Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: February 17, 1997
(Date of earliest event reported): (December 2, 1996)
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)
6300 S. Syracuse #300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303) 290-9300
(Former name or former address, if changed since last report) Not applicable
Item 7. Financial Statements and Exhibits
Set forth below is the information required by Items 7(a), Financial
Statements of Acquired Businesses, and 7(b), Pro Forma Financial Statements, of
Form 8-K with respect to the acquisition of Woods Industries, Inc. by Katy
Industries, Inc. ("Katy"), as disclosed on Katy's Form 8-K, filed with the
Securities and Exchange Commission on December 17, 1996.
Financial Statements of Acquired Business and Pro Forma Financial Statements
Unaudited Financial Statements
Combined Balance Sheets as of
September 30, 1996 and December 31, 1995 1
Combined Statements of Operations and Accumulated Deficit
for the nine months ended September 30, 1996 and 1995 2
Combined Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 3
Notes to Combined Financial Statements 4
Audited Financial Statements
Report of Independent Accountants 7
Combined Balance Sheet as of December 31, 1995 8
Combined Statement of Operations and Accumulated
Deficit for the year ended December 31, 1995 9
Combined Statement of Cash Flows for the year
ended December 31, 1995 10
Notes to Combined Financial Statements 11
Pro Forma Financial Statements
Unaudited Pro Forma Statement of Operations
for the nine months ended September 30, 1996 23
Unaudited Pro Forma Statement of Operations
for the year ended December 31, 1995 24
Unaudited Pro Forma Balance Sheet as of September 30, 1996 25
Unaudited Notes to Pro Forma Financial Statements 27
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Katy Industries, Inc.
---------------------
(Registrant)
By:/s/ John R. Prann, Jr.
----------------------
John R. Prann, Jr.
Chief Executive Officer
Date: February 17, 1997
Woods Industries, Inc. and Woods Worldwide Limited
Combined Balance Sheets
($ in thousands)
- -------------------------------------------------------------------------------
September 30, 1996
(unaudited) December 31, 1995
Current Assets
Cash and cash equivalents $ 2,776 $ 1,866
Accounts receivable, net 30,021 29,846
Inventories, net 43,658 33,314
Prepaid expenses and other current assets 510 591
Income taxes receivable 159 344
------------------ -----------------
77,124 65,961
------------------ -----------------
Noncurrent Assets
Property and equipment, net 13,156 14,261
Receivable from former stockholder 560 545
Goodwill 4,950 5,165
Patents and trademarks 370 431
Other assets 114 267
------------------ -----------------
19,150 20,669
------------------ -----------------
Total Assets $ 96,274 $ 86,630
================== =================
Current Liabilities
Short-term debt $ 16,168 $ 12,145
Short-term debt - affiliate 31,500 28,000
Current portion of long-term debt 164 158
Accounts payable 15,693 11,413
Accured liabilities 7,668 6,447
Amounts due affiliates 4,415 4,275
------------------ -----------------
75,608 62,438
------------------ -----------------
Long-Term Liabilities
Long-term debt, less current portion 100 187
Long-term debt - affiliate 25,000 25,000
Other liabilities 1,071 580
------------------ -----------------
26,171 25,767
------------------ -----------------
Total Liabilities 101,779 88,205
------------------ -----------------
Contingencies (Note 5)
Stockholders' Deficit
Common stock 4,155 4,155
Additional paid-in capital 789 789
Accumulated deficit (10,293) (6,363)
Minimum pension liability (156) (156)
------------------- -----------------
Total Stockholders' Deficit (5,505) (1,575)
------------------- -----------------
Total Liabilities and
Stockholders' Deficit $ 96,274 $ 86,630
=================== =================
See notes to combined financial statements.
Woods Industries, Inc. and Woods Worldwide Limited
Combined Statements of Operations and Accumulated Deficit
($ in thousands)
- -------------------------------------------------------------------------------
Nine months ended
09/30/96 09/30/95
(unaudited)
Net sales $ 131,785 $ 122,886
Cost of goods sold 104,105 97,819
-----------------------------
Gross profit 27,680 25,067
Selling, general and
administrative expenses 26,755 24,141
-----------------------------
Income from operations 925 926
Interest expense 4,814 4,635
-----------------------------
Loss before income taxes (3,889) (3,709)
Income tax benefit (provision) (41) 82
-----------------------------
Net loss (3,930) (3,627)
Accumulated deficit-
beginning of period (6,363) (1,801)
-----------------------------
Accumulated deficit-end of period $ (10,293) $ (5,428)
=============================
See notes to combined financial statements.
Woods Industries, Inc. and Woods Worldwide Limited
Combined Statements of Cash Flows
($ in thousands)
- -------------------------------------------------------------------------------
Nine Nine
months months
ended ended
09/30/96 09/30/95
(unaudited) (unaudited)
Cash Flows from Operating Activities
Net loss $ (3,930) $ (3,627)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation expense 2,825 2,297
Amortization expense 310 373
Loss (gain) on disposal of property
and equipment 418 (6)
Changes in operating assets and liabilities-
Increase in accounts receivable (175) (2,452)
Increase in inventories (10,344) (10,777)
Decrease (increase) in prepaid expenses 81 (438)
Decrease (increase) in income taxes receivable 185 (182)
Increase in accounts payable 4,280 170
Increase in accrued liabilities 1,712 1,574
Increase in amounts due affiliates 140 160
Other 104 (44)
----------- ------------
Net cash used for operating activities (4,394) (12,952)
----------- ------------
Cash Flows from Investing Activities
Additions to property and equipment (2,210) (4,731)
Sales proceeds from disposals of property
and equipment 72 27
Patent and trademark expenditures (139)
------------ ------------
Net cash used for investing activities (2,138) (4,843)
------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt 4,023 (932)
Net increase in short-term debt - affiliate 3,500 20,115
Payments on long-term debt (81) (121)
------------ ------------
Net cash provided by financing activities 7,442 19,062
------------ ------------
Net increase in cash 910 1,267
Cash and cash equivalents at beginning of period 1,866 976
------------ ------------
Cash and cash equivalents at end of period $ 2,776 $ 2,243
============ ============
See notes to combined financial statements.
