Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended: March 31, 1996 Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303)290-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at May 13, 1996
Common stock, $1 par value 8,252,387
KATY INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 1996
INDEX
Page No.
PART I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 2
Statements of Condensed Consolidated Operations
Three months ended March 31, 1996 and 1995 4
Statements of Condensed Consolidated Cash Flows
Three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Information 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(In Thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 47,894 $ 43,701
Marketable securities - available for sale 7,892 16,653
Accounts receivable, trade, net 26,749 22,399
Notes and other receivables, net 3,048 15,645
Inventories - Note 1 38,532 35,902
Other current assets 15,710 15,297
Total current assets 139,825 149,597
OTHER ASSETS:
Investments, at equity, in
unconsolidated subsidiaries - Note 3 7,028 7,328
Investments in waste-to-energy facility 11,285 11,360
Notes receivable, net 1,490 1,566
Cost in excess of net assets of businesses
acquired, net 7,186 7,249
Miscellaneous 5,825 5,664
Total other assets 32,814 33,167
PROPERTIES, at cost:
Land and improvements 4,188 4,308
Buildings and improvements 32,532 32,464
Machinery and equipment 40,223 38,723
76,943 75,495
Accumulated depreciation ( 33,886) (32,847)
Net properties 43,057 42,648
$215,696 $225,412
See Notes to Condensed Consolidated Financial Information.
</TABLE>
<TABLE>
<CAPTION>
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
March 31, December 31,
1996 1995
(In Thousands)
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable - banks $ - $ 14,193
Accounts payable 9,563 8,361
Accrued compensation 2,298 3,792
Accrued expenses 27,348 23,947
Accrued interest and taxes 3,640 1,342
Current maturities, long-term debt 816 913
Dividends payable 700 624
Total current liabilities 44,365 53,172
LONG-TERM DEBT, less current maturities 9,045 9,346
DEFERRED INCOME TAXES 26,173 24,598
OTHER LIABILITIES 8,642 7,966
Total liabilities 88,225 95,082
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, authorized
25,000,000 shares, issued 9,821,329 shares 9,821 9,821
Additional paid-in capital 51,111 51,111
Foreign currency translation and other adjustments ( 1,798) ( 1,640)
Unrealized holding gains, net of tax 2,607 5,297
Retained earnings 85,711 81,925
Treasury stock 1,413,342 and 1,097,142 shares ( 19,981) ( 16,184)
Total shareholders' equity 127,471 130,330
$215,696 $225,412
</TABLE>
See Notes to Condensed Consolidated Financial Information.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
(In Thousands,
Except Per Share Data)
<S> <C> <C>
Net sales $ 42,465 $ 38,358
Cost of goods sold 28,551 27,374
Gross profit 13,914 10,984
Selling, general and administrative 11,794 11,413
Income (loss) from operations 2,120 ( 429)
Interest expense ( 307) ( 418)
Interest income 701 276
Other income (expense) - Note 4 4,923 ( 238)
Income (loss) from consolidated operations
before provision for income taxes 7,437 ( 809)
Provision for income taxes 2,825 628
Income (loss) from consolidated operations 4,612 ( 1,437)
Equity in income (loss) of unconsolidated
subsidiaries (net of tax)- Note 3 ( 183) 700
Net income (loss) $ 4,429 $ (737)
Earnings (loss) per share $ .52 $ (.08)
Average shares outstanding 8,600 9,076
Dividends paid per share - Common stock $ .0625 $ .0625
</TABLE>
See Notes to Condensed Consolidated Financial Information.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,429 $ ( 737)
Depreciation and amortization 1,553 1,378
Equity in (income) loss of unconsolidated subsidiaries 183 ( 700)
Gain on marketable securities transactions ( 4,914) -
Gain on sale of assets ( 52) ( 3)
Adjustments to reconcile net income to net cash
flows from operating activities 1,448 251
Net cash flows from operating activities 2,647 189
Cash flows from investing activities:
Proceeds from sale of assets 255 41
Collections of notes and other receivables 13,204 143
Marketable securities activity, net 9,191 -
Purchase of subsidiary, net of cash acquired - ( 23,717)
Capital expenditures ( 2,171) ( 3,372)
Net cash flows from investing activities 20,479 ( 26,905)
Cash flows from financing activities:
Notes payable activity, net ( 14,193) 18,267
Principal payments on long-term debt ( 398) ( 1,150)
Purchase of treasury shares ( 3,797) -
Payment of dividends ( 545) ( 567)
Proceeds from issuance of long-term debt - 4,298
Net cash flows from financing activities ( 18,933) 20,848
Net increase (decrease) in cash and cash
equivalents 4,193 ( 5,868)
Cash and cash equivalents beginning of period 43,701 8,475
Cash and cash equivalents end of period $ 47,894 $ 2,607
</TABLE>
See Notes to Condensed Consolidated Financial Information.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 1996
(1) Significant Accounting Policies:
Consolidation Policy
The financial statements include, on a consolidated basis, the accounts of
Katy Industries, Inc. and subsidiaries (Katy) in which it has greater than
50% interest or exercises significant influence or control.
