interested
parties, and we anticipate a final closing during April of 2002. The Company has
entered into these agreements as a result of evaluations of SESCO's business.
The Company has determined that SESCO is not a core component to Katy's
long-term strategic goals. Moreover, Katy does not feel it has the management
expertise to deal with certain risks and uncertainties presented by the
operation, given that SESCO is the only waste-to-energy facility in which the
Company has an interest. Katy has explored options for divesting SESCO for a
number of years, and management feels that the agreements contemplated currently
offer a reasonable exit strategy from this business.
The third party would essentially assume SESCO's position in various
contracts relating to the facility's operation. Under the agreements, SESCO will
contribute its assets and liabilities (except for its liability under the Loan
Agreement) to a joint venture. While SESCO will maintain a 99% limited
partnership interest in the joint venture, the third party will have control of
the joint venture. SESCO will give a note payable as consideration for the
transaction of $6,600,000. Certain amounts may be due to SESCO upon expiration
of the Service Agreement in 2008. Also, the third party may purchase SESCO's
remaining interest in the joint venture at that time. Also, if the Service
Agreement were extended, further amounts would be due to SESCO from the third
party.
While SESCO (and therefore the Company) will maintain an investment in the
joint venture, it will have a zero value since no positive return will be
realized from it and SESCO will not be able to exert any meaningful level of
control over it. Upon completion of the transaction, the Company expects to
recognize a loss consisting of 1) a charge for the discounted value of the
$6,600,000 note, which is payable over seven years, and 2) an amount
representing the carrying value of certain assets contributed to the joint
venture, consisting primarily of machinery spare parts. It should be noted that
all of SESCO's long-lived assets were written to zero value at December 31,
2001, so no additional impairment will be required. However, the Company will
incur higher than normal expenses related to SESCO as a result of legal fees and
other costs to complete the transaction, and higher operational expenses during
2002 as a result of the ceasing of cost capitalization (i.e., costs previously
considered capital expenditures are now being expensed in 2002) given the zero
book value of long-lived assets.
On a going forward basis, Katy would expect little if any income statement
activity as a result of its involvement in the joint venture, and Katy's balance
sheet will carry the note payable mentioned above. We have not booked any
amounts receivable or other assets relating to amounts that may be received at
the time the Service Agreement expires, given their uncertainty.
19
Contractual Obligations and Commercial Obligations
Katy's obligations are summarized below:
(In thousands of dollars)
Due in less Due in Due in Due after
Contractual Cash Obligations Total than 1 year 1-3 years 4-5 years 5 years
- ----------------------------- ----------- ----------- ----------- ----------- -----------
Revolving credit facility (b) $ 57,000 $ -- $ -- $ 57,000 $ --
Term loans 26,325 14,552 11,773 -- --
Preferred interest of subsidiary 16,400 -- -- 16,400 --
Operating leases 62,516 11,860 21,915 15,395 13,346
Other 768 67 701 -- --
----------- ----------- ----------- ----------- -----------
Total Contractual Obligations $ 163,009 $ 26,479 $ 34,389 $ 88,795 $ 13,346
=========== =========== =========== =========== ===========
Due in less Due in Due in Due after
Other Commercial Commitments Total than 1 year 1-3 years 4-5 years 5 years
- ----------------------------- ----------- ----------- ----------- ----------- -----------
Commercial letters of credit $ 530 $ 530 $ -- $ -- $ --
Stand-by letters of credit 9,678 5,305 4,373 -- --
Guarantees (a) 40,265 4,445 12,150 23,670 --
----------- ----------- ----------- ----------- -----------
Total Commercial Commitments $ 50,473 $ 10,280 $ 16,523 $ 23,670 $ --
=========== =========== =========== =========== ===========
(a) As discussed in the Off-Balance Sheet Arrangements section above, SESCO, an
indirect wholly-owned subsidiary of Katy, operates a waste-to-energy facility,
under which it has certain contractual obligations, and for which Katy provides
certain guarantees. If SESCO is not able to perform its obligations under the
contracts, under certain circumstances SESCO and Katy could be subject to
damages equal to the amount of Industrial Revenue Bonds outstanding (which
financed construction of the Facility) less amounts held by certain trusts in
debt service reserve funds. Katy and SESCO do not anticipate non-performance by
parties to the contracts. See the Off-Balance Sheet Arrangements section above
and Note 14 to Consolidated Financial Statements.
(b) As discussed in the Liquidity and Capital Resources section above, the
entire Revolving Credit Facility is classified as a current liability on the
Consolidated Statements of Financial Position as a result of the combination in
the new credit agreement of 1) lockbox agreements on Katy's depository bank
accounts and 2) a subjective Material Adverse Effect (MAE) clause. The revolving
credit facility expires on June 28, 2006.
OTHER ITEMS
Effect of Transactions with Related and Certain Other Parties
In connection with the Contico acquisition on January 8, 1999, we entered
into building lease agreements with Newcastle Industries, Inc. Newcastle is
majority-owned by Lester I. Miller, who was appointed to our Board of Directors
on January 8, 1999, and who resigned in September 2000. Newcastle also is the
holder of the preferred interest in Contico. Also, several additional properties
utilized by Contico are leased directly from Lester I. Miller. Rental expense
for these properties approximates historical market rates. Related party rental
expense for the year ending December 31, 2001, 2000 and 1999 was approximately
$1.5 million, $1.5 million and $5.5 million, respectively.
We paid Newcastle $2.0 million of preferred dividends for the year ended
December 31, 2001, compared to $2.6 million for each of the years ended December
31, 2000 and 1999. In connection with the recapitalization, we agreed with the
holder of the preferred interest in Contico to redeem, at a discount,
approximately half of such interest. As a consequence of the redemption, annual
preferred cash distributions required to be paid pursuant to the purchase
agreement were lower in 2001, and will decrease in future years by approximately
$1.3 million from fiscal year 2000 and 1999 levels.
Kohlberg, whose affiliate holds all 700,000 shares of our Convertible
Preferred Stock, provides ongoing management oversight and advisory services to
Katy. We paid $250,000 for such services in 2001, and expect to pay $500,000
annually in future years.
20
Restructuring Efforts and Severance Charges
During the fourth quarter of 2001, we recorded $3.2 million of severance
and restructuring charges. Approximately $1.0 million was related to severance
payments. These payments related to the closing of the former corporate
headquarters in Englewood, Colorado and an adjunct corporate office in Chicago
and the related terminations of employees, as well as severance paid to
employees at operating divisions in headcount reduction efforts. Approximately
$1.4 million of the charges related to a consultant working with us on sourcing
and other manufacturing and production efficiency initiatives. Approximately
$0.4 million of the charges related to transition activities within the Company.
Other costs related to manufacturing restructuring initiatives at Contico.
During the third quarter of 2001, we recorded $6.5 million of severance
and restructuring charges, of which $5.1 million related to the payment or
accrual of severance and other payments associated with the management
transition resulting from the recapitalization. Additionally, $1.0 million of
costs were incurred related primarily to consultants working with the Company on
sourcing and other manufacturing and production efficiency initiatives.
During the second quarter of 2001, Contico 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.
Also during the second quarter of 2001, 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 were being affected by these actions. Total severance and exit costs
associated with these efforts were $0.4 million.
We incurred charges for non-cancelable rent and other exit costs
associated with the planned closure of our Englewood, Colorado corporate office.
Total costs recognized in the second quarter of 2001 were $0.7 million. An
additional $0.1 million was added to this cost estimate in the fourth quarter
(see above).
During the first quarter of 2001, Woods undertook a restructuring effort
that involved reductions in senior management headcount as well as facilities
closings. We 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.
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 group.
The workforce reduction included severance and related costs for certain
employees. Total severance and related costs was $2.4 million.
In June 1999, we began a restructuring plan for our Electrical/Electronics
businesses as a result of weaker than expected sales performance and lower
margins. The cost of the 1999 restructuring, which included severance costs
related to the elimination of 22 management employees, resulted in a pre-tax
charge to earnings in the second quarter of 1999 of approximately $0.6 million.
Additionally, plant personnel levels were reduced in excess of 100 persons and
24 unfilled administrative positions were eliminated.
As of December 31, 2001 accrued severance and restructuring totaled $3.6
million which will be paid through the year 2009.
The table below summarizes the future obligations for severance and
restructuring charges detailed above:
(Thousands of dollars)
2002 $3,209
2003 265
2004 55
2005 55
2006 22
Thereafter --
------
Total payments $3,606
======
21
Outlook for 2002
We anticipate a continuation of the difficult economic conditions and
business environment in 2002, which will present challenges in maintaining top
line net sales. In particular, we expect to see softness continue in the
restaurant, travel and hotel markets to which we sell cleaning products. We have
a significant concentration of customers in the mass-market retail, discount,
and do-it-yourself market channels. Our ability to maintain and increase our
sales levels depends in part on our ability to retain and improve relationships
with these customers. We face the continuing challenge of recovering or
offsetting costs increases for raw materials.
Gross margins are expected to improve during 2002 as we realize the
benefits of various profit-enhancing strategies begun in 2001. These strategies
include sourcing previously manufactured products, as well as locating new
sources for products already sourced outside the Company. We have significantly
reduced headcount, and continue to examine issues related to excess facilities.
Cost of goods sold is subject to variability in the prices for certain raw
materials, most significantly thermoplastic resins used by Contico in the
manufacture of plastic products. We are also exposed to price changes for copper
(used by Woods and Woods Canada), corrugated packaging material and other raw
materials. We have not employed any hedging techniques in the past, but are
evaluating alternatives in the area of commodity price risk. We anticipate
mitigating these risks in part by creating efficiencies in and improvements to
our production processes.
Selling, general and administrative costs are expected to remain stable or
improve as a percentage of sales from 2001 levels. Cost reduction efforts are
ongoing throughout the Company. Our corporate office has relocated, and we
expect to maintain modest headcount and rental costs. We have begun the process
of transferring most back-office functions of our Wilen subsidiary from Atlanta
to St. Louis, the headquarters of Contico. We will evaluate the possibility of
further consolidation of administrative processes at our other companies.
It should be noted that we may incur further unusual charges during 2002
for potential restructuring efforts related to decisions on manufacturing and
distribution facilities, as well as administrative operations. These charges
could be for any or all of severance, plant closure costs and asset impairments.
We are also pursuing a strategy of developing the Katy Maintenance Group
(KMG). This process involves bundling certain products of the
janitorial/sanitation business of Contico, Wilen, Glit/Microtron and Disco for
customers in the janitorial/sanitation markets. The new organization would allow
customers to order certain products from all of the companies using a single
purchase order, and billing and collection would be consolidated as well. In
addition to administrative efficiencies, we believe that combining sales and
marketing efforts of these entities will allow us a unique marketing opportunity
to have improved delivery of both product and customer service. We do not expect
significant financial benefits from this project in 2002, but believe it to be a
key to improving profitability and the long-term success of the Company
Interest expense is expected to be significantly lower during 2002 as
opposed to 2001, given a full year of lower debt levels as a result of the
recapitalization. Also, we have benefited from lower prevailing rates of
interest in recent months as a result of variable rate borrowing facilities. We
cannot predict the future levels of these interest rates.
The effective tax rate for 2002 is expected to be higher than the federal
statutory rate as a result of state and foreign income tax provisions. The
effective tax rate is also subject to ongoing adjustments as a result of the
Company's ongoing evaluations of its abilities to utilize certain deferred tax
assets, particularly net operating losses.
We are continually evaluating the possibility of divesting certain
businesses. This strategy would allow us to de-leverage our current financial
position and allow available cash, as well as management focus, to be directed
at core business activities.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
This report and the information incorporated by reference in this report
contain various "forward-looking statements" as defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, as amended.
The forward-looking statements are based on the beliefs of our management, as
well as assumptions made by, and information currently available to, our
management. We have based these forward-looking statements on current
expectations and projections about future events and trends affecting the
financial condition of our business. These forward-looking statements are
subject to risks and uncertainties that may lead to results that differ
materially from those expressed in any forward-looking statement made by us or
on our behalf, including, among other things:
- 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.
22
- Our inability to reduce product costs, including manufacturing,
sourcing, freight, and other product costs.
- Our inability to reduce administrative costs through consolidation
of functions and systems improvements.
- Our inability 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 us and our existing channels.
- The potential impact of rising interest rates on our
Eurodollar-based credit facility.
- Our inability to meet covenants associated with the New 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. We are also subject to labor relations issues at
entities involved in our supply chain, including both suppliers and
those involved in transportation and shipping.
- Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
- Our inability to sell certain assets to raise cash and de-leverage
its financial condition.
Words and phrases such as "expects," "estimates," "will," "intends,"
"plans," "believes," "anticipates" and the like are intended to identify
forward-looking statements. The results referred to in forward-looking
statements may differ materially from actual results because they involve
estimates, assumptions and uncertainties. We are not obligated to update
or revise any forward-looking statements or to advise changes in the
assumptions on which they are based, whether as a result of new
information, future events or otherwise. All forward looking statements
should be viewed with caution.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements. Certain of our accounting policies as
discussed below require the application of significant judgment by management in
selecting the appropriate assumptions for calculating amounts to record in our
financial statements. By their nature, these judgments are subject to an
inherent degree of uncertainty.
Accounts Receivable - We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customer's
current credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payment from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provision established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past. Since our accounts
receivable are concentrated in a relatively few number of large sized customers,
a significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectibility of our
accounts receivable and our future operating results.
Inventories - We value our inventory at the lower of the actual cost to
purchase and/or manufacture the inventory or the current estimated market value
of the inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements for the next twelve
months. A significant increase in the demand for our products could result in a
short-term increase in the cost of inventory purchases while a significant
decrease in demand could result in an increase in the amount of excess inventory
quantities on hand. Additionally, our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore,
23
although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or product
developments could have a significant impact on the value of our inventory and
our reported operating results.