Woods Industries, Inc. and Woods Worldwide Limited
Notes to Combined Financial Statements
($ in thousands)
Note 1 - Basis of Presentation and Description of Business
The accompanying unaudited combined condensed financial statements should be
read in conjunction with the combined financial statements of Woods Industries,
Inc. and Woods Worldwide Limited (together referred to as "the Company") as of
and for the year ended December 31, 1995. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
However, the Company believes that the financial statements reflect all
adjustments, which are of a normal recurring nature, that are necessary for a
fair presentation of the Company's results for the interim periods.
Description of Business
Woods Industries, Inc. manufactures and distributes consumer electric corded
products and supplies electrical / electronic accessories. Woods Worldwide
Limited distributes electrical products that are shipped from Far East
suppliers to customers directly. Both Woods Industries, Inc. and Woods
Worldwide Limited sell its products to retailers principally located in the
United States and Canada. Woods Industries, Inc. is a wholly-owned subsidiary
of Pentland U.S.A., Inc. which is ultimately owned by Pentland Group plc, a
United Kingdom company. Woods Worldwide Limited operates out of Hong Kong and
is ultimately owned by Pentland Group plc.
Note 2 - Sale of Woods Industries, Inc.
On December 2, 1996, all of the capital stock of Woods Industries, Inc. and the
business of Woods Worldwide Limited was sold to Katy Industries, Inc. for an
estimated price of approximately $47 million less the amount of outstanding
Company debts to Marine Midland Bank and certain Hong Kong banks that were
repaid as of that date. The Company's short-term and long-term debts with
affiliates of Pentland Group plc, and all receivables and payables with
affiliates of Pentland Group plc, were not assumed upon the stock purchase by
Katy Industries, Inc. In accordance with the terms of the stock purchase
agreement, the estimated purchase price, which was based on estimated net
assets at November 30, 1996, is to be adjusted based on the difference between
the estimated net assets and the net assets as determined in an audit of the
November 30, 1996 balance sheet of Woods Industries, Inc. The audit and,
hence, the determination of this net asset adjustment has not yet been
finalized.
The stock purchase agreement also required Woods Worldwide Limited to change
its corporate name. Subsequent to December 2, 1996, all new sales, purchasing
and other operating activities that were previously included in Woods Worldwide
Limited will be included in Woods Industries, Inc.
The Internal Revenue Code and the regulations thereunder impose certain
limitations on a corporation's ability to use a net operating loss carryforward
if such corporation experiences an ownership change. Pursuant to the sale of
Woods Industries, Inc. on December 2, 1996, this limitation is estimated to
result in none of the Company's net operating loss carryforwards being utilized
subsequent to the sale date.
Also in connection with the sale of Woods Industries, Inc., the lease with
Pentland U.S.A., Inc. related to the Company's copper fabrication facility was
modified so that (1) annual rents are $120 during the first three years ending
December 31, 1998 of the 15-year lease which runs through December 31, 2010,
(2) rent is adjusted every subsequent three-year period during the lease term
based on the consumer price index, and (3) Woods Industries, Inc. has an option
to purchase this facility prior to December
Finally, in connection with the December 2, 1996 sale of the Company, the
receivable from the former stockholder related to the 1993 acquisition was
forgiven.
Note 3 - Inventories
September 30, December 31,
1996 1995
Raw materials and work-in-process $ 6,946 $ 7,680
Finished goods 37,578 26,601
Inventory reserves (866) (967)
------------- ------------
$ 43,658 $ 33,314
============= ============
Note 4 - Common Stock
Common stock in the accompanying September 30, 1996 and December 31, 1995
combined balance sheets comprises the common stock of Woods Industries, Inc. of
$4,150 and the common stock of Woods Worldwide Limited of $5. Woods
Industries, Inc. has 2,500 shares of no par common stock authorized of which
100 shares has been issued, 80 shares is outstanding and 20 shares are held in
treasury. Woods Worldwide Limited has 250,000 shares of $1 par value common
stock authorized of which 5,000 shares are issued and outstanding.
Note 5 - Contingencies
In December 1996, Banco Atlantico, a bank located in Mexico, filed a lawsuit
against the Company, certain past and present officers and directors and former
owners of Woods Industries, Inc. alleging that the defendants participated in a
violation of the Racketeer Influence and Corrupt Organizations Act involving
allegedly fraudulently obtained loans from Mexican banks, including the
plaintiff, and "money laundering" of the proceeds of the illegal enterprise.
