United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended: March 31, 1997 Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303)290-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at May 14, 1997
Common stock, $1 par value 8,259,227
KATY INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 1997
INDEX
Page
PART I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 2,3
Statements of Condensed Consolidated Income
Three Months Ended March 31, 1997 and 1996 4
Statements of Condensed Consolidated Cash Flows
Three Months Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Information 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 11
<PAGE>
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
March 31, December 31,
1997 1996
(Thousands of dollars)
CURRENT ASSETS:
Cash and cash equivalents $ 23,889 $ 27,321
Accounts receivable, trade, net 46,094 50,324
Notes and other receivables, net 4,958 2,154
Inventories - Note 1 72,374 68,885
Deferred income taxes 14,331 14,331
Other current assets 5,332 3,500
-------- -------
Total current assets 166,978 166,515
-------- -------
OTHER ASSETS:
Investments, at equity, in
unconsolidated affiliates 6,159 6,382
Investments in waste-to-energy facility 10,983 11,058
Notes receivable, net 1,210 1,260
Cost in excess of net assets of
businesses acquired, net 6,619 6,723
Miscellaneous 6,116 5,211
------- -------
Total other assets 31,087 30,634
------- -------
PROPERTIES, at cost:
Land and improvements 3,776 3,776
Buildings and improvements 32,579 32,545
Machinery and equipment 43,246 41,773
------- -------
79,601 78,094
Accumulated depreciation (37,057) (35,734)
------- -------
Net properties 42,544 42,360
------- -------
$240,609 $239,509
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
March 31, December 31,
1997 1996
(Thousands of dollars)
CURRENT LIABILITIES:
Accounts payable $ 24,730 $ 20,318
Accrued expenses 33,055 37,351
Other current liabilities 1,256 1,277
------- -------
Total current liabilities 59,041 58,946
LONG-TERM DEBT, less current maturities 8,398 8,582
DEFERRED INCOME TAXES 23,468 23,861
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net 8,091 8,517
OTHER LIABILITIES 9,879 9,557
------- -------
Total liabilities 108,877 109,463
------- -------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, authorized
25,000,000 shares, issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 51,139 51,117
Foreign currency translation
and other adjustments (2,339) (1,778)
Retained earnings 94,970 93,099
Treasury stock, at cost, 1,556,177 and
1,582,942 shares (21,860) (22,214)
------- -------
Total shareholders' equity 131,732 130,046
------- -------
$240,609 $239,509
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
THREE MONTHS MONTHS ENDED MARCH 31, 1997 AND 1996
Three Months Ended March 31, 1997 1996
(Thousands of dollars except
per share data)
Net sales $76,593 $42,465
Cost of goods sold 57,348 28,551
------- -------
Gross profit 19,245 13,914
Selling, general and administrative 15,427 11,794
------- -------
Income from operations 3,818 2,120
Interest expense (313) (307)
Interest income 450 701
Other, net - Note 2 85 4,923
------- -------
Income from consolidated operations
before provision for income taxes 4,040 7,437
Provision for income taxes 1,414 2,825
------- -------
Income from consolidated operations 2,626 4,612
Equity in loss of unconsolidated
affiliates (net of tax)- Note 2: (136) (183)
------ ------
Net income $ 2,490 $ 4,429
====== ======
Earnings per share $ .30 $ .52
====== ======
Average shares outstanding 8,302 8,600
====== ======
Dividends paid per share - Common stock $ .0750 $ .0625
====== ======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Three Months Ended March 31, 1997 1996
(Thousands of dollars)
Cash flows from operating activities:
Net income $2,490 $ 4,429
Depreciation and amortization 472 1,553
Gain on marketable security transactions - (4,914)
Adjustments to reconcile net income to net cash
flows from operating activities (mainly changes
in working capital) (3,642) 1,579
------ ------
Net cash flows from operating activities (680) 2,647
------ ------
Cash flows from investing activities:
Proceeds from sale of assets 56 255
Collections of notes receivable 67 13,204
Proceeds from sale of marketable securities - 9,191
Capital expenditures (1,610) (2,171)
------ ------
Net cash flows from investing activities (1,487) 20,479
------ ------
Cash flows from financing activities:
Notes payable activity, net - (14,193)
Principal payments on long-term debt (204) (398)
Payment of dividends (619) (545)
Purchase of treasury shares (460) (3,797)
Other 18 -