Deferred income taxes - We recognize deferred income tax assets and
liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. Deferred income tax assets
also include net operating loss carry forwards primarily due to the significant
operating losses incurred during recent years. We regularly review our deferred
income tax assets for recoverability and establish a valuation allowance when it
is more likely than not such assets will not be recovered, taking into
consideration historical net income (losses), projected future income (losses)
and the expected timing of the reversals of existing temporary differences. As
of December 31, 2001, we had a valuation allowance of $13.9 million. During the
year ended December 31, 2001, the valuation allowance was increased by $9.7
million, reducing our effective tax rate benefit to 25% and our total income tax
benefit to $21.7 million . We will continue to evaluate our valuation allowance
requirements based on future operating results and business acquisitions and
dispositions. As circumstances change that require an increase or decrease in
our income tax valuation allowance, the change in valuation allowance will be
reflected in current operations through our income tax provision (benefit).
Workers' compensation and product liabilities - We make payments for
workers' compensation and product liability claims generally through the use of
a third party claims administrator. We have purchased insurance coverage for
large claims over our self-insured retention levels. Our workers' compensation
and health benefit liabilities are developed using actuarial methods based upon
historical data for payment patterns, cost trends, and other relevant factors.
While we believe that our liabilities for workers' compensation and product
liability claims of $9.1 million as of December 31, 2001, are adequate and that
the judgment applied is appropriate, such estimated liabilities could differ
materially from what will actually transpire in the future.
New 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 under its predecessor,
Accounting Principles Board (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 APB 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 of 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. In addition, goodwill on prior business combinations will
cease to be amortized. The Company is unable at this time to determine the
impact that this Statement will have on goodwill and 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
its Wilen subsidiary, as discussed in Note 7 to Consolidated Financial
Statements. However, even considering this impairment, the terms of the recently
completed recapitalization (see Note 3 to Consolidated Financial Statements)
indicate that the fair value of the Company may be less than the carrying value
represented on the consolidated balance sheets. Therefore, the Company
recognizes the possibility of impairments of goodwill and certain intangibles
upon adoption in the first quarter of 2002.
In August, 2001, the FASB released SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Previously, two accounting models
existed for long-lived assets to be disposed of, as SFAS No. 121, Accounting for
the
24
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, did
not address the accounting for a segment of a business accounted for as a
discontinued operation under APB Opinion 30. This statement establishes a single
model based on the framework of SFAS No. 121. This statement also broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. While the Company is still evaluating the potential impact of the
statement, it anticipates that this statement could have an impact on its
financial reporting as it liberalizes the presentation of discontinued
operations. If the Company were to divest of certain businesses that are under
consideration, Katy anticipates they would possibly qualify as discontinued
operations under SFAS No. 144, whereas they would have not met the requirements
of discontinued operations treatment under APB Opinion 30.
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 (Superfund) Act 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 amounts that it
deems reasonable and believes that any liability with respect to these matters
in excess of the accrual will not be material. The ultimate costs will depend on
a number of factors and the amount currently accrued represents management's
best current estimate of the total cost to be incurred. The Company expects this
amount to be substantially paid over the next one to four years.
The most significant environmental matter in which the Company is
currently involved relates to the W.J. Smith site. In 1993, the United States
Environmental Protection Agency (USEPA) initiated a Unilateral Administrative
Order Proceeding under Section 7003 of the Resource Conservation and Recovery
Act (RCRA) against W.J. Smith and Katy. The proceeding requires certain actions
at the W.J. Smith site and certain off-site areas, as well as development and
implementation of additional cleanup activities to mitigate off-site releases.
In December 1995, W.J. Smith, Katy and USEPA agreed to resolve the proceeding
through an Administrative Order on Consent under Section 7003 of RCRA. Pursuant
to the Order, W.J. Smith is currently implementing a cleanup to mitigate
off-site releases.
With regard to non-environmental contingencies, in December 1996, Banco
del Atlantico, a bank located in Mexico, filed a lawsuit against Woods, a
subsidiary of Katy, 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 (RICO) 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 our 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 RICO. Because certain
procedural issues have not yet been fully adjudicated in this litigation, it is
not possible at this time for the Company to reasonably determine an outcome or
accurately estimate the range of potential exposure. We 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 we 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.
We also have a number of product liability and worker's compensation
claims pending against us and our 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
worker's compensation claims, we have provided for our 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 our 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.
25
Although we believe that these actions individually and in the aggregate
are not likely to have a material adverse effect on the Company, further costs
could be significant and will be recorded as a charge to operations when such
costs become probable and reasonably estimable.
26
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk associated with changes in interest rates
relates primarily to our debt obligations and temporary cash investments. We
currently do not use derivative financial instruments relating to either of
these exposures. Our interest obligations on outstanding debt are indexed from
short-term Eurodollar rates.
The holder of the preferred interest in Contico redeemed with Katy, at a
discount, approximately half of such interest at the time of the
recapitalization. We utilized approximately $10.2 million of the proceeds from
the issuance of the Convertible Preferred Stock for the purpose of redeeming
approximately 50% of the preferred interest. The holder will retain
approximately 50% of the preferred interest, or a stated value of $16.4 million.
Additionally, in connection with the recapitalization, the agreement governing a
put option was amended to, among other things, provide that in the event of a
change of control, or at any time during the period beginning on the earlier to
occur of 1) June 28, 2006 , or 2) the date at which all indebtedness incurred by
us in connection with the recapitalization has been paid in full and lenders
have released all security interests in connection with such indebtedness, and
ending on January 7, 2010, the holder of the preferred interest shall have the
right to require us to purchase from them any portion of their preferred
interest at its stated value. In the same amendment, provisions regarding our
call option on the preferred interest were amended to allow us to purchase the
outstanding preferred interest at stated value at any time following the
recapitalization. See Note 12 to Consolidated Financial Statements
The following table presents our financial instruments, rates of interest
and indications of fair value:
Expected Maturity Dates
(Thousands of Dollars)
ASSETS
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Temporary cash investments
Fixed rate $ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Average interest rate -- -- -- -- -- --
LONG-TERM DEBT
Fixed rate debt $ 67 $ 701 $ -- $ -- $ -- $ -- $ 768 $ 768
Average interest rate 7.14% 7.14% -- -- -- -- 7.14%
Variable rate debt $14,552 $ 6,000 $ 5,773 $ -- $ 57,000 $ -- $ 83,325 $83,325
Average interest rate 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
PREFERRED INTEREST OF SUBSIDIARY
Fixed rate obligation $ -- $ -- $ -- $ -- $ 16,400 $ -- 16,400 (a)
Average interest rate 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
(a) The Company cannot estimate the fair value of the preferred interest due to
lack of a market. The fair value of the preferred interest in Contico is
impacted by two factors: the rate of interest paid on the stated amount, and the
market price of Katy's common stock. During 2001, market rates for similar
instruments decreased, which would have the effect of increasing the fair value
of the preferred interest. Also during 2001, the value of Katy's common stock
declined, which caused the fair value of the preferred interest to decrease.
Upon exercise of the put option, the holder would receive 780,968 shares of Katy
common stock, implying a $21.00 per share value when divided into the
post-redemption value of $16.4 million. Katy's stock closed at $17.00 on January
8, 1999, the date of the Contico acquisition, and closed at $3.42 on December
31, 2001.
27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT
Our management is responsible for the fair presentation and consistency of
all financial data included in this Annual Report in accordance with generally
accepted accounting principles. Where necessary, the data reflects management's
best estimates and judgments.
Management also is responsible for maintaining an internal control
structure with the objective of providing reasonable assurance that our assets
are safeguarded against material loss from unauthorized use or disposition and
that authorized transactions are properly recorded to permit the preparation of
accurate financial data. Cost-benefit analyses are an important consideration in
this regard. The effectiveness of internal controls is maintained by: (1)
personnel selection and training; (2) division of responsibilities; (3)
establishment and communication of policies; and (4) ongoing internal review
programs and audits. Management believes that our system of internal controls is
effective and adequate to accomplish the above described objectives.
/s/ C. Michael Jacobi
- --------------------------------------
C. Michael Jacobi
President and Chief Executive Officer
/s/ Amir Rosenthal
- --------------------------------------
Amir Rosenthal
Vice President, Chief Financial Officer, General Counsel and Secretary
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO KATY INDUSTRIES, INC.:
We have audited the accompanying consolidated balance sheets of KATY INDUSTRIES,
INC., (a Delaware corporation) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Katy Industries, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
March 26, 2002
28
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 and 2000
(Thousands of Dollars)
ASSETS
2001 2000
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 8,064 $ 2,459
Trade accounts receivable, net of allowance
for doubtful accounts of $2,023 and $1,478 72,810 86,442
Inventories 65,941 103,068
Deferred income taxes 8,243 7,544
Other current assets 2,878 5,571
---------- ----------
Total current assets 157,936 205,084
---------- ----------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $11,315 and $9,398 15,125 39,500
Intangibles, net of accumulated
amortization of $10,182 and $7,559 33,032 47,214
Deferred income taxes 2,278 --
Equity method investment in unconsolidated affiliate - Note 2 7,011 6,927
Other 12,825 15,382
---------- ----------
Total other assets 70,271 109,023
---------- ----------
PROPERTY AND EQUIPMENT
Land and improvements 3,798 3,789
Buildings and improvements 23,526 23,273
Machinery and equipment 171,333 168,312
---------- ----------
198,657 195,374
Less - Accumulated depreciation (78,909) (62,758)
---------- ----------
Net property and equipment 119,748 132,616
---------- ----------
Total assets $ 347,955 $ 446,723
========== ==========
See Notes to Consolidated Financial Statements.
29
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 and 2000
(Thousands of Dollars, except Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
---- ----
CURRENT LIABILITIES:
Accounts payable $ 39,181 $ 54,444
Accrued compensation 7,201 6,179
Accrued expenses 37,578 39,030
Current maturities, long-term debt - Note 8 14,619 133,067
Revolving credit agreement - Note 8 57,000 --
Dividends payable -- 629
---------- ----------
Total current liabilities 155,579 233,349
LONG-TERM DEBT, less current maturities - Note 8 12,474 771
OTHER LIABILITIES 5,638 7,609
EXCESS OF ACQUIRED NET
ASSETS OVER COST, net of accumulated amortization of
$8,517 and $6,725 -- 1,792
DEFERRED INCOME TAXES -- 19,969
---------- ----------
Total liabilities 173,691 263,490
---------- ----------
COMMITMENTS AND CONTINGENCIES - Notes 8, 16 and 19
PREFERRED INTEREST OF SUBSIDIARY - Note 3 and 12 16,400 32,900
---------- ----------
STOCKHOLDERS' EQUITY
15% Convertible Preferred Stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 700,000 shares,
liquidation value $70,000 - Note 3 and 9 69,560 --
Common stock, $1 par values; authorized 35,000,000 and
25,000,000 shares; issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 58,314 51,127
Accumulated other comprehensive loss (4,625) (2,757)
Unearned compensation (106) (518)
Retained earnings 44,976 112,697
Treasury stock, at cost, 1,430,621
and 1,427,446 shares, respectively (20,077) (20,038)
---------- ----------
Total stockholders' equity 157,864 150,333
---------- ----------
Total liabilities and stockholders equity $ 347,955 $ 446,723
========== ==========
See Notes to Consolidated Financial Statements.
30
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(Thousands of Dollars, Except Per Share Amounts)
2001 2000 1999
---- ---- ----
Net sales $ 505,960 $ 579,629 $ 598,045
Cost of goods sold 429,140 473,823 469,211
--------- --------- ---------
Gross profit 76,820 105,806 128,834
Selling, general and administrative expenses (85,567) (94,949) (100,094)
Impairments of long-lived assets (47,469) -- --
Severance and restructuring charges (13,648) (2,651) (1,158)
--------- --------- ---------
Operating (loss) income (69,864) 8,206 27,582
Equity in income (loss) of unconsolidated affiliate 72 (61) (84)
Interest (10,772) (14,376) (12,135)
Other, net (625) 462 1,687
--------- --------- ---------
(Loss) income before income taxes, distributions on preferred
interest of subsidiary, discontinued operations and
extraordinary loss on early extinguishment of debt (81,189) (5,769) 17,050
Benefit from (provision) for income taxes 20,383 2,022 (3,217)
--------- --------- ---------
(Loss) income from operations before distributions on preferred
interest of subsidiary, discontinued operations and
extraordinary loss on early extinguishment of debt (60,806) (3,747) 13,833
Distributions on preferred interest of subsidiary (net of tax) (1,274) (1,711) (1,678)
--------- --------- ---------
(Loss) income from continuing operations (62,080) (5,458) 12,155
Loss from operations of discontinued businesses (net of tax) -- -- (1,700)
Extraordinary loss on early extinguishment of debt (net of tax) (1,182) -- --
--------- --------- ---------
Net (loss) income (63,262) (5,458) 10,455
Gain on early redemption of preferred interest of subsidiary 6,600 -- --
Payment in kind dividends on convertible preferred stock (4,459) -- --
Net (loss) income available to common shareholders ($ 61,121) ($ 5,458) 10,455
========= ========= =========
(Loss) earnings per share of common stock - Basic
(Loss) income from continuing operations $ (7.14) $ (0.65) $ 1.45
Discontinued operations -- -- (.20)
Extraordinary loss on early extinguishment of debt (.14) -- --
--------- --------- ---------
Net (loss) income $ (7.28) $ (0.65) $ 1.25
========= ========= =========
(Loss) earnings per share of common stock - Diluted
(Loss) income from continuing operations $ (7.14) $ (0.65) $ 1.38
Discontinued operations -- -- (.17)
Extraordinary loss on early extinguishment of debt (.14) -- --
--------- --------- ---------
Net (loss) income $ (7.28) $ (0.65) $ 1.21
========= ========= =========
See Notes to Consolidated Financial Statements.