The plaintiff also alleges that it made loans to an entity controlled by
officers and directors based upon fraudulent representations. The plaintiff
seeks to hold Woods Industries, Inc. liable for its alleged damage under
principles of respondeat superior and successor liability. The plaintiff is
claiming damages in excess of $24,000 and is requesting treble damages under
the statutes. As the litigation is in preliminary stages, it is impossible at
this time for the Company to determine an outcome or reasonably estimate the
range of potential exposure.
The Company is subject to various other claims and contingencies arising out of
the normal course of business, including those relating to commercial
transactions, product liability, and employee-related matters. Management
believes that the ultimate liability, if any, in excess of amounts already
provided or covered by insurance, is not likely to have a material adverse
effect on the Company's financial condition, results of operations or cash
flows for the items discussed in the preceding sentence.
Report of Independent Accountants
To the Board of Directors and
Stockholders of Woods Industries, Inc.
and Woods Worldwide Limited
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and accumulated deficit and of cash flows
present fairly, in all material respects, the combined financial position of
Woods Industries, Inc. and Woods Worldwide Limited (together referred to as
"the Company") at December 31, 1995, and the combined results of their
operations and their combined cash flows for the year then ended in conformity
with generally accepted accounting principles. 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 audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 2, the Company's businesses were sold to Katy Industries,
Inc. on December 2, 1996.
Price Waterhouse LLP
Indianapolis, Indiana
February 12, 1996 except for Notes 2 and 14
which are as of February 7, 1997
Woods Industries, Inc. and Woods Worldwide Limited
Combined Balance Sheet
December 31, 1995
($ in thousands)
- -------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 1,866
Accounts receivable, net 29,846
Inventories, net 33,314
Prepaid expenses and other current assets 591
Income taxes receivable 344
---------------
65,961
---------------
Noncurrent Assets
Property and equipment, net 14,261
Receivable from former stockholder 545
Goodwill 5,165
Patents and trademarks 431
Other assets 267
---------------
20,669
---------------
Total Assets $ 86,630
===============
Current Liabilities
Short-term debt $ 12,145
Short-term debt - affiliate 28,000
Current portion of long-term debt 158
Accounts payable 11,413
Accrued liabilities 6,447
Amounts due affiliates 4,275
---------------
62,438
---------------
Long-Term Liabilities
Long-term debt, less current portion 187
Long-term debt - affiliate 25,000
Other liabilities 580
---------------
25,767
---------------
Total Liabilities 88,205
===============
Commitments and Contingencies (Notes 10 and 14)
Stockholders' Deficit
Common Stock 4,155
Additional paid-in capital 789
Accumulated deficit (6,363)
Minimum pension liability (156)
---------------
Total Stockholders' Deficit (1,575)
---------------
Total Liabilities and Stockholders' Deficit $ 86,630
===============
See notes to combined financial statements.
Woods Industries, Inc. and Woods Worldwide Limited
Combined Statement of Operations and Accumulated Deficit
Year Ended December 31, 1995
($ in thousands)
- -------------------------------------------------------------------------------
Net Sales $ 177,207
Cost of goods sold 142,012
-------------
Gross profit 35,195
Selling, general and administrative expenses 33,062
-------------
Income from operations 2,133
Interest expense 6,790
-------------
Loss before income taxes (4,657)
Income tax benefit 95
-------------
Net loss (4,562)
Accumulated deficit - beginning of year (1,801)
-------------
Accumulated deficit - end of year $ (6,363)
=============
See notes to combined financial statements.
Woods Industries, Inc. and Woods Worldwide Limited
Combined Statement of Cash Flows
Year Ended December 31, 1995
($ in thousands)
- -------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $ (4,562)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation expense 3,129
Amortization expense 490
Loss on disposal of property and equipment 207
Changes in operating assets and liabilities-
Decrease in accounts receivable 548
Decrease in inventories 2,320
Decrease in prepaid expenses and other current assets 827
Increase in income taxes receivable (160)
Decrease in accounts payable (4,049)
Increase in accrued liabilities 381
Decrease in amounts due affiliates (155)
Other (47)
-------------
Net cash used for operating activities (1,071)
-------------
Cash Flows from Investing Activities
Additions to property and equipment (6,624)
Sales proceeds from disposals of property and equipment 38
Patent and trademark expenditures (71)
-------------
Net cash used for investing activities (6,657)
-------------
Cash Flows from Financing Activities
Net decrease in short-term debt (3,330)
Net increase in short-term debt - affiliate 12,115
Payments on long-term debt (167)
-------------
Net cash provided by financing activities 8,618
-------------
Net increase in cash 890
Cash and cash equivalents at beginning of year 976
-------------
Cash and cash equivalents at end of year $ 1,866
=============
See notes to combined financial statements.
Woods Industries, Inc. and Woods Worldwide Limited
Notes to Combined Financial Statements
Year Ended December 31, 1995
- -------------------------------------------------------------------------------
Note 1 - Description of Business and Significant Accounting Policies
Description of Business
Woods Industries, Inc. manufactures and distributes consumer electric corded
products and supplies electrical / electronic accessories. Woods Worldwide
Limited distributes electrical products that are shipped from Far East
suppliers to customers directly. Both Woods Industries, Inc. and Woods
Worldwide Limited sell its products to retailers principally located in the
United States and Canada. As of December 31, 1995, Woods Industries, Inc. is a
wholly-owned subsidiary of Pentland U.S.A., Inc. which is ultimately owned by
Pentland Group plc, a United Kingdom company. Woods Worldwide Limited operates
out of Hong Kong and is ultimately owned by Pentland Group plc.