------ ------
Net cash flows from financing activities (1,265) (18,933)
------ ------
Net decrease in cash and cash equivalents (3,432) 4,193
------ ------
Cash and cash equivalents beginning of period 27,321 43,701
------ ------
Cash and cash equivalents end of period $23,889 $47,894
====== ======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 1997
(1) Significant Accounting Policies
Consolidation Policy
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries ("Katy") in which it has
greater than 50% interest. Investments in affiliates which are not majority
owned are reported using the equity method. The condensed consolidated
financial statements at March 31, 1997 and December 31, 1996 and for the
three month periods ended March 31, 1997 and 1996 are unaudited and reflect
all adjustments which are, in the opinion of management, necessary for a fair
presentation of financial condition and results of operations. Interim figures
are subject to year end audit adjustments and may not be indicative of results
to be realized for the entire year. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Inventories
The components of inventories are as follows:
March 31, December 31,
1997 1996
(Thousands of dollars)
Raw materials $17,553 $15,933
Work in process 6,251 6,269
Finished goods 48,570 46,683
------ ------
$72,374 $68,885
====== ======
Earnings Per Share
Earnings per share for the three months ended March 31, 1997 and 1996 is
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period.
Common stock equivalents, in the form of stock options, have been included in
the calculation of weighted average shares outstanding under the treasury stock
method.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings Per Share". This Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to all entities with publicly held common stock or potential
common stock. This Statement replaces the presentation of primary EPS and
fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully diluted EPS, diluted EPS
reflects the potential dilution of securities that could share in the earnings.
This Statement is not expected to have a material effect on the Company's
reported EPS amounts. This Statement is effective for the Company's financial
statement for the year ended December 31, 1997.
(2) Contingencies
In December, 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc., a subsidiary of the Company, and
against 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 Influenced and Corrupt Organizations Act involving
allegedly fraudulently obtained loans from Mexican banks, including the
plaintiff, and "money laundering" of the proceeds of the illegal enterprise.
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 $24,000,000 and is requesting treble damages
under the statutes. Katy may have recourse against the former owners of
Woods under the purchase agreement; however, as the litigation is in
preliminary stages, it is impossible at this time for the Company to
determine the limit of such recourse. 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.
(3) Nonrecurring Items
Included in Other, net for the three months ended March 31, 1996 is a gain
of $4,914,000 resulting from the sale of Union Pacific Corporation common
stock.
KATY INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997
Following are summaries of sales and operating income for the three months
ended March 31, 1997 and 1996 by industry segment:
Sales Increase (Decrease)
1997 1996 Amount Percent
Distribution and Service $18,901 $20,204 $(1,303) (6.4)%
Industrial and
Consumer Manufacturing 48,497 14,537 33,960 233.6
Machinery Manufacturing 9,195 7,724 1,471 19.0
Operating Income Increase (Decrease)
1997 1996 Amount Percent
Distribution and Service $ 775 $1,799 $(1,024) (56.9)%
Industrial and
Consumer Manufacturing 4,287 1,659 2,628 158.4
Machinery Manufacturing 928 759 169 22.3
The Distribution and Service Group's sales decreased due to decreases in
sales of rerolled metals, waste-to-energy services, and portions of electronic
components and electrical parts and accessories. The decrease in the Group's
operating income was mainly a result of the decreased volume in the rerolled
metals and waste-to-energy services.
The increased sales of the Industrial and Consumer Manufacturing Group was
primarily due to the acquisition of Woods Industries, Inc.("Woods"), in
December 1996. Increased sales in the sanitary maintenance supplies and stain
areas also contributed to the improvement. The increase in the Group's
operating income was due to the Woods acquisition and the increased volume in
the above mentioned areas.