31
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of dollars, except per share data)
Convertible Common Other
Preferred Stock Stock Additional Compre-
Number of Par Number of Par Paid in hensive Unearned Retained
Shares Value Shares Value Capital Loss Compensation Earnings
--------------------------------------------------------------------------------------------------
Balance, January 1, 1999 -- -- 9,822,204 $ 9,822 $ 51,243 $ (2,309) $ (1,302) $ 112,784
Net income -- -- -- -- -- -- -- 10,455
Foreign currency translation
adjustments -- -- -- -- -- 1,875 -- --
Comprehensive income -- -- -- -- -- -- -- --
Common stock dividends -- -- -- -- -- -- -- (2,514)
Issuance of shares under Stock
Option Plan -- -- -- -- (37) -- --
Other issuance of shares -- -- -- -- (79) -- 292 (36)
Purchase of treasury shares -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
Balance, December 31, 1999 -- -- 9,822,204 9,822 51,127 (434) (1,010) 120,689
Net loss -- -- -- -- -- -- -- (5,458)
Foreign currency translation
adjustment -- -- -- -- -- (2,323) -- --
Comprehensive loss
Common stock dividends -- -- -- -- -- -- -- (2,520)
Issuance of shares under
Stock Option Plan -- -- -- -- -- -- -- --
Other -- -- -- -- -- -- 492 (14)
Purchase of Treasury Shares -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 9,822,204 9,822 51,127 (2,757) (518) 112,697
Net loss -- -- -- -- -- -- -- (63,262)
Foreign currency translation
adjustment -- -- -- -- -- (1,511) -- --
Pension adjustment (357)
Comprehensive loss
Issuance of convertible
preferred stock 700,000 $ 70,000 -- -- -- -- -- --
Direct costs related to
issuance of convertible
preferred stock -- (4,899) -- -- -- -- -- --
Redemption of preferred
interest in subsidiary, with
tax -- -- -- -- 6,710 -- -- --
Payment in kind dividend 4,459 (4,459)
Stock option grant 477
Other -- -- -- -- -- -- 412 --
Balance,December 31, 2001 700,000 $ 69,560 9,822,204 $ 9,822 $ 58,314 $ (4,625) $ (106) $ 44,976
==================================================================================================
Compre-
hensive
Treasury Income
Stock (Loss)
------------------------
Balance, January 1, 1999 $ (20,922)
Net income -- $ 10,455
Foreign currency translation
adjustments -- 1,875
---------
Comprehensive income -- $ 12,330
=========
Common stock dividends --
Issuance of shares under Stock
Option Plan 289
Other issuance of shares 988
Purchase of treasury shares (238)
------------------------
Balance, December 31, 1999 (19,883)
Net loss -- $ (5,458)
Foreign currency translation
adjustment -- (2,323)
---------
Comprehensive loss $ (7,781)
=========
Common stock dividends --
Issuance of shares under
Stock Option Plan 63
Other 44
Purchase of Treasury Shares (262)
---------
Balance, December 31, 2000 (20,038)
Net loss -- $ (63,262)
Foreign currency translation
adjustment -- (1,511)
Pension adjustment (357)
---------
Comprehensive loss $ (65,130)
=========
Issuance of convertible
preferred stock --
Direct costs related to
issuance of convertible
preferred stock --
Redemption of preferred
interest in subsidiary, net of
tax --
Payment in kind dividend
Stock option grant
Other (39)
Balance,December 31, 2001 $ (20,077)
========================
See Notes to Consolidated Financial Statements
32
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(Thousands of Dollars)
2001 2000 1999
---------------------------------------
Cash flows from operating activities:
Net (loss) income $ (63,262) $ (5,458) $ 10,455
Depreciation and amortization 22,468 23,598 20,172
Impairment of long-lived assets 47,469 -- --
Loss (gain) on sale of assets (33) (408) 1,754
Equity in (income) loss of unconsolidated affiliates (72) 61 84
Extraordinary loss on early extinguishment of debt 1,818 -- --
Deferred income taxes (22,836) 885 2,188
Changes in assets and liabilities, net of acquisition/disposition
of subsidiaries:
Accounts receivable 13,135 10,248 (8,201)
Inventories 34,397 14,332 (9,978)
Other current assets 526 212 1,268
Accounts payable (15,263) (3,384) 13,467
Accrued liabilities (430) (14,595) 9,362
Other, net 364 (1,247) (2,654)
---------------------------------------
Net cash flows provided by operating activities 18,281 24,244 37,917
---------------------------------------
Cash flows from investing activities:
Capital expenditures (12,566) (14,196) (21,066)
Proceeds from sale of assets 691 904 210
Collections of notes receivable 137 581 684
Payments for purchase of subsidiaries -- -- (140,088)
Proceeds from sale of subsidiaries 1,576 -- 10,501
---------------------------------------
Net cash flows used in investing activities (10,162) (12,711) (149,759)
---------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on Former Credit Agreement, prior
to Recapitalization 11,300 (17,064) 110,855
Repayment of borrowings under Former Credit Agreement at
Recapitalization (144,300) -- --
Proceeds on initial borrowings from New Credit Agreement at
Recapitalization - term loans 30,000 -- --
Proceeds on initial borrowings from New Credit Agreement at
Recapitalization - revolving loans 63,211 -- --
Repayments on New Credit Agreement following Recapitalization
- revolving loans (3,675) -- --
Net repayments on New Credit Agreement following Recapitalization
- term loans (6,282) -- --
Fees and costs associated with New Credit Agreement (7,471) -- --
Proceeds from issuance of Convertible Preferred Stock 70,000 -- --
Direct costs related to issuance of Convertible Preferred Stock (4,899) -- --
Redemption of preferred interest of subsidiary (9,900) -- --
Payment of dividends (629) (2,520) (2,508)
Purchase of treasury shares -- (262) (238)
Other 122 75 530
---------------------------------------
Net cash flows (used in) provided by financing activities (2,523) (19,771) 108,639
Effect of exchange rate changes on cash and cash equivalents 9 54 (37)
---------------------------------------
Net increase (decrease) in cash and cash equivalents 5,605 (8,184) (3,240)
Cash and cash equivalents, beginning of period 2,459 10,643 13,883
---------------------------------------
Cash and cash equivalents, end of period $ 8,064 $ 2,459 $ 10,643
=======================================
See Notes to Consolidated Financial Statements.
33
KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2001 and 2000
(Thousands of dollars, except per share data)
Note 1. ORGANIZATION OF THE BUSINESS
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, electronics, automotive, and computer
markets. These activities are grouped into two primary reportable segments:
Electrical/Electronics and Maintenance Products.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include the
accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% voting interest, collectively "Katy" or the "Company". All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority-owned and where
the Company does not exercise significant influence are reported using the
equity method.
As part of the continuous evaluation of its operations, Katy has acquired
and disposed of certain of its operating units in recent years. Those which
affected the Consolidated Financial Statements for the years ended December 31,
2001, 2000, and 1999 are discussed in Note 4.
At December 31, 2001, the Company owns 30,000 shares of common stock, a
43% interest, in Sahlman Holding Company, Inc., (Sahlman) that is accounted for
under the equity method. Sahlman is engaged in the business of harvesting shrimp
off the coast of South and Central America and shrimp farming in Nicaragua. As
of December 31, 2001 and 2000 the investment balances were $7,011 and $6,927,
respectively.
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.
Cash and Cash Equivalents - Cash equivalents consist of highly liquid
investments with original maturities of three months or less.
Supplemental Cash Flow Information - Cash paid and (received) during the
year for interest and income taxes is as follows:
2001 2000 1999
-------- -------- --------
(Thousands of dollars)
Interest $ 11,333 $ 15,065 $ 10,121
======== ======== ========
Income taxes $ (2,549) $ (3,850) $ 111
======== ======== ========
Significant non-cash transactions during 2001 include the accrual of
payment-in-kind dividends on the convertible preferred stock (Note 9) of $4,459,
the gain on the early redemption of the preferred interest in Contico (Notes 3
and 12) of $6,600, and the creation of a note receivable on the sale of the
Thorsen Tools business of $1,000.
Advertising Costs - Advertising costs are expensed as incurred.
Advertising costs expensed in 2001, 2000 and 1999 were $8.8 million, $10.0
million and $9.5 million, respectively.
Inventories - Inventories are stated at the lower of cost or market. Cost
includes materials and conversion costs. At December 31, 2001 and 2000,
approximately 40% and 34%, respectively, of Katy's inventories were accounted
for using the last-in, first-out (LIFO) method, 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 $1.5 million and $1.7
million at December 31, 2001 and 2000, respectively. The components of
inventories are:
34
December 31,
2001 2000
-------- --------
(Thousands of dollars)
Raw materials $ 30,804 $ 38,736
Work in process 3,256 3,269
Finished goods 31,881 61,063
-------- --------
$ 65,941 $103,068
======== ========
Goodwill - In connection with certain acquisitions, the Company recorded
goodwill representing the cost of the acquisition in excess of the fair value of
the net assets acquired. Goodwill is being amortized using the straight-line
method over periods ranging from 10 to 20 years. Goodwill amortization expense
was $1,917, $2,664 and $1,940 for 2001, 2000 and 1999, respectively, excluding
impairment charges that are further discussed in Note 7.
Excess of Acquired Net Assets Over Cost - In connection with the
acquisition of Woods Industries, Inc., (Woods) the Company recorded negative
goodwill for the excess of the fair value of the net assets acquired over the
cost of the acquisition. Negative goodwill was amortized using the straight-line
method over a period of five years. Amortization of this item was substantially
complete as of December 31, 2001.
Property and Equipment - Property and equipment are stated at cost and
depreciated over their estimated useful lives: buildings (10-40 years) generally
using the straight-line method; machinery and equipment (3-20 years) using
straight-line or composite methods; and leasehold improvements using the
straight-line method over the remaining lease period.
Impairment of Assets - Long-lived assets are reviewed for impairment if
events or circumstances indicate the carrying amount of these assets may not be
recoverable through future undiscounted cash flows. If this review indicates
that the carrying value of these assets will not be recoverable, based on future
net cash flows from the use or disposition of the asset, the carrying value is
reduced to fair value (see Note 7).
Income Taxes - Income taxes are accounted for using a balance sheet
approach known as the liability method. The liability method accounts for
deferred income taxes by applying the statutory tax rates in effect at the date
of the balance sheet to the differences between the book basis and tax basis of
the assets and liabilities. The Company records a valuation allowance when it is
more likely than not that some portion or all of the deferred income tax asset
will not be realizable.
Foreign Currency Translation - The results of the Company's foreign
subsidiaries are translated to U.S. dollars using the current-rate method.
Assets and liabilities are translated at the year end spot exchange rate,
revenue and expenses at average exchange rates and equity transactions at
historical exchange rates. Exchange differences arising on translation are
recorded as a component of accumulated other comprehensive loss.
Fair Value of Financial Instruments - Where the fair values of Katy's
financial instrument assets and liabilities differ from their carrying value or
Katy is unable to establish the fair value without incurring excessive costs,
appropriate disclosures have been given in the Notes to Consolidated Financial
Statements. All other financial instrument assets and liabilities not
specifically addressed are believed to be carried at their fair value in the
accompanying Consolidated Balance Sheets.
New Accounting Pronouncements - In 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 also 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, Accounting Principles Board (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 APB 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 of cost or fair value and tested for impairment at least annually. All
other recognized intangible assets will
35
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 goodwill.
In addition, goodwill on prior business combinations will cease to be amortized.
The Company is unable at this time to determine the impact that this Statement
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 7. However, even considering this impairment, the terms of the
recently completed Recapitalization of the Company (See Note 3) indicate that
the fair value of the Company may be less than the carrying value represented on
the consolidated balance sheets. Therefore, the Company recognizes the
possibility of impairments of goodwill and certain intangibles upon adoption in
the first quarter of 2002.
In August, 2001, the FASB released SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Previously, two accounting models
existed for long-lived assets to be disposed of, as SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
did not address the accounting for a segment of a business accounted for as a
discontinued operation under APB Opinion 30. This statement establishes a single
model based on the framework of SFAS No. 121. This statement also broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. While the Company is still evaluating the potential impact of the
statement, it anticipates that this statement could have an impact on its
financial reporting as it broadens the presentation of discontinued operations.
If the Company were to divest of certain businesses that are under
consideration, Katy anticipates they would possibly qualify as discontinued
operations under SFAS No. 144, whereas they would have not met the requirements
of discontinued operations treatment under APB Opinion 30.
Revenue Recognition - Sales are recognized upon shipment of products to
customers or when services are performed.
Reclassifications - Certain amounts from prior years have been
reclassified to conform to the 2001 financial statement presentation. See
unaudited Note 21 for a further discussion of these reclassifications.
Note 3. RECAPITALIZATION
On June 28, 2001, Katy announced that it completed a recapitalization of
the Company (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) regarding the recapitalization. On June 28, 2001,
1) Katy stockholders approved proposals to effectuate the recapitalization 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 (New Credit Agreement) to finance 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 700,000 shares of
newly issued preferred stock, $100 par value per share (Convertible Preferred
Stock), which is convertible into 11,666,666 common shares, for an aggregate
purchase price of $70.0 million. See Note 9. The Recapitalization allowed Katy
to retire obligations it had under its former revolving credit agreement (Former
Credit Agreement), which was agented by Bank of America. In connection with the
Recapitalization, Katy entered into the New Credit Agreement, agented by Bankers
Trust Company. See Note 8.
Also in connection with the recapitalization, the Company entered into an
agreement with the holder of the preferred interest in Contico (a subsidiary of
Katy) to redeem at a discount approximately half of such interest, plus $0.3
million of accrued distributions thereon. The stated value prior to the
recapitalization was $32.9 million. See Note 12. 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 ($6.7 million, net of tax) was
recognized as an increase to Additional Paid in Capital on the Condensed
Consolidated Balance Sheets. The holder of the remaining preferred interest will
retain approximately 50% of the original preferred interest, or a stated value
of $16.4 million. Following is a summary of the sources and uses of funds from,
and in connection with, the recapitalization:
36
(Thousands of Dollars)
Sources:
Sale 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 $144,300
Payment of accrued interest under the Former Credit Agreement 624
Purchase of one-half of preferred interest of Contico at a discount 9,900
Payment of accrued distributions on one-half of preferred interest of subsidiary 322
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
Note 4. ACQUISITIONS AND DISPOSITIONS
Acquisitions
On January 8, 1999, the Company purchased all of the common membership
interest (Common Interest) in Contico, the successor to the janitorial, consumer
products and industrial packaging businesses of Contico International, Inc., now
known as Newcastle Industries, Inc. (Newcastle). Newcastle had previously
contributed substantially all its assets and certain liabilities to Contico and
entered into leases with Contico for certain real property used in the business
and retained by Newcastle. The purchase price for the Common Interest was
approximately $132.1 million. The payment of the purchase price was financed by
the Company's unsecured revolving credit agreement from Bank of America (Former
Credit Agreement). Newcastle retained a preferred membership interest in Contico
(Preferred Interest), having a stated value, prior to the recapitalization, of
$32.9 million. In connection with the recapitalization, the Company reached
agreement with the holder of the preferred interest to redeem, at a discount,
approximately half of the Preferred Interest for $9.9 million. The holder's
remaining approximate 50% preferred interest, valued at $16.4 million, yields an
8% annual return on its stated value while outstanding (see Note 12). Contico,
based in St. Louis, Missouri, manufactures and distributes janitorial equipment
and supplies, consumer storage, home and automotive products, as well as food
service equipment and supplies. The acquisition has been accounted for under the
purchase method. The accounts of this acquisition have been included in the
Company's Consolidated Financial Statements from the acquisition date. The
estimated cost in excess of net assets acquired of approximately $7.0 million,
has been recorded as "Goodwill" in the Consolidated Balance Sheets and is being
amortized on a straight line basis over 20 years. In addition, Katy has recorded
intangible assets of approximately $28.0 million, consisting of customer lists,
trademarks and trade names. These intangible assets are being amortized over 20
years.