Combined Financial Statements
The accompanying financial statements present the combined balance sheet of
Woods Industries, Inc. and Woods Worldwide Limited (together referred to as
"the Company") at December 31, 1995 and the related combined statements of
operations and accumulated deficit and of cash flows for the year then ended.
All intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all highly-
liquid marketable securities with maturities of three months or less to be cash
equivalents.
Accounts Receivable
Substantially all accounts receivable are uncollateralized and arise from sales
to the retail industry. The accounts receivable for Woods Worldwide Limited
are backed by letter of credit arrangements. Although the Company does not
believe that there is significant credit risk, accounts receivable from the
Company's ten largest customers aggregate approximately 75% of total accounts
receivable at December 31, 1995.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined on the first-in, first-out (FIFO) method. The cost of manufactured
products comprise raw materials, direct labor and manufacturing overhead. The
cost of imported products comprise the costs incurred to obtain products from
suppliers.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-
line method over the following estimated useful lives:
Years
Leasehold improvements 5 - 32
Machinery and equipment 2 - 10
Office furniture and equipment 3 - 7
Goodwill
In connection with the acquisition by Pentland U.S.A., Inc. of the Company in
1993 and the minority stockholder interest buyout in 1994, the acquisition
price in excess of the fair value of the net assets acquired was recognized as
goodwill. Goodwill is being amortized over 20 years using the straight-line
method. Accumulated amortization of goodwill was $563 at December 31, 1995.
Patents and Trademarks
Costs incurred to third parties to obtain patents and trademarks are
capitalized and amortized over their estimated economic lives which range from
5 to 10 years. Accumulated amortization of patents and trademarks was $56 at
December 31, 1995.
Revenue Recognition
Sales are recognized upon shipment of products to customers.
Sales to Significant Customers
Sales to two customers were 33% and 12% of total sales, respectively, in 1995.
Customer Allowances
The Company has customer allowance programs, including cooperative advertising
agreements, with certain customers. Customer allowance expenses are matched
with the associated revenues and aggregated $8,746 in 1995.
Income Taxes
Woods Industries, Inc. is included in the consolidated U.S. income tax returns
of its parent company, Pentland U.S.A., Inc. Woods Industries, Inc. files its
own state income tax returns. Woods Worldwide Limited is a Bahamian
corporation with operations in Hong Kong, and is subject to Hong Kong income
tax jurisdiction. During 1995, Woods Worldwide Limited did not incur any Hong
Kong income taxes as its income was "offshore" and thus tax-exempt in
accordance with Hong Kong income tax regulations. Deferred tax assets and
liabilities result from differences in the basis of assets and liabilities for
financial statement and income tax purposes.
Note 2 - Sale of Woods Industries, Inc.
On December 2, 1996, all of the capital stock of Woods Industries, Inc. and the
business of Woods Worldwide Limited was sold to Katy Industries, Inc. for an
estimated price of approximately $47 million less the amount of outstanding
Company debts to Marine Midland Bank and certain Hong Kong banks that were
repaid as of that date. The Company's short-term and long-term debts with
affiliates of Pentland Group plc (previously with Pentland Management Services
Ltd. at December 31, 1995), and all receivables and payables with affiliates of
Pentland Group plc, were not assumed upon the stock purchase by Katy
Industries,Inc. In accordance with the terms of the stock purchase agreement,
the estimated purchase price, which was based on estimated net assets at
November 30, 1996, is to be adjusted based on the difference between the
estimated net assets and the net assets as determined in an audit of the
November 30, 1996 balance sheet of Woods Industries, Inc. The audit and,
hence, the determination of this net asset adjustment has not yet been
finalized.
The stock purchase agreement also required Woods Worldwide Limited to change
its corporate name. Subsequent to December 2, 1996, all new sales, purchasing
and other operating activities that were previously included in Woods Worldwide
Limited will be included in Woods Industries, Inc.
As disclosed in Note 8, the Company has deferred tax assets of $2,127 related
to net operating loss carryforwards at December 31, 1995. The Internal Revenue
Code and the regulations thereunder impose certain limitations on a
corporation's ability to use a net operating loss carryforward if such
corporation experiences an ownership change. Pursuant to the sale of Woods
Industries, Inc. on December 2, 1996, this limitation is estimated to result in
none of these net operating loss carryforwards being utilized subsequent to the
sale date.
Also in connection with the sale of Woods Industries, Inc., the lease with
Pentland U.S.A., Inc. related to the Company's copper fabrication facility was
modified so that (1) annual rents are $120 during the first three years ending
December 31, 1998 of the 15-year lease which runs through December 31, 2010,
(2) rent is adjusted every subsequent three-year period during the lease term
based on the consumer price index, and (3) Woods Industries, Inc. has an option
to purchase this facility prior to December 2, 1997 for $1,200.
Finally, in connection with the December 2, 1996 sale of the Company, the
receivable from the former stockholder related to the 1993 acquisition
(December 31, 1995 balance of $545) was forgiven.