The information furnished reflects all known adjustments which are, in the
opinion of management, necessary for a fair presentation of financial
condition and results of operations. Interim figures are subject to
year-end audit adjustments and may not be indicative of results to be
realized for the entire year.
Inventories
The components of inventories are as follows:
March 31, December 31,
1996 1995
(Thousands of Dollars)
Raw materials $ 15,153 $ 14,471
Work in process 8,233 7,132
Finished goods 15,146 14,299
$ 38,532 $ 35,902
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosure of stock-based compensation
arrangements with employees. Companies are permitted to continue to apply
APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of equity instruments awarded. Katy will continue to apply
APB Opinion No. 25 to its stock-based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share.
(2) Subsequent Event
On April 4, 1996, the Company sold its Walsh Press operation for $1,125,000
resulting in a nominal gain.
(3) Investments in Unconsolidated Subsidiaries, at Equity
Katy's investments in unconsolidated subsidiaries are comprised of the
following:
March 31, December 31,
1996 1995
(Thousands of Dollars)
Schon & Cie, AG $ - $ -
Bee Gee Holding Company, Inc. 7,028 7,328
$ 7,028 $ 7,328
In December 1995, the Company sold its wholly owned subsidiary, WSC
Liquidating Co., whose sole asset was 2,555,500 common shares of Syratech
Corporation, to Syratech. The Company also sold to Syratech the remaining
509,251 shares of Syratech stock held directly by Katy. The investment in
Syratech had been accounted for using the equity method. The net proceeds
from both transactions was approximately $50,800,000 and resulted in a total
after tax gain of $7,500,000.
As a result of the Company's sale of one-half of its interest in Schon &
CIE, AG (Schon) on June 30, 1995, Schon's assets and liabilities and sales and
costs and expenses are included in the following tables subsequent to June 30,
1995, but there is no effect on the Company's investment or equity in income
of unconsolidated subsidiaries.
The condensed financial information which follows reflects Katy's
proportionate share in the financial position and results of operations of
its unconsolidated subsidiaries:
March 31, December 31,
1996 1995
(Thousands of Dollars)
Current assets $ 15,931 $ 15,968
Current liabilities ( 15,800) ( 15,105)
Working capital 131 863
Properties, net 9,528 9,112
Other assets 3,776 3,785
Long-term debt ( 3,897) ( 3,998)
Other liabilities ( 1,618) ( 1,514)
Shareholders' equity 7,920 8,248
Shareholders' equity of Schon ( 1,638) ( 1,604)
Unamortized excess of cost
over net assets acquired 746 684
Investments, at equity, in
unconsolidated subsidiaries $ 7,028 $ 7,328
(3) Investments in Unconsolidated Subsidiaries, at Equity: (Continued)
Sales $7,226 $25,355
Cost and expenses ( 8,246) ( 24,039)
Net income (loss) ( 1,020) 1,316
Unrecorded losses of Schon 796 -
Amortization of excess of cost
over net assets acquired ( 76) ( 102)
Benefit (provision) for income taxes 117 ( 514)
Equity in income (loss) of
unconsolidated subsidiaries $ ( 183) $ 700
(4) Marketable Securities:
During the first quarter of 1996 the Company sold 135,000 shares of
Union Pacific Corporation common stock for proceeds of $9,191,000, resulting
in a pre-tax gain of $4,914,000.