Dispositions
On May 3, 2001, Katy sold the Thorsen Tools business for $2.5 million,
including a note for $1.0 million, due over five years. The company recognized
losses on impairments of goodwill of $0.8 million and a write-down on the value
of inventory through cost of goods sold of $0.2 million in connection with the
sale.
During 1999, Katy completed the sales of the businesses classified as
Discontinued Operations. Katy has recorded a "Loss from Discontinued Operations"
on the 1999 Consolidated Statement of Operations. The sales are summarized
below:
On December 27, 1999, the Airtronics division of American Gage & Machine
Company (Airtronics) was sold for $2.3 million, including a note for $0.5
million, due in six years, and $0.9 million in deferred payments based upon the
Airtronics business' future sales. On September 24, 1999, the assets of Peters
Machinery Inc., (Peters) were sold for approximately $5.4 million, including a
mortgage note of $1.0 million, due in five years, and an estimated $1.5 million
in deferred payments based on the future sales of the Peters business. On May 7,
1999, the Company completed the divestiture of Diehl Machines, Inc. (Diehl)
for approximately $3.7 million. On January 25, 1999, the Company sold the
operating assets of Bach Simpson, Ltd. for approximately $0.6 million. The
Company retained ownership of Bach Simpson, Ltd.'s building and leases it to the
buyer. With respect to all of the foregoing divestitures, the purchaser assumed
certain liabilities of the seller.
Note 5. DISCONTINUED OPERATIONS
On December 31, 1997, the Board of Directors approved a plan to dispose of
the Company's previously reported Machinery Manufacturing segment. The
businesses included as "Discontinued Operations" are Airtronics, Beehive,
Bach-
37
Simpson, Ltd., Diehl, and Peters. The divestiture of Beehive was completed in
July of 1997, the sale of Bach Simpson, Ltd. closed on January 25, 1999, Diehl
was sold on May 7, 1999, Peters was sold on September 24, 1999 and Airtronics
was sold on December 27, 1999.
The historical operating results have been segregated as "Discontinued
Operations" on the accompanying Consolidated Statements of Operations for all
periods presented. Discontinued Operations have not been segregated on the
Consolidated Statements of Cash Flows. Katy has recorded a "Loss from
Discontinued Operations" on the 1999 Consolidated Statement of Operations.
Selected financial data for the Discontinued Operations is summarized as
follows:
For the Year Ended December 31, 1999
------------------------------------
Net sales $ 10,025
Loss before income taxes $ (1,722)
Income tax benefit 22
Net loss $ (1,700)
========
Net loss per share - Basic $ (0.20)
========
Net loss per share - Diluted $ (0.17)
========
Note 6. INTANGIBLES
Intangible assets consist of the following components as of December 31,
2001 and 2000:
December 31,
2001 2000
---- ----
Patents $ 4,232 $ 4,442
Trademarks and trade names 12,432 15,416
Customer lists 25,035 30,635
Other 1,515 4,280
-------- --------
Total 43,214 54,773
Accumulated amortization (10,182) (7,559)
-------- --------
Total intangibles $ 33,032 $ 47,214
======== ========
Note 7. 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 had experienced consistently
poor operating results for a number of periods, causing the Company to evaluate
the division for impairment. While the Company had plans to improve the
division's performance, the then current sales levels and operating results did
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 the impaired
long-lived assets at fair value amounted to a reduction of goodwill of $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.
During the fourth quarter of 2001, the Company recorded an impairment of
all of the long-lived assets of the waste-to-energy facility (See Note 14).
SESCO's long-lived assets consisted of equity contributions that SESCO was
required to make as a result of contractual obligations through 1993, which had
a carrying value of $8.5 million, and certain property, plant and equipment,
which had a carrying value of approximately $1.3 million. Upon determining that
future undiscounted cash flows would not be adequate to cover the carrying
amount of long-lived assets, the company determined that the long-lived assets
have a fair value of zero. The fair value estimate is based on attempts to
dispose of SESCO.
Also during 2001, the Company recorded other impairments of long-lived
assets totaling $4.7 million. These impairments were primarily the result of
management decisions regarding the retirement of certain capitalized assets.
38
Note 8. INDEBTEDNESS
In connection with the recapitalization, Katy refinanced its outstanding
debt obligations under its former revolving credit agreement (Former Credit
Agreement) with a secured, asset-based lending arrangement (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 (Term Loan)
with a final maturity date of June 28, 2006 that requires quarterly repayments
of $1.5 million, the first of which was made on 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 (Revolving Credit Facility) that also has an
expiration date of June 28, 2006. The borrowing base of the Revolving Credit
Facility is determined by eligible inventory and accounts receivable of the
Company. Unused borrowing availability on the Revolving Credit Facility was
$16.8 million at December 31, 2001. 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 and restrictions on the
payment of dividends apply to the New Credit Agreement. Among other financial
covenants, the Company was required to generate earnings before interest, taxes,
depreciation and amortization and other adjustments (EBITDA, as defined in the
New Credit Agreement) in excess of $26.0 million for the twelve months ended
December 31, 2001. The Company's actual EBITDA in this regard was $31.1 million.
The minimum EBITDA covenant adjusts to $28.0 million for the twelve month
periods ending September 30 and December 31, 2002. Interest accrues on
borrowings at approximately 275 basis points over the Eurodollar rate for
Eurodollar loans, and 175 basis points over the prime rate for base 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. The Company pays a commitment fee of 1/2 of 1% of the unused portion
of the Revolving Credit Facility.
December 31, December 31,
2001 2000
---------------------------
(Thousands of Dollars)
Revolving loans payable under Former Credit Agreement, interest at
various LIBOR rates (7.41% - 8.75%) $ -- $ 133,000
Term loans payable under New Credit Agreement, interest based on
Eurodollar Rate (4.75%), due through 2006 26,325 --
Revolving loans payable under New Credit Agreement, interest based on
Eurodollar and Prime Rates (4.75%) 57,000 --
Real estate and chattel mortgages, with interest at fixed rates (7.14%),
due through 2003 768 838
--------- ---------
Total debt
84,093 133,838
Less revolving loans, classified as current (see below) (57,000) --
Less current maturities (14,619) (133,067)
--------- ---------
Long-term debt $ 12,474 $ 771
========= =========
Aggregate scheduled maturities of term loans and real estate mortgages are as
follows (thousands of dollars):
2002 $14,619
2003 6,701
2004 5,773
2005 --
2006 --
-------
Total $27,093
=======
In connection with the Revolving Credit Facility, the New Credit Agreement
requires lockbox agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements, combined with the existence of
a Material Adverse Effect (MAE) clause in the New Credit Agreement, cause the
Revolving Credit Facility to be classified as a current liability, per guidance
in the FASB's Emerging Issues Task Force 95-22, Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement. However, the Company
does not expect to repay, or be required to repay, within one year, the balance
of the Revolving Credit Facility classified as a current liability. The MAE
clause, which is a typical requirement in commercial credit
agreements, allows the lender to require the loan to become due if it determines
there has been a material adverse effect on the operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the Revolving Credit Facility as
39
a current liability is a result only of the combination of the two afore
mentioned factors: the lockbox agreements and the MAE clause. However, the
Revolving Credit Facility does not expire or have a maturity date within one
year, but rather has a final expiration date of June 28, 2006. Also, the Company
was in compliance with the applicable financial covenants at December 31, 2001,
the lender has not notified the Company of any indication of a MAE at December
31, 2001, and to our knowledge, we were not in default of any provision of the
New Credit Agreement at December 31, 2001.
The New Credit Agreement calls for scheduled repayments of Term Loans of
$6.0 million during 2002. However, the New Credit Agreement also has a provision
requiring the Company to repay Term Loans by a percentage of excess cash flow
("Consolidated Excess Cash Flow" as calculated under the New Credit Agreement)
generated during each annual reporting period. As a result of this provision,
and the calculation per the New Credit Agreement of Consolidated Excess Cash
Flow generated during fiscal 2001, the Company expects to repay Term Loans in
the approximate amount of $8.6 million on or around April 1, 2002. Much of the
Consolidated Excess Cash Flow was generated by improved working capital during
2001. This repayment would require the Company to convert Term Loans to
Revolving Loans. The most recently available calculations of Katy's borrowing
base (eligible accounts receivable and inventory) performed as of the end of the
February 2002 reporting period indicated that the Company had unused borrowing
availability of $24.9 million. The prepayment would reduce this unused
availability.
Letters of credit totaling $10.2 million were outstanding at December 31,
2001.
All of the debt under the New Credit Agreement is re-priced to current
rates at frequent intervals. Therefore, its fair value approximates its carrying
value at December 31, 2001.
The Company has incurred approximately $7.5 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.
The extraordinary item of $1.2 million (net of tax of $0.6 million)
recorded in 2001 was due to the write-off of deferred financing costs associated
with the early extinguishment of the Former Credit Agreement.
Note 9. CONVERTIBLE PREFERRED STOCK
As discussed in Note 3 above, Recapitalization, KKTY purchased from Katy
700,000 shares of newly issued Convertible Preferred Stock, $100 par value per
share, which is convertible into 11,666,666 common shares, for an aggregate
purchase price of $70.0 million. 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
started accruing on August 1, 2001, and are payable on August 1, 2002. No
dividends will accrue or be payable after December 31, 2004. If converted, the
11,666,666 common shares, along with the 742,361 equivalent common shares
accrued for payment to KKTY as PIK dividends through December 31, 2001, would
represent 59.7% of the outstanding shares of common stock as of December 31,
2001, excluding outstanding options. 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 accrual of the PIK dividends
for August to December of 2001 was recorded as a charge to Retained Earnings and
an increase to Convertible Preferred Stock. The dividends were recorded at fair
value, reduced earnings available to common shareholders in the calculation of
basic earnings per share, and are presented on the Condensed Consolidated
Statement of Operations as an item to arrive at Net Loss Available to Common
Shareholders.
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 (as approved only by the Class I directors) at any time after
June 30, 2021, 3) are entitled to receive cumulative PIK dividends through
December 31, 2004, 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 per share, par value,
before any distribution could be made to common shareholders.
The Company incurred approximately $4.9 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.
40
Note 10. EARNINGS PER SHARE
The Company's diluted earnings per share were calculated using the
treasury stock method in accordance with the SFAS No. 128, "Earnings Per Share."
The basic and diluted earnings per share calculations are as follows:
For the Year Ended December 31,
-------------------------------
2001 2000 1999
---- ---- ----
Basic EPS:
(Loss) income from continuing operations ($62,080) ($ 5,458) $ 12,155
Gain on early redemption of preferred interest of subsidiary 6,600
Payment-in-kind dividends on convertible preferred stock (4,459) -- --
-------- -------- --------
Net (loss) income before extraordinary item and discontinued
operations available to common shareholders (59,939) (5,458) 12,155
Discontinued operations, net of tax -- -- (1,700)
Extraordinary loss on early extinguishment of debt, net of tax (1,182) -- --
-------- -------- --------
Net loss available to common shareholders ($61,121) ($ 5,458) $ 10,455
======== ======== ========
Weighted average shares - Basic 8,393 8,404 8,366
Per share amount:
Net (loss) income before extraordinary item and discontinued
operations ($ 7.14) ($ 0.65) $ 1.45
Discontinued operations, net of tax -- -- (0.20)
Extraordinary loss on early extinguishment of debt, net of tax (0.14) -- --
-------- -------- --------
Net (loss) income ($ 7.28) ($ 0.65) $ 1.25
======== ======== ========
Diluted EPS:
(Loss) income from continuing operations ($62,080) $ (5,458) $ 12,155
Gain on early redemption of preferred interest of subsidiary 6,600 -- --
Payment-in-kind dividends on convertible preferred stock (4,459) -- --
Distributions on preferred interest, net of tax -- -- 1,678
-------- -------- --------
Net (loss) income before extraordinary item and discontinued
operations available to common shareholders (59,939) (5,458) 13,833
Discontinued operations, net of tax -- -- (1,700)
Extraordinary loss on early extinguishment of debt, net of tax (1,182) -- --
-------- -------- --------
Net (loss) income ($61,121) $ (5,458) $ 12,133
======== ======== ========
Effect of potentially dilutive securities:
Options (a) -- -- 82
Preferred interest -- -- 1,567
Shares - Diluted 8,393 8,404 10,015
Per share amount:
Net (loss) income before extraordinary item and discontinued
operations ($ 7.14) ($ 0.65) $ 1.38
Discontinued operations, net of tax -- -- (0.17)
Extraordinary loss on early extinguishment of debt, net of tax (0.14) -- --
-------- -------- --------
Net (loss) income ($ 7.28) ($ 0.65) $ 1.21
======== ======== ========
(a) As of December 31, 2001, 150,000 options were in-the-money, but were not
included in the calculation of diluted earnings per share because of their
anti-dilutive impact as a result of the Company's Net Loss position. No options
were in the money at December 31, 2000.
41
Note 11. RETIREMENT BENEFIT PLANS
Pension and Other Postretirement Plans
Several subsidiaries have pension plans covering substantially all of
their employees. These plans are noncontributory, defined benefit pension plans.