Note 3 - Accounts Receivable
Trade accounts receivable $ 30,027
Allowances for doubtful accounts (166)
Allowances for returns and adjustments (810)
Allowances for cash discounts (185)
Volume rebates from suppliers 660
Other receivables 320
------------------
$ 29,846
===================
Note 4 - Inventories
Raw materials and work-in-process $ 7,680
Finished goods 26,601
Inventory reserves (967)
--------------------
$ 33,314
====================
Note 5 - Property and Equipment
Leasehold improvements $ 1,267
Machinery and equipment 12,606
Office furniture and equipment 3,091
Construction in progress 4,130
--------------------
21,094
Accumulated depreciation (6,833)
--------------------
$ 14,261
====================
Note 6 - Accrued Liabilities
Customer allowances $ 3,333
Employee benefit plans 891
Vacation 486
Payroll liabilities 470
Property taxes 393
Interest 291
Other 583
--------------------
$ 6,447
====================
Note 7 - Debt
Short-term debt
Notes payable - Pentland Management Services Ltd. $ 28,000
Notes payable - Hong Kong banks 8,039
Note payable - Marine Midland Bank 4,106
------------------
$ 40,145
==================
Long-term debt
Note payable - Pentland Management Services Ltd. $ 25,000
Capital lease obligations 345
------------------
25,345
Less amount due within one year (158)
------------------
$ 25,187
==================
The Company has a short-term loan facility with Pentland Management Services
Ltd., a wholly-owned subsidiary of Pentland Group plc, whereby it could borrow
up to $42,500. Interest on outstanding principal borrowings accrues at the
prime rate (8.5% at December 31, 1995) plus 2%, and is payable semi-annually.
This short-term loan is secured by the Company's assets and the outstanding
principal of $28,000 is due December 31, 1996.
The Company purchases certain of its inventories from Far East suppliers that
are backed by letter of credit agreements with certain banks located in Hong
Kong. Upon shipment by the supplier, the individual inventory purchases are
financed by these banks under 120-day unsecured promissory notes. Interest
accrues on these notes at the prime rate.
The Company has an unsecured line of credit facility with Marine Midland Bank
whereby it can borrow up to $5 million. Interest on outstanding principal
borrowings accrues at the prime rate plus 0.75% and is payable monthly. This
line of credit facility expires on March 31, 1996.
The Company also has an unsecured long-term loan facility with Pentland
Management Services Ltd. whereby the Company borrowed $25 million. Interest
accrues at the annual rate of 8.75% and is payable semi-annually. This long-
term loan is secured by the Company's assets and the outstanding principal of
$25,000 is due April 29, 1998.
Interest expense incurred during 1995 under the short-term and long-term loan
facilities with Pentland Management Services Ltd. aggregated $5,075.
Interest payments aggregated $6,307 in 1995.
Note 8 - Income Taxes
The significant components of the Company's 1995 income tax benefit are:
Loss before income taxes:
Domestic $ (5,616)
Foreign 959
-----------------
$ (4,657)
=================
Current items:
Federal $ -
State income tax benefit (159)
Foreign income tax expense 64
-----------------
(95)
-----------------
Deferred items:
Federal (1,327)
State (54)
Valuation allowance increase 1,381
-----------------
-
-----------------
Total income tax benefit $ (95)
=================
A reconciliation of the federal statutory income tax rate to the Company's 1995
effective income tax rate is as follows:
Percent of
loss before
income taxes
Federal statutory income tax rate (34.0)
State income taxes, net of federal benefit (5.2)
Goodwill amortization - nondeductible amount 4.0
Increase in deferred tax asset valuation allowance 32.9
Other 0.3
-------------
Effective income tax benefit rate (2.0)
=============
Deferred tax assets and liabilities at December 31, 1995 are:
Deferred tax assets
Accounts receivable reserves $ 454
Inventories 1,026
Accrued liabilities 606
Long-term liabilities 227
Packaging costs 378
Net operating loss carryforwards 2,127
----------------
4,818
----------------
Deferred tax liabilities
Property and equipment (606)
Other (9)
----------------
(615)
----------------
Valuation allowance (4,203)
----------------
Net deferred tax assets recognized $ -
================
Included in the deferred tax asset valuation allowance is $1,588 related to
1993 acquisition purchase price allocation. Any reversal in the future of this
valuation allowance would be recognized as an adjustment of goodwill.
Income tax payments aggregated $128 in 1995.
Note 9 - Common Stock
Common stock in the accompanying December 31, 1995 combined balance sheet
comprises the common stock of Woods Industries, Inc. of $4,150 and the common
stock of Woods Worldwide Limited of $5. Woods Industries, Inc. has 2,500
shares of no par common stock authorized of which 100 shares has been issued,
80 shares is outstanding and 20 shares are held in treasury. Woods Worldwide
Limited has 250,000 shares of $1 par value common stock authorized of which
5,000 shares are issued and outstanding.
Note 10 - Leases
The Company leases all of its manufacturing, distribution and office facilities
under lease agreements accounted for as operating leases. The wire mill
manufacturing facility, one satellite manufacturing facility and the office
building are leased from companies affiliated with the Company's chief
executive officer, where rent expense aggregated $348 during 1995. These
leases run through March 2006 and rent is increased biannually based on the
consumer price index.
The Company's new copper fabrication manufacturing facility, that is currently
under construction as of December 31, 1995, will be leased from Pentland
U.S.A., Inc.. The terms of leasing this facility have not been determined yet.
In addition, the Company leases two distribution centers, three other satellite
manufacturing facilities, and certain equipment from unrelated third parties.
Rent expense related to these leases aggregated $1,983 during 1995.