(5) Stock Repurchase Program:
In August 1995, Katy's Board of Directors authorized the Company to
repurchase up to 400,000 of its common shares over the subsequent twelve
months in open market transactions. On January 2, 1996, the Board
authorized the Company to repurchase an additional 500,000 shares. In
connection therewith, Katy repurchased 316,200 shares in the quarter ended
March 31, 1996 at a total cost of $3,797,000, bringing the total shares
repurchased under these authorizations to 668,400. Subsequent to March 31,
1996 through May 10, 1996 the Company purchased an additional 155,600 shares
at a cost of $2,089,000.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996
Following are summaries of sales and operating income for the three months
ended March 31, 1996 and 1995 by industry segment:
<TABLE>
<CAPTION>
Sales
Increase (Decrease)
1996 1995 Amount Per Cent
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Distribution and Service $ 20,204 $ 9,092 $ 11,112 122.2%
Industrial and Consumer Manufacturing 14,537 12,569 1,968 15.7
Machinery Manufacturing 7,724 16,697 ( 8,973) (53.7)
Total sales $ 42,465 $ 38,358 $ 4,107 10.7%
Operating Income
Percent of Sales
1996 1995 1996 1995
(Thousands of Dollars)
Distribution and Service $ 1,799 $ 898 8.9% 9.9%
Industrial and Consumer Manufacturing 1,659 1,461 11.4 11.6
Machinery Manufacturing 759 (813) 9.8 (4.9)
Total operating income $ 4,217 $ 1,546 9.9% 4.0%
The Distribution and Service Group's sales increased $11,112,000 or 122%.
The acquisition of GC Thorsen, effective March 31, 1995, provided the
majority of the increase, although all other product lines within the group
recorded year-to-year sales increases. Operating income for the group was up
by $901,000 although the operating margin dropped by a percentage point.
The margin decline is primarily due to the change in product mix with the
addition of GC Thorsen and sales increases in certain other product lines.
The increased sales of the Industrial and Consumer Manufacturing Group is
impacted by the acquisition of Gemtex in August 1995, partially offset by the
sale of Moldan in December 1995. Other product lines had modest increases
for the quarter. Operating income for the group increased by $198,000,
however, margins declined slightly due to the inclusion of Gemtex and due
to preseason sales of stain at discounted prices.
The Machinery Manufacturing Group's significant sales decrease results
primarily from the sale of one-half of Katy's interest in Schon in June
1995 and the sale of B.M. Root in July 1995. Sales of food packaging
machinery were up from last year and sales of testing and measuring
instruments were down from last year. Other product lines were either
flat or slightly down for the prior year. Operating income improved
$1,572,000 from last year's loss due almost entirely to the exclusion of
Schon.
As a result of the factors described above, gross profit increased
$2,930,000 from last year and gross margins were 32.8%, up 4.2 points from
28.6% last year.
Selling, general and administrative expenses increased by $381,000, or
3.3% primarily the result of increased sales expenses due to the higher
volume levels in 1996.
Interest expense decreased due to lower debt levels, while interest income
increased due to higher levels of investable funds resulting from the sale of
Syratech stock and Union Pacific stock. Other, net was much higher due to the
gain on the sale of Union Pacific stock.
Income before income taxes increased by $8,246,000 primarily the result
of the Union Pacific sale and the improvement in operating income.
The provision for income taxes in 1996 equates to an effective rate of
38%. The effective rate in 1995 was impacted by the fact that losses from
Schon were not tax effected.
Equity in income of unconsolidated subsidiaries decreased by $883,000.
This decrease is due to the sale of Katy's interest in Syratech in December
1995.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash, cash equivalents and marketable securities decreased
$4,568,000 to $55,786,000 on March 31, 1996 compared to $60,354,000 on
December 31, 1995 primarily due to the share repurchase program.
Current ratios were 3.15 to 1.00 at March 31, 1996 and 2.81 to 1.00 at
December 31, 1995, respectively. Working capital decreased $965,000 in
the first quarter of 1996. Katy has authorized and expects to
commit an additional $5,000,000 for capital projects during the remainder of
1996. Funding for these expenditures and for working capital needs is
expected to be accomplished substantially through use of available cash
and internally generated funds. The Company also continues to search for
appropriate acquisition candidates, and may obtain all or a portion of the
financing for future acquisitions through the incurrence of additional debt,
which the Company believes it can obtain at reasonable terms and pricing.