The benefits to be paid under these plans are generally based on employees'
retirement age and years of service. The companies' funding policies, subject to
the minimum funding requirements of employee benefit and tax laws, are to
contribute such amounts as determined on an actuarial basis to provide the plans
with assets sufficient to meet the benefit obligations. Plan assets consist
primarily of fixed income investments, corporate equities and government
securities. The Company also provides certain health care and life insurance
benefits for some of its retired employees. The post-retirement health plans are
unfunded.
Pension Benefits Other Benefits
---------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
(Thousands of dollars)
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,988 $ 1,861 $ 3,187 $ 1,420
Service cost 169 121 15 13
Interest cost 150 139 155 181
Actuarial (gain)/loss 48 17 -- 1,848
Effect of sale -- -- -- (14)
Settlement (194) -- -- --
Benefits paid (76) (150) (332) (275)
-------- -------- -------- --------
Benefit obligation at end of year $ 2,085 $ 1,988 $ 3,025 $ 3,173
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 2,118 $ 2,145 $ -- $ --
Actuarial return on plan assets (305) 33 -- --
Employer contribution 237 90 332 275
Effect of sale -- -- -- --
Settlement (261) -- -- --
Benefits paid (76) (150) (332) (275)
-------- -------- -------- --------
Fair value of plan asset at end of year $ 1,713 $ 2,118 $ -- $ --
======== ======== ======== ========
Reconciliation of prepaid (accrued) benefit cost:
Funded status $ (372) $ 131 $ (3,025) $ (3,173)
Unrecognized net actuarial (gain)/loss 963 565 (325) 31
Unrecognized prior service cost -- -- 845 702
Unrecognized net transition asset/(obligation) 35 44 -- --
Additional minimum liability adjustment (391) -- -- --
-------- -------- -------- --------
Prepaid/(Accrued) benefit cost $ 235 $ 740 $ (2,505) $ (2,440)
======== ======== ======== ========
Components of net periodic benefit cost:
Service cost $ 169 $ 121 $ 15 13
Interest cost 150 139 155 181
Expected return on plan assets (170) (171) -- --
Amortization of net transition asset 9 8 -- --
Amortization of prior service cost -- -- 81 81
Amortization of net gain/(loss) 37 26 97 --
Curtailment/settlement recognition 156 -- -- --
-------- -------- -------- --------
Net periodic benefit cost 351 $ 123 $ 348 $ 275
======== ======== ======== ========
Assumptions as of December 31:
Discount rates 7.5% 7-7.5% 7.5% 7%
Expected return on plan assets 8.0% 7-7.5% 0% 0%
Assumed rates of compensation increases 0-5% 0-5% 0-5%- 0-5%
Impact of one-percent increase in health care trend rate:
Increase in accumulated postretirement benefit obligation $ 123 $ 106
Increase in service cost and interest cost $ -- $ --
42
Impact of one-percent decrease in health care trend rate:
Decrease in accumulated postretirement benefit obligation $ 99 $ 85
Decrease in service cost and interest cost $ -- $ --
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation as of December 31, 2001 was 8% in 2001
grading to 5% by 2009.
In addition to the plans described above, in 1993 the Company's Board of
Directors approved a retirement compensation program for certain officers and
employees of the Company and a retirement compensation arrangement for the
Company's then Chairman and Chief Executive Officer. The Board approved a total
of $3.5 million to fund such plans. This amount represented the best estimate of
the obligation that vested immediately upon Board approval and is to be paid for
services rendered to date. The Company had $2.9 million and $3.2 million accrued
at December 31, 2001 and December 31, 2000, respectively, for this obligation.
401(k) Plans
The Company offers its employees the opportunity to voluntarily
participate in one of five 401(k) plans administered by the Company or one of
its subsidiaries. The Company makes matching and other contributions in
accordance with the provisions of the plans and, under certain provisions, at
the discretion of the Company. The Company made annual matching and other
contributions of $0.5 million, $0.7 million and $0.8 million in 2001, 2000 and
1999, respectively.
Note 12. PREFERRED INTEREST OF SUBSIDIARY
Upon the Company's purchase of the Common Interest of Contico on January
8, 1999, Newcastle retained a preferred interest in Contico, represented by 329
preferred units, each with a stated value of $100,000, for an aggregate stated
value of $32.9 million. The preferred interest yields an 8% cumulative annual
return on its stated value while outstanding, payable quarterly in cash. In
connection with the Recapitalization, the Company entered into an agreement with
the holder of the preferred interest in its Contico International, L.L.C.
subsidiary to redeem at a discount approximately half of the aforementioned
interest, plus accrued distributions thereon, which, as disclosed above, had a
stated value prior to the recapitalization of $32.9 million. Katy utilized
approximately $10.2 million of the proceeds from the recapitalization for the
purpose of redeeming approximately 50% of the preferred interest. The holder of
the preferred interest will retain approximately 50% of the preferred interest,
or a stated value of $16.4 million. Additionally, in connection with the
Recapitalization, the agreement governing a put option was amended to, among
other things, provide that in the event of a change in control, or at any time
during the period beginning on the earlier to occur of 1) June 28, 2006, or 2)
the date at which all indebtedness incurred by the Company in connection with
the Recapitalization has been paid in full and lenders have released all
security interests in connection with such indebtedness, and ending on January
7, 2010, the holder of the preferred interest shall have the right to require
Katy to purchase from them any portion of their preferred interest at its stated
value. In the same amendment, provisions regarding the Company's call option on
the preferred interest were amended to allow us to purchase the outstanding
preferred interest at stated value at any time following the Recapitalization.
On the exercise of a put or call option, Katy must also pay to the preferred
holder in cash, the accrued and unpaid Priority Return and profits allocated to
the units being purchased by Katy.
The difference between the amount paid on redemption and the stated value
of preferred interest redeemed ($6.6 million, plus $0.1 million of tax benefit)
was recognized as an increase to Additional Paid in Capital on the Condensed
Consolidated Balance Sheets.
The Company cannot estimate the fair value of the preferred interest due
to the lack of an active market. The fair value of the preferred interest in
Contico is impacted by several factors: the rate of interest paid on the stated
amount, the market price of Katy's common stock, and the existence of certain
put and call provisions associated with the Preferred Interest. During 2001,
market rates for similar instruments decreased, which would have the effect of
increasing the fair value of the preferred interest. Also during 2001, the value
of Katy's common stock declined, which caused the fair value of the preferred
interest to decrease. Upon exercise of the put option, the holder would receive
780,968 shares of Katy common stock, implying a $21.00 per share value when
divided into the post-redemption value of $16.4 million. Katy's stock closed at
$17.00 on January 8, 1999, the date of the Contico acquisition, and closed at
$3.42 on December 31, 2001.
43
Note 13. STOCKHOLDERS' EQUITY
Share Repurchase
On February 26, 2000, the Company's Board of Directors authorized
management to spend up to $5.0 million over a twelve month period for the
repurchase of Katy common stock in the open market. During 2000, the Company
repurchased 24,800 shares of Katy common stock at a total cost of $262,000 and
an average stock price of $10.49. The Company did not repurchase any of its
shares during calendar 2001. Katy repurchased 15,200 of its common shares during
1999 at a total cost of $238,000 as a result of a 1998 authorization from the
Board of Directors.
Stockholder Rights Plan
In January 1995, the Board of Directors adopted a Stockholder Rights
Agreement and distributed one right for each outstanding share of the Company's
common stock (not otherwise exempted under the terms of the agreement). The
rights entitle the stockholders to purchase, upon certain triggering events,
shares of either 1) the Company's common stock or 2) any acquiring company
stock, at a reduced price. The rights are not and will not become exercisable
unless 1) certain change of control events or 2) increases in certain parties'
percentage ownership, occur. Consistent with the intent of the Agreement, a
shareholder who caused a triggering event would not be able to exercise their
rights. If stockholders were to exercise rights, the effect would be to increase
the percentage ownership stakes of those not causing the triggering event, while
decreasing the percentage ownership stake of the party causing the triggering
event. The Stockholder Rights Agreement was amended on June 2, 2001 to clarify
that the Recapitalization was not a triggering event under the Rights Agreement.
As of December 31, 2001, there are 8,391,583 rights outstanding, of which none
are currently exercisable.
Stock Purchase Plan for Key Employees and Directors
In 1994, the Board of Directors approved the Stock Purchase Plan for Key
Employees and Directors (Stock Purchase Plan). Under the Stock Purchase Plan,
shares of the Company's common stock, held in treasury, were reserved for
issuance at a purchase price equal to 65% (50% in certain cases) of the market
value of the shares as determined based upon the offering period established by
the Compensation Committee of the Board of Directors. As of December 31, 2000,
83,000 common shares had been issued at prices ranging from $6.17 to $8.02 per
share. There has been no activity in this plan since 1996, and the Plan was
terminated during 2000.
Proceeds from the sale of these shares consisted of cash or notes
receivable due on demand but no later than sixty months from date of purchase
with an interest rate equal to the Federal Short-Term Funds Rate. The
outstanding balances of all of these notes were collected during 2001.
Restricted Stock Grant
During 2000 and 1999, the Company issued restricted stock grants in the
amount of 3,000 and 45,100 shares, respectively, to certain key employees of the
Company. These stock grants vest over a three-year period, of which 25% vested
immediately upon distribution. As a result of restricted stock grants, the
Company has recognized compensation expense for 2001, 2000 and 1999 in the
amount of $274,000, $391,000 and $539,000, respectively.
Director Stock Grant
During 2001, 2000 and 1999, the Company granted all independent,
non-employee Directors 500 shares of Company common stock as part of their
compensation. For 2001, this grant was limited to the three non-employee Class I
directors. The total grant to the Directors for the years ended December 31,
2001, 2000 and 1999 was 1,500, 4,000, and 4,500 shares, respectively.
Employment Agreements and Stock Option Grants
On June 28, 2001, the Company entered into an employment agreement with C.
Michael Jacobi, President and Chief Executive 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 was granted 978,572
stock options. Mr. Jacobi was also 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, and vest unconditionally (assuming continued employment) in nine
years.
44
On September 4, 2001, the Company entered into an employment agreement
with Amir Rosenthal, Vice President, Chief Financial Officer, General Counsel
and Secretary. To induce Mr. Rosenthal to enter into the employment agreement,
on September 4, 2001, the Compensation Committee of the Board of Directors
approved the Katy Industries, Inc. 2001 Chief Financial Officer's Plan. Under
this plan, Mr. Rosenthal was granted 123,077 stock options. Mr. Rosenthal was
also granted 76,923 stock options under the Company's 1997 Incentive Plan. All
stock options granted to Mr. Rosenthal will vest over a three year period
provided that certain performance measures are met in each year, and vest
unconditionally (assuming continued employment) in nine years.
Stock Options and Stock Appreciation Rights
At the 1998 Annual Meeting, the Company's stockholders approved the 1997
Long-Term Incentive Plan (the 1997 Incentive Plan), authorizing the issuance
of up to 875,000 shares of Company common stock pursuant to the grant or
exercise of stock options, including incentive stock options, nonqualified stock
options, stock appreciation rights ("SARs"), restricted stock, performance units
or shares and other incentive awards. The Compensation Committee of the Board of
Directors administers the Incentive Plan and determines to whom awards may be
granted, the type of award as well as the number of shares of Company common
stock to be covered by each award, and the terms and conditions of such awards.
The exercise price of stock options granted under the 1997 Incentive Plan cannot
be less than 100 percent of the fair market of such stock on the date of grant.
The restricted stock grants in 1999 and 1998 referred to above were made under
the 1997 Incentive Plan. Related to the 1997 Incentive Plan, the Company granted
SARs as described below.
Two hundred four thousand four hundred and seventy-three (204,473) SARs
become exercisable at any time after the earliest that (a) up to and including
July 22, 2001, the Company's average closing stock price over a 45 calendar day
period has equaled or exceeded $39.125 per share; or (b) up to and including
January 22, 2005, the Company's average closing stock price over a 45 calendar
day period has equaled or exceeded $53.80 per share. In addition, in the event
that goal (a) above is met, only 50% of the SARs thus vested will be immediately
exercisable, with, 25% exercisable upon the first anniversary of the performance
vesting date, and 25% exercisable upon the second anniversary of the performance
vesting date. During 2001, 146,965 of these SARs were cancelled due to employee
terminations; 57,508 remain outstanding. In addition, 163,579 SARs become
exercisable at such time up to and including January 22, 2005, the Company's
average closing stock price over a 45-calendar day period has equaled or
exceeded $53.80 per share. During 2001, 117,572 of these SARS were cancelled due
to employee terminations; 46,007 remain outstanding. All SARs which have met the
performance goals above, as the case may be, will expire December 9, 2007. As a
result of the underlying stock price, no compensation expense was recorded in
2001, 2000 or 1999.
The 1997 Incentive Plan also provides that in the event of the Change in
Control of the Company, as defined below, (i) any SARs and stock options
outstanding as of the date of the Change in Control which are neither
exercisable or vested will become fully exercisable and vested (the payment
received upon the exercise of the SARs shall be equal to the excess of the fair
market value of a share of the Company's Common Stock on the date of exercise
over the grant date price multiplied by the number of SARs exercised); (ii) the
restrictions applicable to restricted stock will lapse and such restricted stock
will become free of all restrictions and fully vested; and (iii) all performance
units or shares will be considered to be fully earned and any other restrictions
will lapse, and such performance units or shares will be settled in cash or
stock, as applicable, within 30 days following the effective date of the Change
in Control. For purposes of subsection (iii), the payout of awards subject to
performance goals will be a pro rata portion of all targeted award opportunities
associated with such awards based on the number of complete and partial calendar
months with the performance period which had elapsed as of the effective date of
the Change in Control. The Compensation Committee will also have the authority,
subject to the limitations set forth in the 1997 Incentive Plan, to make any
modifications to awards as determined by the Compensation Committee to be
appropriate before the effective date of the Change in Control.