Future minimum annual lease payments under these operating leases are as
follows:
Year ending December 31,
1996 $ 1,600
1997 1,437
1998 1,439
1999 1,411
2000 372
Thereafter 2,008
-----------------
$ 8,267
=================
Note 11 - Retirement Plans
The Company has one defined benefit pension plan covering certain hourly
employees. Pension benefits for this plan are based on a fixed amount per year
of service. It is the Company's policy to fund at least the minimum amounts
required under the Employee Retirement Income Security Act of 1974. The
weighted average discount rate and the expected long-term rate of return on
assets was 7.5% and 8.0%, respectively, at the beginning and end of 1995.
Net pension expense in 1995 includes the following components:
Service expense - benefits earned during the year $ 38
Interest expense on projected benefit obligation 33
Actual loss on plan assets 1
Net amortization and deferral (10)
-----------
Net pension expense $ 62
===========
The funded status of the defined benefit plan is as follows:
Accumulated benefit obligation - vested $ 466
Accumulated benefit obligation - nonvested 76
-----------
Accumulated benefit obligation and projected
benefit obligation 542
Plan assets 349
-----------
Projected benefit obligation in excess of plan assets (193)
Unrecognized net loss 410
Unrecognized transition asset (4)
Underfunded liability recognized upon 1993 acquisition
of the Company (250)
Additional liability recognized (156)
-----------
Accrued pension liability at December 31, 1995 $ (193)
===========
The Company also has a defined contribution 401(k) retirement plan covering
most full-time employees. The Company matches a portion of each employee's
contributions. The Company-matching contributions vest over four years and
aggregated $80 during 1995.
Effective January 1, 1996, the Company established two nonqualified deferred
compensation plans for seven key executives. Under one plan, the Company will
contribute 5% of each executive's compensation as a supplemental retirement
benefit which vests over five years. The other plan is a deferred compensation
plan for these executives whereby the Company will match 50% of the executive's
contributions, not to exceed 5% of their annual salary. These Company-matching
contributions vest over five years.
Note 12 - Transactions with Affiliates
Asco Investments, Ltd., a Pentland Group plc company, performs certain
administrative services for Woods Worldwide Limited. Charges to the Company
for these services aggregated $392 during 1995.
The Company is charged a monthly management fee from Pentland U.S.A., Inc.
which aggregated $100 in 1995.
At December 31, 1995, the Company had a receivable from a former stockholder of
$545 related to the 1993 acquisition of the Company.
Amounts due to affiliates at December 31, 1995 in the accompanying balance
sheet represents amounts due to Pentland U.S.A., Inc. primarily for a $3,000
advance to the Company related to the 1994 buyout of the minority stockholders,
$545 due to Pentland U.S.A., Inc. related to the receivable from the former
stockholder, and $655 for litigation costs incurred by Pentland U.S.A., Inc.
related to certain litigation that was settled in 1994. Interest charged to
the Company on the $3,000 advance aggregated $322 in 1995.
Note 13 - Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, prepaid expenses and other
current assets, accounts payable and accrued expenses approximate fair value
because of the short maturity of those instruments. The carrying amounts of
short-term debt approximate fair value as the interest rate is adjusted to
current market rates. The carrying amounts of long-term debt and other long-
term liabilities approximate fair value as the applicable interest rates
approximate current market rates.
Note 14 - Contingencies
In December 1996, Banco Atlantico, a bank located in Mexico, filed a lawsuit
against the Company, certain past and present officers and directors and former
owners of Woods Industries, Inc. alleging the defendants participated in a
violation of Racketeer Influence and Corrupt Organizations Act involving
allegedly fraudulently obtained loans from Mexican banks, including the
plaintiff, and "money laundering" of the proceeds of the illegal enterprise.
The plaintiff also alleges that it made loans to an entity controlled by
officers and directors based upon fraudulent representations. The plaintiff
seeks to hold Woods Industries, Inc. liable for its alleged damage under
principles of respondeat superior and successor liability. The plaintiff is
claiming damages in excess of $24,000 and is requesting treble damages under
the statutes. As the litigation is in preliminary stages, it is impossible
at this time for the Company to determine an outcome or reasonably estimate the
range of potential exposure.
The Company is subject to various other claims and contingencies arising out
of the normal course of business, including those relating to commercial
transactions, product liability, and employee-related matters. Management
believes that the ultimate liability, if any, in excess of amounts already
provided or covered by insurance, is not likely to have a material adverse
effect on the Company's financial condition, results of operations or cash
flows for the items discussed in the preceding sentence.
KATY INDUSTRIES, INC. AND WOODS INDUSTRIES, INC. AND WOODS WORLDWIDE LIMITED
UNAUDITED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1995
The following unaudited pro forma balance sheet as of September 30, 1996 and
unaudited pro forma statements of operations for the nine months ended
September 30, 1996 and the year ended December 31, 1995 give effect to the
acquisition by Katy Industries, Inc. ("Katy") of the common stock of Woods
Industries, Inc. and the business of Woods Worldwide Limited (together known
as "Woods") as if the acquisition had occurred on September 30, 1996 for
purposes of the balance sheet and on January 1, 1995 for purposes of the
statements of operations. The transaction was accounted for as a purchase in
accordance with the provisions of Accounting Principles Board Opinion No. 16.
The historical financial data included in the pro forma statements is as of the
periods presented. The historical financial data of Woods as of September 30,
1996 and for the nine months ended September 30,1996 was derived from unaudited
financial statements for the nine months ended September 30, 1996. The
historical financial data of Woods included in the pro forma statement of
operations for the year ended December 31, 1995 was derived from audited
financial statements for the year ended December 31, 1995.