At March 31, 1996, Katy had short and long-term indebtedness for money
borrowed of $9,861,000. Total debt was 7.2% of total debt and equity at
March 31, 1996. Katy has a secured short-term line of credit with The
Northern Trust Company in the amount of $20,000,000 which it expects to use
principally for letters of credit.
In August 1995, Katy's Board of Directors authorized the Company to
repurchase up to 400,000 shares of its common stock over the subsequent
twelve months in open market transactions. In January 1996 the board
authorized an additional 500,000 shares to be repurchased. In connection
therewith, Katy repurchased 316,200 shares in the quarter ended March 31,
1996 at a total cost of $3,797,000, bringing the total
shares repurchased under the authorization to 668,400. Subsequent to
March 31, 1996 through May 10, 1996 the Company purchased an additional
155,600 shares at a cost of $2,089,000.
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by
the U.S. Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties ("PRP's")
at a number of hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act ("Superfund") and
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. The means of determining
allocation among PRPs is generally set forth in a written agreement entered
into by the PRPs at a particular site. An allocation share assigned to a
PRP is often based on the PRP's volumetric contribution of waste to a site.
The Company is also involved in remedial response and voluntary
environmental clean-up at a number of other sites which are
not currently the subject of any legal proceedings under Superfund, including
certain of its current and formerly owned manufacturing facilities. Based
on its estimate of allocation of liability among PRPs, the probability that
other PRPs, many of whom are large, solvent, public companies, will fully
pay the costs apportioned to them, currently available information
concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company
believes that it has an adequate accrual for all known liabilities at
March 31, 1996.
Although management believes that these actions in the aggregate are not
likely to have a material adverse effect on Katy's consolidated financial
position or results of operations, further costs could be significant and
will be recorded as a charge to operations when such costs become probable
and reasonably estimable.
Katy also has a number of product liability and workers' compensation
claims pending against it and its subsidiaries. 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. Such accruals are developed
using currently available claim information. The incurred but not reported
component of the liability was developed using actuarial techniques.
In January 1995, the Board of Directors adopted a Stockholder Rights Plan
and distributed one right for each outstanding share of the Company's
common stock. Each right entitles the shareholder to acquire one share of
the Company's common stock at an exercise price of $35, subject to
adjustment. The rights are not and will not become
exercisable unless certain change of control events occur.
None of the rights are exercisable as of March 31, 1996.
Management continuously reviews each of its businesses. As a result of
these ongoing reviews, management may determine to sell certain companies
and may augment its remaining businesses with acquisitions. When sales do
occur, management anticipates that funds from these sales will be used for
general corporate purposes or to fund acquisitions. Acquisitions may also
be funded through cash balances, available lines of credit and future
borrowings.
KATY INDUSTRIES, INC.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
During the quarter for which this report is filed, there have been no
material developments in previously reported legal proceedings, and no
other cases or legal proceedings, other than ordinary routine litigation
incidental to the Company's business and other non-material proceedings,
have been brought against the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
On January 16, 1996, the Company filed a current report on Form 8-K
providing information in response to item 2 to Form 8-K with respect to
the sale of its wholly owned subsidiary WSC Liquidating Co. to Syratech
Corporation and the sale of an additional 509,251 share of Syratech common
shares held directly by Katy.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
Registrant
DATE: May 15, 1996 By /s/John R. Prann, Jr.
John R. Prann, Jr.
President,
Chief Executive Officer &
Chief Operating Officer
DATE: May 15, 1996 By /s/Stephen P. Nicholson
Stephen P. Nicholson
Treasurer &
Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 47894
<SECURITIES> 7892
<RECEIVABLES> 26749<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 38532
<CURRENT-ASSETS> 139825
<PP&E> 76943
<DEPRECIATION> 33886
<TOTAL-ASSETS> 215696
<CURRENT-LIABILITIES> 44365
<BONDS> 0
0
0
<COMMON> 9821
<OTHER-SE> 117650
<TOTAL-LIABILITY-AND-EQUITY> 127471
<SALES> 42465
<TOTAL-REVENUES> 42465
<CGS> 28551
<TOTAL-COSTS> 40435
<OTHER-EXPENSES> (5317)
<LOSS-PROVISION> 111
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> 7437
<INCOME-TAX> 2825
<INCOME-CONTINUING> 2120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4429
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
<FN>
<F1>Accounts receivable, trade are reported net of allowances for doubtful accounts
in the condensed consolidated balance sheets.
</FN>
</TABLE>