For purposes of the 1997 Incentive Plan, "Change in Control" of the
Company means, and shall be deemed to have occurred upon, any of the following
events: (a) any person (other than those persons in control of the Company as of
the effective date of the 1997 Incentive Plan, a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company)
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities; or (b) during any period of two (2)
consecutive years (not including any period prior to the effective date), the
individuals who at the beginning of such period constitute the Board of
Directors (and any new director, whose election by the Company's stockholders
was approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was so approved), cease for any reason to
constitute a majority thereof; or (c) the stockholders of the Company approve:
(i) a plan of complete liquidation of the Company; or (ii) an agreement for the
sale or disposition of all or substantially all the Company's assets; or (iii) a
merger, consolidation, or reorganization of the Company with or involving any
other corporation, other than a merger, consolidation, or reorganization that
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent at least
45
50 percent of the combined voting power of the voting securities of the Company
(or such surviving entity) outstanding immediately after such merger,
consolidation, or reorganization. The Company has determined that the
Recapitalization did not result in such a Change in Control.
At the 1995 Annual Meeting, the Company's stockholders approved the
Long-Term Incentive Plan (the 1995 Incentive Plan) authorizing the issuance of
up to 500,000 shares of Company common stock pursuant to the grant or exercise
of stock options, including incentive stock options, nonqualified stock options,
SARs, restricted stock, performance units or shares and other incentive awards
to executives and certain key employees. The Compensation Committee of the Board
of Directors administers the 1995 Incentive Plan and determines to whom awards
may be granted, the type of award as well as the number of shares of Company
common stock to be covered by each award and the terms and conditions of such
awards. The exercise of stock options granted under the 1995 Incentive Plan
cannot be less than 100 percent of the fair market value of such stock on the
date of grant. Stock options granted pursuant to the 1995 Incentive Plan
generally vest in four equal annual installments from the date of grant and
generally expire 10 years after the date of grant. In the event of a Change in
Control of the Company, awards granted under the 1995 Incentive Plan are subject
to substantially similar provisions to those described under the 1997 Incentive
Plan. The definition of Change in Control of the Company under the 1995
Incentive Plan is substantially similar to the definition described under the
1997 Incentive Plan.
At the 1995 Annual Meeting, the Company's stockholders approved the
Non-Employee Directors Stock Option Plan (the Directors' Plan) authorizing the
issuance of up to 200,000 shares of Company common stock pursuant to the grant
or exercise of nonqualified stock options to outside directors. The Board of
Directors administers the Directors' Plan. The exercise price of stock options
granted under the Directors' Plan is equal to the fair market value of the
Company's common stock on the date of grant. Stock options granted pursuant to
the Directors' Plan are immediately vested in full on the date of grant and
generally expire 10 years after the date of grant.
The following table summarizes option activity under each of the 1997
Incentive Plan, 1995 Incentive Plan, the Chief Executive Officer's Plan, the
Chief Financial Officer's Plan and the Directors' Plan:
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Options Exercise Price Life Price
------- -------------- ---- -----
Outstanding at December 31, 1998 471,100 $8.50 - 19.56 7.6 years $12.21
Granted 222,100 $9.88 - 17.00 $13.65
Exercised (20,650) $8.50 - 13.19 $12.22
Canceled (16,700) $13.19 - 19.56 $14.40
---------
Outstanding at December 31, 1999 655,850 $8.50 - 19.56 7.6 years $12.64
Granted 166,000 $9.63 - 10.50 $10.33
Exercised (4,500) $8.50 - 9.25 $ 9.00
Canceled (53,550) $8.50 - 19.56 $13.86
---------
Outstanding at December 31, 2000 763,800 $8.50 - 19.56 7.2 years $12.07
Granted 1,429,000 $3.02 - 4.74 $ 4.04
Exercised -- -- -- --
Canceled (314,150) $8.50 - 18.13 $11.72
---------
Outstanding at December 31, 2001 1,878,650 8.83 years $ 6.03
=========
Vested and Exercisable at December 31, 2001 341,250 $12.49
=========
Available to grant as of December 31, 2001 229,888
=========
46
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Weighted-
Number Average Number
Range of Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Prices 12/31/01 Contractual Life Exercise Price 12/31/01 Exercise Price
- ----------------- --------- --------- --------- --------- ---------
$3.02 - 4.20 1,429,000 9.59 $ 4.04 4,000 $ 4.74
$8.50 - 10.50 227,100 6.84 9.70 138,950 9.46
$12.69 - 13.57 125,950 4.96 13.21 125,950 13.21
$18.13 - 19.56 96,600 7.32 17.35 72,350 17.47
--------- --------- --------- --------- ---------
1,878,650 8.83 $ 6.03 341,250 $ 12.49
========= ========= ========= ========= =========
During 2001, the Company promised to grant a non-employee consultant
200,000 options. As of December 31, 2001, this grant had not occurred. However,
the Company recorded compensation expense of $477,000 during 2001 representing
the fair value of options promised, determined using a binomial option pricing
model.
The Company applies APB No. 25, "Accounting for Stock Issued to Employees"
and related Interpretations in accounting for stock options. SFAS No. 123,
"Accounting for Stock-Based Compensation" was issued and, if fully adopted by
the Company, would change the method for recognition of expense related to
option grants to employees. Under SFAS No. 123, cost is based upon the fair
value of each option at the date of grant using an option-pricing model that
takes into account as of the grant date the exercise price and expected life of
the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest rate for
the expected term of the option. Had compensation cost been determined based on
the fair value method of SFAS No. 123, the Company's net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below. The weighted average fair values of options granted in 2001,
2000 and 1999 were $2.70, $5.02 and $7.19 respectively.
The fair value of each option grant is estimated on the date of grant
using the binomial option-pricing model with the following assumptions: dividend
yield of 0.00%, 3.16% and 2.25% for the periods 2001, 2000, and 1999
respectively; expected volatility ranging from 17.8% to 47.1% for all grants,
risk-free interest rates ranging from of 1.69% to 6.92% for all grants; and
expected lives of five to ten years for all grants.
2001 2000 1999
---- ---- ----
(In Thousands, Except Per Share Data)
Net (loss) income as reported $ (61,121) $ (5,458) $ 10,455
========== ========== ==========
Net (loss) income - pro forma $ (61,816) $ (5,970) $ 9,993
========== ========== ==========
(Loss) earnings per share as reported - Basic $ (7.28) $ (0.65) $ 1.25
========== ========== ==========
(Loss) earnings per share - pro forma - Basic $ (7.37) $ (0.71) $ 1.19
========== ========== ==========
(Loss) earnings per share as reported - Diluted $ (7.28) $ (0.65) $ 1.21
========== ========== ==========
(Loss) earnings per share - pro forma - Diluted $ (7.37) $ (0.71) $ 1.17
========== ========== ==========
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
Note 14. WASTE-TO-ENERGY FACILITY
An indirect wholly-owed subsidiary of Katy, Savannah Energy Systems
Company (SESCO), owns a waste-to-energy facility, in Savannah, Georgia. SESCO is
under contract with the Resource Recovery Development Authority (the Authority)
of the City of Savannah (the City) to receive and dispose of the City's solid
waste through 2008 under a service agreement (the Service Agreement). The
Authority issued $55.0 million of Industrial Revenue Bonds in 1984 and lent the
proceeds to SESCO for the acquisition and construction of the facility (the Loan
Agreement). SESCO's ability to repay the loan is dependent upon money it
receives as a result of contract obligations of the City to deliver minimum
quantities of waste and for the Authority to pay a related disposal fee, a
component of which is the debt service for the loan. As of December 31, 2001 and
2000, $40.3 million and $43.7 million, respectively, remains outstanding on the
Loan Agreement (and the bonds).
47
Under the Service Agreement, SESCO is obligated to receive and
process a certain amount of waste delivered by the Authority each year, and to
produce certain amounts of steam and energy. The Authority is obligated to
deliver a certain tonnage of waste generated by the City during each year and to
pay a monthly disposal fee, notwithstanding delivery of less than minimum
amounts of waste during a given period. The Authority must pay the disposal fee
whether or not the Facility is operating unless 1) SESCO and Katy are insolvent,
and 2) the facility is deemed incapable of incinerating a certain amount of
waste. SESCO is liable for liquidated damages if it fails to accept the required
amount of waste or to meet other performance standards. The liquidated damages,
an off balance sheet risk for Katy, is equal to the amount of the Loan Agreement
(and the bonds) outstanding, less $4.0 million maintained in a debt service
reserve trust for the bonds. The Company does not expect non-performance by the
other parties.
SESCO's obligations under the Service Agreement are, except in
limited circumstances relating to a default by the Authority, guaranteed by
Katy. The obligation of SESCO to repay the loan is dependent upon debt service
payments received from the Authority as part of the monthly disposal fee under
the Service Agreement. The obligation of the Authority to provide for debt
service payments is expected to be fulfilled from money derived from the City
under a waste disposal contract. If all other parties fail to fulfill their
respective obligations to provide funds for payments for principal and interest
and premium on the bonds under the contract documents, the City is
unconditionally obligated to provide the funds for such payments (even during
periods of force majeure), unless 1) SESCO and Katy are insolvent, and 2) the
Facility is deemed to be incapable of incinerating the required amount of waste.
The obligation of the City to make such payments constitutes a general
obligation of the City for which its full faith and credit are irrevocably
pledged.
With the consent of the City and other parties to the contracts (and
without the approval of the holders of the bonds), 1) SESCO may be replaced as
operator of the Facility if the experience of the substitute operator in
operating mass-burn resource recovery facilities similar to the Facility equals
or exceeds that of Katy and SESCO, and 2) Katy may be replaced as guarantor of
SESCO's performance under the Service Agreement by a third party, whose senior
unsecured long-term debt is rated investment grade or better. To the extent the
above qualifications are not met, the consent of the majority of bondholders
would be required to authorize the replacement.
Based on consultations with outside legal counsel, SESCO has a
legally enforceable right to offset amounts it owes to the Authority under the
Loan Agreement against amounts that are owed from the Authority under the
Service Agreement. Accordingly, the amounts owed to and due from SESCO have been
netted for financial reporting purposes and are not shown on the consolidated
statements of financial position.
On March 15, 2002, the Company and SESCO signed agreements that
would effectively turn over operation of the facility to a third party. We
anticipate a final closing on these agreements during April of 2002. The third
party would essentially assume SESCO's position in various contracts relating to
the facility's operation. See Note 22 to Consolidated Financial Statements.
Following are scheduled principal repayments on the Loan Agreement (and
the Industrial Revenue Bonds):
2002 $ 4,445
2003 5,385
2004 6,765
2005 8,370
2006 15,300
-------
Total $40,265
=======
48
Note 15. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes,
exclusive of distributions on preferred interest in subsidiary, discontinued
operations and extraordinary gain on early extinguishment of debt, are:
2001 2000 1999
---- ---- ----
(Thousands of Dollars)
Domestic $ (82,406) $ (8,459) $ 14,075
Foreign 1,217 2,690 2,975
---------- ---------- ----------
Total worldwide $ (81,189) $ (5,769) $ 17,050
========== ========== ==========
The components of the net (benefit) provision for income taxes are:
2001 2000 1999
---- ---- ----
(Thousands of Dollars)
Continuing operations:
Current:
Federal $ (34) $ (3,978) $ (1,205)
State 208 168 228
Foreign 957 624 1,761
---------- ---------- ----------
Total 1,131 (3,186) 784
---------- ---------- ----------
Deferred:
Federal (18,691) 326 1,369
State (2,872) 368 758
Foreign 49 470 306
---------- ---------- ----------
Total (21,514) 1,164 2,433
---------- ---------- ----------
Total continuing operations, excluding preferred interest (20,383) (2,022) 3,217
Preferred interest of subsidiary (686) (921) (903)
Discontinued operations -- -- (22)
Extraordinary loss on early extinguishment of debt (636) -- --
---------- ---------- ----------
Net (benefit from) provision for income taxes $ (21,705) $ (2,943) $ 2,292
========== ========== ==========
The total income tax provision for continuing operations differed from the
amount computed by applying the statutory federal income tax rate to pre-tax
income from continuing operations. The computed amount and the differences for
the years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
---- ---- ----
(Thousands of Dollars)
(Benefit) provision for income taxes at statutory rate $ (28,416) $ (2,019) $ 5,968
State income taxes, net of federal benefit (717) 477 906
Foreign tax rate differential -- (43) (40)
Amortization of negative goodwill (596) (596) (596)
Change in valuation reserves 9,748 544 (2,750)
Other, net (402) (385) (249)
---------- ---------- ----------
(Benefit) provision for income taxes from continuing
operations (20,383) (2,022) 3,239
Distribution on preferred interest of subsidiary (686) (921) (903)
Discontinued operations -- -- (22)
Extraordinary loss on early extinguishment of debt (636) -- --
---------- ---------- ----------
Net (benefit) provision for income taxes from continuing
operations $ (21,705) $ (2,943) $ 2,314
========== ========== ==========
49
The tax effects of significant items comprising the Company's net deferred
tax asset (liability) as of December 31, 2001 and 2000 are as follows:
2001 2000
---- ----
(Thousands of Dollars)
Deferred tax liabilities:
Difference between book and tax basis of property $ (1,926) $(12,550)
Waste-to-energy facility (12,426) (17,079)
Inventory costs (867) (1,658)
Undistributed earnings of equity investees (1,645) (1,531)
-------- --------
$(16,864) $(32,818)
======== --------
Deferred tax assets:
Allowance for doubtful receivables $ 1,395 1,429
Accrued expenses and other items 10,926 10,888
Operating loss carry-forwards - domestic 25,580 9,017
Operating loss carry-forwards - foreign 661 663
Tax credit carry-forwards 2,677 2,502
-------- --------
41,239 $ 24,499
Less valuation allowance (13,854) (4,106)
-------- --------
27,385 $ 20,393
-------- --------
Net deferred income tax asset (liability) $ 10,521 $(12,425)
======== ========
The Company has approximately $61.5 million of United States federal net
operating loss carry-forwards (federal NOLs) which will expire in 2020 and
2021 if not utilized prior to that time. Due to tax laws governing change in
control events and their relation to the Recapitalization, approximately $40.0
million of the federal NOLs are subject to annual limitations in the amounts
that they can be used to offset taxable income in any single year. The remainder
of the Company's domestic and foreign net operating loss carry-forwards
primarily relate to certain U.S. operating subsidiaries, including SESCO and the
Company's Canadian operations, respectively, and primarily can only be used to
offset income from these operations. The Company's Canadian subsidiaries have
Canadian net operating loss carry-forwards of approximately $1.8 million at
December 31, 2001 that expire in the years 2002 through 2008. SESCO has state
net operating loss carry-forwards of $48.1 million at December 31, 2001 that
expire in the years 2003 through 2019. The tax credit carry-forwards relate to
United States federal minimum tax credits of $1.0 million that have no
expiration date, general business credits of $0.1 million that expire in 2020,
and foreign tax credit carryovers of $1.6 million that expire in the years 2002
through 2006.