The unaudited pro forma financial data is based on management's best estimate
of the effects of the acquisition of Woods. Pro forma adjustments are based on
currently available information; however, the actual adjustments will be based
on more precise appraisals, evaluations and estimates of fair values. It is
possible that the actual adjustments could differ substantially from those
presented in the unaudited pro forma financial statements.
The unaudited pro forma balance sheet as of September 30, 1996 and the
statements of operations for the nine months ended September 30, 1996 and the
year ended December 31, 1995 are not necessarily indicative of the results of
operations that actually would have been achieved had the acquisition of Woods
been consummated as of the dates indicated, or that may be achieved in the
future. The unaudited pro forma financial statements should be read in
conjunction with the accompanying notes and historical financial statements and
notes thereto.
In accordance with the rules regarding the preparation of pro forma financial
statements, income of $12,289,000, or $1.37 per share, from discontinued
operations and certain nonrecurring items (related to Katy historical financial
statements) has not been considered in the unaudited pro forma statement of
operation for the year ended December 31, 1995.
Pursuant to the purchase agreement related to this transaction, the estimated
purchase price of $46,800,000 was based on an estimated balance sheet as of
November 30, 1996 and is subject to possible adjustment based on the November
30, 1996 balance sheet prepared on a post closing basis. The ultimate purchase
price will be based upon an audit of this balance sheet which has not yet been
completed. The accompanying pro forma financial statements do not include
adjustments which may result from this audit or from the resolution of any
issues between the parties. Certain balance sheet adjustments and/or
resolution of issues between the parties will also affect the ultimate price of
the acquisition and the allocation of the purchase price.
KATY INDUSTRIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(in thousands except per share information)
Katy Woods Pro forma
Historical Historical Adjustments Pro forma
---------- ---------- ----------- ---------
Net sales $133,390 $131,785 $(24,955)[b] $240,220
Cost of goods sold 90,907 104,105 (2,260)[a] 171,161
(21,591)[b]
------- ------- ------ -------
Gross profit 42,483 27,680 (1,104) 69,059
Selling, general and
administrative expenses 35,444 26,755 (2,152)[a] 56,683
(3,364)[b]
------- ------- ------ -------
Income from operations 7,039 925 4,412 12,376
Interest expense (804) (4,814) 4,814 [a] (804)
Interest income 1,789 - (1,270)[a] 519
Other, net 896 - 896
Gain on sale of
marketable securities 4,914 - 4,914
------- ------- ------ -------
Income (loss) before taxes
and equity in income of
unconsolidated subsidiaries 13,834 (3,889) 7,956 17,901
Provision for income taxes 5,051 41 991 [a] 6,083
------- ------- ------ -------
Income (loss) before equity
in income of unconsolidated
subsidiaries 8,783 (3,930) 6,965 11,818
Equity in loss of
unconsolidated subsidiaries
(net of tax) (420) - (420)
------- ------- ------ -------
Net income (loss) $ 8,363 $ (3,930) $ 6,965 $ 11,398
======= ======= ====== =======
Earnings per share
of common stock $ 1.00 $ 1.36
======= =======
Weighted average
shares outstanding 8,380 8,380
======= =======
KATY INDUSTRIES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands except per share information)
Katy Woods Pro forma
Historical Historical Adjustments Pro forma
---------- ---------- ----------- ---------
Net sales $171,269 $177,207 $(29,790)[b] $318,686
Cost of goods sold 120,437 142,012 (2,503)[a] 234,180
(25,766)[b]
------- ------- ------ -------
Gross profit 50,832 35,195 (1,521) 84,506
Selling, general and
administrative expenses 46,293 33,062 (2,819)[a] 72,512
(4,024)[b]
------- ------- ------ -------
Income from operations 4,539 2,133 5,322 11,994
Interest expense (2,753) (6,790) 6,040 [a] (3,503)
Interest income 1,011 - (1,011)[a] -
Other income, net 3,575 - 3,575
Gain on sale of
marketable securities 6,841 - 6,841
Reversal of previously
recorded losses 4,920 - 4,920
------- ------- ------ -------
Income (loss) before taxes
and equity in income of
unconsolidated subsidiaries 18,133 (4,657) 10,351 23,827
Provision (benefit)
for income taxes 3,771 (95) 1,572 [a] 5,248
------- ------- ------ -------
Income (loss) before equity
in income of unconsolidated
subsidiaries 14,362 (4,562) 8,779 18,579
Equity in income of
unconsolidated subsidiaries
(net of tax) 1,920 - 1,920
------- ------- ------ -------
Net income (loss) $ 16,282 $ (4,562) $ 8,779 $ 20,499
======= ======= ====== =======
Earnings per share
of common stock $ 1.81 $ 2.28
======= =======
Weighted average
shares outstanding 8,986 8,986
======= =======
KATY INDUSTRIES, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(in thousands)
Katy Woods Pro forma
Historical Historical Adjustments Pro forma
---------- ---------- ----------- ---------
Cash and
cash equivalents $ 43,242 $ 2,776 $(42,120)[c] $3,898
Marketable securities
- available for sale 8,395 - 8,395
Accounts receivable,
trade, net 26,774 30,021 56,795
Notes and other
receivables, net 1,505 159 1,664