The Machinery Manufacturing Group's sales increase was due mainly to
increased sales in the cookie sandwich machinery business which contributed
to the improved operating income for the Group.
Selling, general and administrative expenses decreased as a percentage of
sales to 20.1% in 1997 from 27.8% in 1996. The decrease in this percentage
is due to the acquisition of Woods. Excluding Woods from the first quarter
of 1997, selling, general and administrative expenses remained constant
between the periods.
Interest expense remained constant during the period, while interest income
decreased due to lower cash levels during the first quarter of 1997.
Other, net in 1996 includes a gain of $4,914,000 resulting from the sale of
Union Pacific Corporation common stock.
The effective tax rate decreased during the first quarter of 1997 primarily
due to the benefits resulting from the Woods acquisition.
Liquidity and Capital Resources
Combined cash and cash equivalents decreased to $23,889,000 on March 31, 1997
compared to $27,321,000 on December 31, 1996 primarily due to the increase in
working capital needs caused by higher sales and seasonal factors.
Katy expects to commit an additional $9,800,000 for capital projects during
the remainder of 1997. Funding for these expenditures and for working
capital needs is expected to be accomplished through the 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, 1997, Katy had short and long-term indebtedness for money
borrowed of $9,036,000. Total debt was 6.4% of total debt and equity at
March 31, 1997. The Company has a committed unsecured line of credit with
The Northern Trust Company in the amount of $20,000,000, which is used
principally for letters of credit. Katy intends to secure an additional
commitment of bank credit in an amount it determines appropriate for future
acquisitions.
In August 1995, Katy's Board of Directors authorized the Company to
repurchase up to 400,000 shares of its common stock in open market
transactions. In January 1996, Katy's board authorized the Company to
repurchase an additional 500,000 shares, bringing the total authorization to
900,000 shares. In connection, therewith, Katy repurchased 38,000 shares in
1997, bringing the total repurchased to 900,000, thus, completing the
repurchase program.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings Per Share". This Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to all entities with publicly held common stock or potential
common stock. This Statement replaces the presentation of primary EPS and
fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully diluted EPS, diluted EPS
reflects the potential dilution of securities that could share in the earnings.
This Statement is not expected to have a material effect on the Company's
reported EPS amounts. This Statement is effective for the Company's
financial statement for the year ended December 31, 1997.
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, 1997. 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.
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 nonmaterial proceedings, have been
brought against the Company.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
On February 17, 1997, the Company filed a current report on Form 8-K/A
providing information in response to Item 7 to Form 8-K with respect to
financial statements of Woods Industries, Inc. and pro forma financial
statements related to the acquisition of Woods Industries, Inc. by the Company.
On May 8, 1997, the Company filed a current report on Form 8-K providing
information in response to Item 5 to Form 8-K with respect to the
resignation of Philip E. Johnson as the Chairman of the Board and a Director
of the Company.
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 14, 1997 By /s/John R. Prann, Jr.
John R. Prann, Jr.
President,
Chief Executive Officer &
Chief Operating Officer
DATE: May 14, 1997 By /s/Stephen P. Nicholson
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,889
<SECURITIES> 0
<RECEIVABLES> 46,094<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 72,374
<CURRENT-ASSETS> 5,332
<PP&E> 79,601
<DEPRECIATION> 37,057
<TOTAL-ASSETS> 240,609
<CURRENT-LIABILITIES> 59,041
<BONDS> 9,036
0
0
<COMMON> 9,822
<OTHER-SE> 121,910
<TOTAL-LIABILITY-AND-EQUITY> 240,609
<SALES> 76,593
<TOTAL-REVENUES> 76,593
<CGS> 57,348
<TOTAL-COSTS> 72,775
<OTHER-EXPENSES> (535)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 313
<INCOME-PRETAX> 4,040
<INCOME-TAX> 1,414
<INCOME-CONTINUING> 2,626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,490
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<FN>
<F1>Accounts Receivable, Trade are reported net of allowance for doubtful
accounts in Condensed Consolidated Balance Sheet.
</FN>
</TABLE>