The valuation allowance relates to federal, state and foreign net
operating loss carry-forwards and foreign tax credits from the Company's foreign
operations, the tax benefits from which may not be realized. The valuation
allowance increased $9.7 million during the year ended December 31, 2001,
primarily due to uncertainties as to the Company's ability to realize its
federal NOL deferred tax assets, and to a lesser extent, foreign tax credit and
state NOL deferred tax assets. The valuation allowance increased $0.5 million in
2000 primarily due to uncertainties as to the Company's ability to realize its
foreign tax credit deferred tax assets.
Note 16. LEASE OBLIGATIONS
The Company has entered into noncancelable leases for manufacturing and
data processing equipment and real property with lease terms of up to ten years.
Future minimum lease payments as of December 31, 2001 are as follows:
2002 $ 11,860
2003 11,410
2004 10,505
2005 8,735
2006 6,660
Later years 13,346
---------
Total minimum payments $ 62,516
=========
Rental expense for 2001, 2000 and 1999 for operating leases was $13.3
million, $13.3 million and $13.2 million, respectively.
50
Note 17. RELATED PARTY TRANSACTIONS
In connection with the Contico acquisition on January 8, 1999, the Company
entered into building lease agreements with Newcastle Industries, Inc. Newcastle
is majority-owned by Lester I. Miller, who was appointed to the Board of
Directors on January 8, 1999, and who resigned in September 2000. Newcastle also
is the holder of the preferred interest in Contico. Also, several additional
properties utilized by Contico are leased directly from Lester I. Miller. Rental
expense for these properties approximates historical market rates. Related party
rental expense for the year ended December 31, 2001, 2000 and 1999 was
approximately $1.5 million, $1.5 million and $5.5 million, respectively.
The Company paid Newcastle $2.0 million of preferred dividends for the
year ended December 31, 2001, compared to $2.6 million for each of the years
ended December 31, 2000 and 1999. In connection with the recapitalization, we
agreed with the holder of the preferred interest in Contico to redeem, at a
discount, approximately half of such interest. As a consequence of the
redemption, annual preferred cash distributions required to be paid pursuant to
the purchase agreement were lower in 2001, and will decrease in future years by
approximately $1.3 million from fiscal year 2000 and 1999 levels.
Kohlberg, whose affiliate holds all 700,000 shares of Convertible
Preferred Stock, provides ongoing management oversight and advisory services to
Katy. The Company paid $250,000 for such services in 2001, and expects to pay
$500,000 annually in future years.
Note 18. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company is a manufacturer and distributor of a variety of industrial
and consumer products, including sanitary maintenance supplies, coated
abrasives, stains, electrical and electronic components. 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. During 2001, Katy had several large customers in the mass
merchant/discount/home improvement retail markets. Two customers, Wal*Mart/Sam's
Club and Home Depot, accounted for 8% and 7% of consolidated net sales,
respectively. A significant loss of business at any of these retail outlets
would have an adverse impact on the Company's results.
51
The table below, and the narrative that follows, summarize the key factors
in the year-to-year changes in operating results.
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
(Thousands of dollars)
Electrical/Electronics Group
Net external sales $ 173,661 $ 210,187 $ 232,384
Net intercompany sales 52,864 64,793 59,992
Income (loss) from operations [a] 856 8,055 8,303
Operating margin (deficit) 0.5% 3.8% 3.6%
Total assets 81,924 103,676 126,090
Depreciation and amortization [b] 3,524 2,800 2,557
Capital expenditures 1,944 1,709 3,434
Maintenance Products Group
Net external sales $ 327,714 $ 365,752 $ 361,761
Net intercompany sales 13,950 9,062 11,141
Income (loss) from operations [a] (39,699) 10,298 29,458
Operating margin (deficit) (12.1%) 2.8% 8.1%
Total assets 231,179 299,292 318,906
Depreciation and amortization [b] 56,013 20,638 17,065
Capital expenditures 10,060 11,732 16,936
Other
Net external sales $ 4,585 $ 3,690 $ 3,900
Net intercompany sales -- 2 --
Income (loss) from operations (9,782) (889) (190)
Operating margin (deficit) (213.3%) (24.0%) (4.9%)
Total assets 8,995 18,468 17,903
Depreciation and amortization [b] 10,042 116 5
Capital expenditures 524 755 429
Discontinued Operations
Net external sales $ -- $ -- $ 10,025
Net intercompany sales -- -- --
Income (loss) from operations -- -- (190)
Operating margin (deficit) -- -- (1.9%)
Total assets -- -- --
Depreciation and amortization [b] -- -- 454
Capital expenditures -- -- 80
Corporate
Corporate expenses $ 21,239 $ 9,258 $ 9,989
Total assets 25,857 25,287 30,205
Depreciation and amortization [b] 358 44 91
Capital expenditures 38 -- 187
Company
Net external sales [a] $ 505,960 $ 579,629 $ 608,070
Net intercompany sales 66,814 73,857 71,133
Income (loss) from operations [a] (69,864) 8,206 27,392
Operating margin (deficit) [a] (13.8%) 1.4% 4.5%
Total assets [a] 347,955 446,723 493,104
Depreciation and amortization [a] [b] 69,937 23,598 20,172
Capital expenditures 12,566 14,196 21,066
[a] Company balances include amounts from "Discontinued Operations" in the
consolidated financial statements for 2001, 2000, and 1999. The (Loss) from
operations for Discontinued Operations has been recorded in the line item "Loss
from operations of discontinued businesses (net of tax)" on the 1999
Consolidated Statement of Operations. See Note 5 to the Consolidated Financial
Statements.
52
[b] Depreciation and amortization includes amounts recorded for impairments of
long-lived assets.
The Company follows accounting principles generally accepted in the United
States in preparing its segment information. The following tables reconcile the
Company's total revenues, operating income and assets to the Company's
Consolidated Statements of Operations and Consolidated Balance Sheets.
2001 2000 1999
---- ---- ----
(Thousands of Dollars)
Revenues
Total revenues for reportable segments $ 572,774 $ 653,486 $ 679,203
Elimination of inter-company revenues (66,814) (73,857) (71,133)
Revenues included in discontinued operations -- -- (10,025)
--------- --------- ---------
Total consolidated revenues $ 505,960 $ 579,629 $ 598,045
========= ========= =========
Operating (loss) income
Total operating (loss) income for reportable segments ($ 69,864) $ 8,206 $ 27,392
Operating loss included in discontinued operations -- -- 190
--------- --------- ---------
Total consolidated operating (loss) income ($ 69,864) $ 8,206 $ 27,582
========= ========= =========
Export sales of products, primarily to Canada, Mexico, Europe, and the Far
East, were $17.6 million, $16.6 million and $17.9 million, in 2001, 2000 and
1999, respectively.
The Company operates businesses in the United States and foreign
countries. The operations for 2001, 2000 and 1999 of businesses within major
geographic areas are summarized as follows:
United Canada/ Far East &
States Mexico Europe Other Consolidated
(Thousands of Dollars)
2001:
Sales to unaffiliated customers $ 433,477 $ 38,098 $ 30,065 $ 4,320 $ 505,960
============= ============= ============= ============= =============
Total assets $ 302,384 $ 21,546 $ 23,193 $ 832 $ 347,955
============= ============= ============= ============= =============
2000:
Sales to unaffiliated customers $ 490,871 $ 52,538 $ 31,285 $ 4,935 $ 579,629
============= ============= ============= ============= =============
Total assets $ 397,059 $ 24,908 $ 24,678 $ 78 $ 446,723
============= ============= ============= ============= =============
1999:
Sales to unaffiliated customers $ 520,594 $ 52,957 $ 31,002 $ 3,877 $ 608,430
============= ============= ============= ============= =============
Total assets $ 442,322 $ 29,055 $ 21,727 $ -- $ 493,104
============= ============= ============= ============= =============
Net sales for each geographic area include sales of products produced in
that area and sold to unaffiliated customers, as reported in the Consolidated
Statements of Operations.
53
Note 19. CONTINGENT LIABILITIES
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of Katy, 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 (RICO) 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 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 RICO. Because certain procedural issues have not yet been fully
adjudicated in this litigation, it is not possible at this time for the Company
to reasonably determine an outcome or accurately estimate the range of potential
exposure. The Company may have recourse against the former owner of Woods and
others for, among other things, violations of covenants, representations and
warranties under the purchase agreement through which the Company acquired
Woods, and under state, federal and common law. In addition, the purchase price
under the purchase agreement may be subject to adjustment as a result of the
claims made by Banco del Atlantico. The extent or limit of any such recourse
cannot be predicted at this time.
Katy also has a number of product liability and workers' compensation
claims pending against it and its subsidiaries. Many of these claims are
proceeding through the litigation process and the final outcome will not be
known until a settlement is reached with the claimant or the case is
adjudicated. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final outcome for such claims. With respect to the
product liability and workers' compensation claims, Katy has provided for its
share of expected losses beyond the applicable insurance coverage, including
those incurred but not reported, which are developed using actuarial techniques.
Such accruals are developed using currently available claim information, and
represent management's best estimates. The ultimate cost of any individual claim
can vary based upon, among other factors, the nature of the injury, the duration
of the disability period, the length of the claim period, the jurisdiction of
the claim and the nature of the final outcome.
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies and
private parties as potentially responsible parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. Based on its estimate of allocation of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent,
public companies, will fully pay the costs apportioned to them, currently
available information concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company has
recorded and accrued for indicated environmental liabilities amounts that it
deems reasonable and believes that any liability with respect to these matters
in excess of the accruals will not be material. The ultimate costs will depend
on a number of factors and the amount currently accrued represents management's
best current estimate of the total cost to be incurred. The Company expects this
amount to be substantially paid over the next one to four years. The most
significant environmental matters in which the Company is currently involved
relates to the W.J. Smith site. In 1993, the United States Environmental
Protection Agency (USEPA) initiated a Unilateral Administrative Order
Proceeding under Section 7003 of the Resource Conservation and Recovery Act
(RCRA) against W.J. Smith and Katy. The proceeding requires certain actions at
the W.J. Smith site and certain off-site areas, as well as development and
implementation of additional cleanup activities to mitigate off-site releases.
In December 1995, W.J. Smith, Katy and USEPA agreed to resolve the proceeding
through an Administrative Order on Consent under Section 7003 of RCRA. Pursuant
to the Order, W.J. Smith is currently implementing a cleanup to mitigate
off-site releases.
Although management believes that these actions individually and in the
aggregate are not likely to have a material adverse effect on the Company,
further costs could be significant and will be recorded as a charge to
operations when, and if, current information dictates a change in management's
estimates.
54
Note 20. RESTRUCTURING CHARGES
During the fourth quarter of 2001, the Company recorded $3.2 million of
severance and restructuring charges. Approximately $1.0 million was related to
severance payments. These payments related to the closing of the former
corporate headquarters in Englewood, Colorado and an adjunct corporate office in
Chicago and the related terminations of employees, as well as severance paid to
employees at operating divisions in headcount reduction efforts. Approximately
$1.4 million of the charges related to accruals for payments to a consultant
working with us on sourcing and other manufacturing and production efficiency
initiatives. Approximately $0.4 million of the charges incurred and paid related
to transition activities within the Company. Other costs related to
manufacturing restructuring initiatives at Contico.
During the third quarter of 2001, the Company recorded $6.5 million of
severance and restructuring charges, of which $5.1 million related to the
payment or accrual of severance and other payments associated with the
management transition resulting from the recapitalization. Additionally, $1.0
million of costs were incurred related primarily to consultants working with the
Company on sourcing and other manufacturing and production efficiency
initiatives.
During the second quarter of 2001, Contico 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.
Also during the second quarter of 2001, 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 were affected by these actions. Total severance and exit costs
associated with these efforts were $0.4 million.
The Company incurred charges for non-cancelable rent and other exit costs
associated with the planned closure of our Englewood, Colorado corporate office.
Total costs recognized in the second quarter of 2001 were $0.7 million. An
additional $0.1 million was added to this cost estimate in the fourth quarter
(see above).
During the first quarter of 2001, Woods 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.
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 group.
The workforce reduction included severance and related costs for certain
employees. Total severance and related costs was $2.4 million.
In June 1999, we began a restructuring plan for our Electrical/Electronics
businesses as a result of weaker than expected sales performance and lower
margins. The cost of the 1999 restructuring, which included severance costs
related to the elimination of 22 management employees, resulted in a pre-tax
charge to earnings in the second quarter of 1999 of approximately $0.6 million.
Additionally, plant personnel levels were reduced in excess of 100 persons and
24 unfilled administrative positions were eliminated.
As of December 31, 2001 accruals for severance and other restructuring
costs totaled $3.6 million which will be paid through the year 2009. The table
below summarizes the future obligations for severance and restructuring charges
detailed above:
(Thousands of dollars)
2002 $3,209
2003 265
2004 55
2005 55
2006 22
Thereafter --
------
Total payments $3,606
======
55
Note 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
2001 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- --------- --------- --------- ---------
Net sales $ 119,914 $ 120,141 $ 140,491 $ 125,414
Gross profit $ 16,807 $ 16,954 $ 20,907 $ 22,152
Income (loss) from continuing operations before
extraordinary loss on early extinguishment of debt $ (8,372) $ (30,434) $ (5,565) $ (17,709)
Extraordinary loss on early extinguishment of debt -- $ (1,182) -- --
--------- --------- --------- ---------
Net income (loss) $ (8,372) $ (31,616) $ (5,565) $ (17,709)
========= ========= ========= =========
Loss per share - Basic and Diluted
Loss from continuing operations $ (1.00) $ (2.84) $ (0.87) $ (2.43)
Extraordinary loss on early extinguishment of debt -- (0.14) -- --
--------- --------- --------- ---------
Net income (loss) $ (1.00) $ (2.98) $ (0.87) $ (2.43)
========= ========= ========= =========
2000 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- --------- --------- --------- ---------
Net sales $ 136,120 $ 138,134 $ 156,275 $ 149,100
Gross profit $ 29,240 $ 27,139 $ 26,113 $ 23,314
Net income (loss) $ 645 $ (1,282) $ (2,546) $ (2,275)
========= ========= ========= =========
Earnings (loss) per share - Basic and Diluted
Net income $ 0.08 $ (0.15) $ (0.30) $ (0.28)
========= ========= ========= =========
During the fourth quarter of 2001, the Company recorded pretax charges of
$3.2 million for severance and restructuring and $11.3 million for impairments
of long-lived assets. During the third quarter of 2001, the Company recorded
pretax charges of $6.5 million for severance and restructuring. During the
second quarter of 2001, the Company recorded pretax charges of $2.7 million for
severance and restructuring and $35.1 million for impairments of long-lived
assets (primarily at Wilen). During the first quarter of 2001, the Company
recorded pretax charges of $1.6 million for severance and restructuring and $0.8
million for impairments of long-lived assets.