Inventories 39,703 43,658 83,361
Other current assets 17,535 510 18,045
------- ------ ------- -------
Total current assets 137,154 77,124 (42,120) 172,158
------- ------ ------- -------
Investments at equity, in
unconsolidated subsidiaries 6,617 - 6,617
Investment in waste-to-
energy facility 11,134 - 11,134
Notes Receivable, net 1,265 - 1,265
Cost in excess of net assets
of businesses acquired, net 6,861 4,950 (4,950)[d] 6,861
Deferred tax asset - - 6,000 [d] 6,000
Miscellaneous 5,420 1,044 (1,044)[d] 5,420
------- ------ ------- -------
Total other assets 31,297 5,994 6 37,297
------- ------ ------- -------
Property, plant and
equipment, net 42,209 13,156 (13,156)[d] 42,209
------- ------ ------- -------
Total assets $210,660 $96,274 $(55,270) $251,664
======= ====== ======= =======
Short-term debt $ - $ 16,168 $(16,168)[d] $ -
Short-term debt-affiliate - 31,500 (31,500)[d] -
Accounts payable 9,833 15,693 25,526
Accrued compensation 3,228 - 3,228
Accrued expenses 25,077 7,668 3,532 [d] 36,277
Liability for remainder of
estimated purchase price - - 4,680 [c] 4,680
Current maturities,
long-term debt 676 164 (164)[d] 676
Amounts due affiliates - 4,415 (4,415)[d] -
Dividends payable 683 - 683
------- ------- ------ -------
Total current liabilities 39,497 75,608 (44,035) 71,070
------- ------- ------ -------
Long-term debt, less
current maturities 8,704 100 (100)[d] 8,704
------- ------- ------ -------
Long-term debt - affiliate - 25,000 (25,000)[d] -
------- ------- ------ -------
Deferred income taxes 25,922 - 25,922
------- ------- ------ -------
Other liabilities 8,232 1,071 8,516[d] 17,819
------- ------- ------ -------
Total liabilities 82,355 101,779 (60,619) 123,515
------- ------- ------ -------
Stockholders' equity (deficit):
Common stock 9,822 4,155 (4,155)[d] 9,822
Additional paid-in capital 51,117 789 (789)[d] 51,117
Foreign currency
translation adjustment (1,736) - (1,736)
Unrealized holding
gains, net of tax 2,762 - 2,762
Retained earnings
(accumulated deficit) 88,364 (10,293) 10,293 [d] 88,364
Treasury stock (22,024) - (22,024)
Minimum pension liability - (156) (156)
------- ------- ------ -------
Total stockholders'
equity (deficit) 128,305 (5,505) 5,349 128,149
------- ------- ------ -------
Total liabilities
and stockholders'
equity (deficit) $210,660 $ 96,274 $(55,270) $251,664
======= ======= ====== =======
KATY INDUSTRIES, INC.
UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS
(in thousands)
[a] The following pro forma adjustments are reflected in the pro forma
statement of operations:
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
------------------ -----------------
1. Elimination of Woods' depreciation
due to write-down of plant, property
and equipment pursuant to purchase
accounting:
Cost of sales $2,260 $2,503
Selling, general and administrative 565 626
2. Elimination of Woods' amortization
due to write-down of cost in excess
of businesses acquired pursuant to
purchase accounting 310 490
3. Amortization of negative goodwill
recorded pursuant to purchase
accounting 1,277 1,703
4. Elimination of Woods' interest
expense as all debt is repaid on
date of purchase pursuant to the
purchase agreement 4,814 6,790
5. Increase in interest expense due to
assumed borrowings at applicable
rates for purchase cost (for the nine
month period Katy's cash position
would have made borrowing unnecessary) - (750)
6. Decrease in interest income due to
use of cash for purchase cost (1,270) (1,011)
7. Net tax effect related to items
1-6 above at the statutory rate
(item 3 has no tax effect) (2,471) (3,200)
8. Net tax benefit from inclusion of
Woods'operations 1,480 1,628
----- -----
$6,965 $8,779
===== =====
[b] Net sales and related costs attributable to direct imports have been
eliminated. The net fee for this activity is recorded as revenue.
[c] Pro forma adjustments represent 90%, or $42,120, of the estimated purchase
price paid on the closing date and 10%, or $4,680, of the estimated
purchase price due upon final determination of the net asset value as of
November 30, 1996.
[d] The following pro forma adjustments are made to reflect (1) the allocation
of cost less than fair value of assets acquired resulting in the write-down
to zero of Woods' noncurrent assets pursuant to purchase accounting, (2) the
recording of a deferred tax asset for the difference between the book and
tax basis of the net assets acquired, (3) the repayment of outstanding debt
on the purchase date, the elimination of short-term and long-term debt with
affiliates of Pentland Group plc, and all receivables and payables with
affiliates of Pentland Group plc, as these items were not assumed upon the
stock purchase by Katy, and (4) the elimination of Woods' shareholders'
deficit as of September 30, 1996:
Write-down of cost in excess of
net assets of business acquired (4,950)
Write-down of miscellaneous long-term assets (1,044)
Write-down of net property, plant and equipment (13,156)
Record deferred tax asset 6,000
Record acquisition liabilities (3,532)
Record negative goodwill (8,516)
Net elimination of due to/from affiliates 60,915
Elimination of short-term and long-term debt 16,432
Elimination of Woods' shareholders' deficit (5,349)
------
Total allocation of estimated purchase price $46,800
======