During the fourth quarter of 2000, the Company recorded a pretax charge of
$0.5 million for severance and restructuring charges. During the third quarter
2000, the Company recorded a pretax charge of $2.2 million for severance and
restructuring.
56
During 2001, the Company made certain income statement reclassifications
relating to freight and distribution costs, the direct import business of Woods
Industries, and businesses previously classified as operations to be disposed
of. The results for 2000 have also been reclassified for comparative purposes. A
reconciliation of previously reported amounts on Forms 10-Q and 10-K with
reclassified amounts is presented below:
2001 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- --------- --------- --------- ---------
Net sales as reported previously $ 115,635 $ 117,499 $ 139,458 $ 125,414
Freight and distribution 50 0 0 0
Direct import business 969 936 0 0
Operations to be disposed of 3,260 1,706 1,033 0
--------- --------- --------- ---------
Net sales as adjusted $ 119,914 $ 120,141 $ 140,491 $ 125,414
========= ========= ========= =========
Gross profit as reported previously $ 27,593 16,659 20,824 22,152
Freight and distribution (10,816) 0 0 0
Direct import business 52 42 0 0
Operations to be disposed of (22) 253 83 0
--------- --------- --------- ---------
Gross profit as adjusted $ 16,807 $ 16,954 $ 20,907 $ 22,152
========= ========= ========= =========
2000 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- --------- --------- --------- ---------
Net sales as reported previously $ 134,008 $ 134,485 $ 144,973 $ 139,783
Freight and distribution 141 132 117 105
Direct import business 1,141 2,710 10,348 7,996
Operations to be disposed of 830 807 837 1,216
--------- --------- --------- ---------
Net sales as adjusted $ 136,120 $ 138,134 $ 156,275 $ 149,100
========= ========= ========= =========
Gross profit as reported previously 41,771 38,288 38,808 35,067
Freight and distribution (12,198) (11,407) (12,494) (12,222)
Direct import business 95 106 405 55
Operations to be disposed of (428) 152 (606) 414
--------- --------- --------- ---------
Gross profit as adjusted $ 29,240 $ 27,139 $ 26,113 $ 23,314
========= ========= ========= =========
NOTE 22: SUBSEQUENT EVENT
On March 15, 2002, the Company and SESCO signed agreements that would
effectively turn over operation of SESCO's waste-to-energy facility to a third
party. See Note 14 for a more complete discussion of SESCO. The closing of the
agreements is contingent upon receipt of certain consents from interested
parties, and we anticipate a final closing during April of 2002. The Company has
entered into these agreements as a result of evaluations of SESCO's business.
The Company has determined that SESCO is not a core component of Katy's
long-term strategic goals. Moreover, Katy does not feel it has the management
expertise to deal with certain risks and uncertainties presented by the
operation, given that SESCO is the only waste-to-energy facility in which the
Company has an interest. Katy has explored options for divesting SESCO for a
number of years, and management feels that the agreements contemplated currently
offer a reasonable exit strategy from this business.
The third party would essentially assume SESCO's position in various
contracts relating to the facility's operation. Under the agreements, SESCO will
contribute its assets and liabilities (except for its liability under the Loan
Agreement and the related receivable under the Service Agreement) to a joint
venture. While SESCO will maintain a 99% ownership interest as a limited partner
in the joint venture, the third party will have most day to day control of the
joint venture. SESCO will give a note payable as consideration for the
transaction of $6,600,000, due in installments through 2008. Certain amounts may
be due to SESCO upon expiration of the Service Agreement in 2008. Also, the
third party may purchase SESCO's remaining interest in the joint venture at that
time. Also, if the Service Agreement were extended, further amounts would be due
to SESCO from the third party.
While SESCO (and therefore the Company) will maintain an investment in the
joint venture, it will have a zero value since no positive return will be
realized from it and SESCO will not be able to exert any meaningful level of
control over it. Upon completion of the transaction, the Company expects to
recognize a loss consisting of 1) a charge for the discounted value of the
$6,600,000 note, which is payable over seven years, and 2) an amount
representing the carrying value of certain assets contributed to the joint
venture, consisting primarily of machinery spare parts. It should be noted that
all of SESCO's long-lived
57
assets were written to zero value at December 31, 2001, so no additional
impairment will be required. However, the Company will incur higher than normal
expenses related to SESCO as a result of legal fees and other costs to complete
the transaction, and higher operational expenses during 2002 as a result of the
ceasing of cost capitalization (i.e., costs previously considered capital
expenditures are now being expensed in 2002) given the zero book value of
long-lived assets.
On a going forward basis, Katy would expect little if any income statement
activity as a result of its involvement in the joint venture, and Katy's balance
sheet will carry the note payable mentioned above. Katy has not booked any
amounts receivable or other assets relating to amounts that may be received at
the time the Service Agreement expires, given their uncertainty.
58
Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of Katy is incorporated herein by reference
to the information set forth under the section entitled "Election of Directors"
in the Proxy Statement of Katy Industries, Inc. for its 2002 Annual Meeting.
Information regarding executive officers of Katy is incorporated herein by
reference to the information set forth under the section entitled "Information
Concerning Directors and Executive Officers" in the Proxy Statement Katy
Industries, Inc. for its 2002 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers is incorporated herein
by reference to the information set forth under the section entitled "Executive
Compensation" in the Proxy Statement of Katy Industries, Inc. for its 2002
Annual Meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of stock by certain beneficial owners
and by management of Katy is incorporated by reference to the information set
forth under the section "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Management" in the Proxy Statement for its 2002 Annual
Meeting.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management is incorporated herein by reference to the information set forth
under the section entitled "Executive Compensation" in the Proxy Statement of
Katy Industries, Inc. for its 2002 Annual Meeting.
59
Part IV
Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statement Schedules
The financial statement schedule filed with this report is listed on the
"Index to Financial Statement Schedules."
2. Exhibits
The exhibits filed with this report are listed on the "Exhibit Index."
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 1, 2002 KATY INDUSTRIES, INC.
Registrant
/s/ C. Michael Jacobi
--------------------------------------
C. Michael Jacobi
President and Chief Executive Officer
60
POWER OF ATTORNEY
Each person signing below appoints C. Michael Jacobi and Amir P.
Rosenthal, or either of them, his attorneys-in-fact for him in any and all
capacities, with power of substitution, to sign any amendments to this report,
and to file the same with any exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of this 1st day of April, 2002.
Signature Title
- --------- -----
/s/ William F. Andrews Chairman of the Board and Director
- -------------------------------------
William F. Andrews
/s/ C. Michael Jacobi President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
C. Michael Jacobi
/s/ Amir Rosenthal Vice President, Chief Financial Officer, General Counsel and Secretary
- ------------------------------------- (Principal Financial and Accounting Officer)
Amir Rosenthal
/s/ Christopher Lacovara Director
- -------------------------------------
Christopher Lacovara
/s/ Robert M. Baratta Director
- -------------------------------------
Robert M. Baratta
/s/ James A. Kohlberg Director
- -------------------------------------
James A. Kohlberg
/s/ Daniel B. Carroll Director
- -------------------------------------
Daniel B. Carroll
/s/ Wallace E. Carroll, Jr. Director
- -------------------------------------
Wallace E. Carroll, Jr.
/s/ Samuel P. Frieder Director
- -------------------------------------
Samuel P. Frieder
/s/ Christopher Anderson Director
- -------------------------------------
Christopher Anderson
61
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
Independent Accountants' Reports 63
Schedule II - Valuation and Qualifying Accounts 64
Independent Auditors' Consent 68
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements of Katy or the Notes thereto.
62
INDEPENDENT ACCOUNTANTS' REPORT ON SUPPLEMENTAL SCHEDULE
TO KATY INDUSTRIES, INC.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Katy Industries, Inc. as
of December 31, 2001 and 2000, and for the three years in the period ended
December 31, 2001 included in this Form 10-K and have issued our report thereon
dated March 26, 2002. Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The
supplemental schedule listed in Item 14 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
March 26, 2002
63
KATY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Thousands of Dollars)
Balance at Additions Balance
Beginning Charged to Write-offs Other at End
Description of Year Expense to the Reserve Adjustments (a) of Year
- ----------- ------- ------- -------------- --------------- -------
Year ended December 31, 2001:
Reserve for doubtful accounts:
Trade receivables $ 1,478 $ 2,242 $ (1,966) $ 269 (a) $ 2,023
Long-term notes receivable 1,000 -- -- -- 1,000
--------- --------- --------- --------- ---------
$ 2,478 $ 2,242 $ (2,966) $ 269 (a) $ 2,023
Year ended December 31, 2000:
Reserve for doubtful accounts:
Trade receivables $ 1,120 $ 847 $ (543) $ 54 (a) $ 1,478
Long-term notes receivable 1,000 -- -- -- 1,000
--------- --------- --------- --------- ---------
$ 2,120 $ 847 $ (543) $ 54 $ 2,478
========= ========= ========= ========= =========
Year ended December 31, 1999:
Reserve for doubtful accounts:
Trade receivables $ 963 $ 463 $ (942) $ 636 (a) $ 1,120
Current notes and other
accounts receivable 198 -- -- (198)(a) 0
Long-term notes receivable 2,452 -- -- (1,452)(a) 1,000
--------- --------- --------- --------- ---------
$ 3,613 $ 463 $ (942) $ (1,014) $ 2,120
========= ========= ========= ========= =========
(a) Includes collections of accounts previously written off, reclassifications
of customer allowance programs not payable to customers, and doubtful
accounts and credit memos written off against the reserve.
64
KATY INDUSTRIES, INC.
INDEX OF EXHIBITS
DECEMBER 31, 2001
Exhibit
Number Exhibit Title Page
- ------ ------------- ----
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).
3.1a The By-laws of the Company, as amended (incorporated by reference to Exhibit 3.1 *
to the Company's Current Report on Form 10-Q filed May 15, 2001).
3.1b 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).
4.1 Rights Agreement dated as of January 13, 1995 between Katy and Harris Trust *
and Savings Bank as Rights Agent (incorporated by reference to Exhibit 2.1 of
Katy's Form 8-A filed January 17, 1995).
4.1a Amendment dated as of October 31, 1996 to the Rights Agreement *
dated as of January 13, 1995 between Katy and Harris Trust
and Savings Bank as Rights Agent (incorporated by reference to
Katy's Form 8-K filed November 8, 1996).
4.1b Amendment dated as of January 8, 1999 to the Rights Agreement *
dated as of January 13, 1995 between Katy and LaSalle
National Bank as Rights Agent (incorporated by reference to
Exhibit 4.1(b) of Katy's Form 10-K filed . March 18, 1999.
4.1c 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).
10.1 Katy Industries, Inc. 1994 Key Employee and Director Stock *
Purchase Plan (incorporated by reference to Exhibit 4.1 of Katy's
Registration Statement on Form S-8 filed September 28, 1994.
10.2 Katy Industries, Inc. Long-Term Incentive Plan (incorporated by *
reference to Katy's Registration Statement on Form S-8 filed
June 21, 1995.
10.3 Katy Industries, Inc. Non-Employee Director Stock Option Plan *
(incorporated by reference to Katy's Registration Statement on
Form S-8 filed June 21, 1995.
10.4 Katy Industries, Inc. Supplemental Retirement and Deferral *
Plan effective as of June 1, 1995.
10.5 Katy Industries, Inc. Directors' Deferred Compensation Plan *
effective as of June 1, 1995.
10.13 Preferred Unit Repurchase Agreement, dated as of March 28, *
2001, between the Company, Contico International, LLC, and
Newcastle Industries, Inc.) incorporated by reference to Exhibit
10.13 to the Company's Current Report on Form 10-Q filed on
May 15, 2001).
10.14 Amendment No. 1, dated as of March 28, 2001, to the Members Agreement *
65
dated as of January 8, 1999, between the Company and Newcastle Industries, Inc.
(incorporated by reference to Exhibit 10.14 to the Company's Current
Report on Form 10-Q filed on May 15, 2001).
10.15 Credit Agreement dated as of June 28, 2001 (incorporated by reference to *
Exhibit 10.1 to the Company's Current Report on Form 10-Q filed August 14, 2001).
10.18 First Amendment and Waiver to Credit Agreement dated as of September 27, 2001 *
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on
Form 10-Q dated November 14, 2001).
10.21 Second Amendment and Waiver to Credit Agreement dated November 26, 2001, 71
filed herewith.
10.16 Employment Agreement dated as of June 28, 2001 between C. Michael Jacobi *
and the Company (incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 10-Q filed August 14, 2001).
10.17 Katy Industries, Inc. 2001 Chief Executive Officer's Plan (incorporated by *
reference to Exhibit 10.3 to the Company's Current Report on Form 10-Q filed
August 14, 2001).
10.19 Employment Agreement dated as of September 1, 2001 between Amir Rosenthal and *
the Company (incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 10-Q dated November 14, 2001).
10.20 Katy Industries, Inc. 2001 Chief Financial Officer's Plan (incorporated by *
reference to Exhibit 10.3 to the Company's Current Report on Form 10-Q dated
November 14, 2001).
21 Subsidiaries of registrant 68
23 Independent Auditors' Consent 69
99 Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X, 70
filed herewith.
* Indicates incorporated by reference.
66