United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1998 Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303)290-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at August 12, 1998
Common stock, $1 par value 8,295,452
KATY INDUSTRIES, INC.
FORM 10-Q
June 30, 1998
INDEX
-----
Page
PART I FINANCIAL INFORMATION ----
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3,4
Statements of Condensed Consolidated Income
Three Months and Six Months Ended June 30, 1998 and 1997 5
Statements of Condensed Consolidated Cash Flows
Six Months Ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Information 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 18
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
ASSETS
------
June 30, December 31,
1998 1997
---- ----
(Thousands of dollars)
CURRENT ASSETS:
Cash and cash equivalents $ 19,690 $ 22,327
Accounts receivable, trade, net of allowance
for doubtful accounts 47,581 47,914
Notes and other receivables, net of allowance
for doubtful notes 1,963 2,263
Inventories 65,748 53,369
Deferred income taxes 13,233 13,233
Other current assets 2,482 3,167
Net current assets of discontinued operations 11,269 10,588
Net current assets of other operations
to be disposed of 5,677 6,692
-------- --------
Total current assets 167,643 159,553
-------- --------
OTHER ASSETS:
Notes receivable, net of allowance for
doubtful notes 1,071 1,106
Cost in excess of net assets of
businesses acquired 9,881 8,544
Miscellaneous 10,069 9,993
Net noncurrent assets of discontinued operations 4,544 4,964
Net noncurrent assets of other operations
to be disposed of 24,769 30,854
-------- --------
Total other assets 50,334 55,461
-------- --------
PROPERTIES:
Land and improvements 997 894
Buildings and improvements 13,285 12,433
Machinery and equipment 40,794 22,073
-------- --------
Accumulated depreciation (27,139) (14,841)
-------- --------
Net properties 27,937 20,559
-------- --------
$245,914 $235,573
======== ========
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
LIABILITIES
-----------
June 30, December 31,
1998 1997
---- ----
(Thousands of dollars)
CURRENT LIABILITIES:
Accounts payable $24,119 $24,354
Accrued compensation 3,603 2,289
Accrued expenses 35,721 28,801
Accrued interest and taxes 562 236
Dividends payable 621 621
Current maturities of long-term debt 85 -
-------- --------
Total current liabilities 64,711 56,301
-------- --------
OTHER LIABILITIES 9,062 10,666
-------- --------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net 6,050 6,902
-------- --------
LONG-TERM DEBT 933 -
-------- --------
DEFERRED INCOME TAXES 22,479 22,533
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 2)
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 51,174 51,127
Foreign currency translation and other
adjustments (2,435) (2,276)
Retained earnings 105,609 102,194
Treasury stock, at cost, 1,525,877
and 1,542,197 shares (21,491) (21,696)
-------- --------
Total shareholders' equity 142,679 139,171
-------- --------
$245,914 $235,573
======== ========
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars Except Per Share Data)
Net sales $ 67,539 $ 60,818 $132,732 $123,151
Cost of goods sold 46,467 42,724 93,440 86,336
------- ------- ------- -------
Gross profit 21,072 18,094 39,292 36,815
Selling, general
and administrative 18,645 15,061 34,766 30,826
------- ------- ------- -------
Income from continuing operations 2,427 3,033 4,526 5,989
Income (loss) from other operations
to be disposed of 1,227 (214) 1,624 (465)
Interest and other, net 630 223 1,016 623
------- ------- ------- -------
Income from continuing
operations before
provision for income taxes 4,284 3,042 7,166 6,147
Provision for income taxes (1,499) (1,083) (2,508) (2,201)
------- ------- ------- -------
Income from continuing
operations 2,785 1,959 4,658 3,946
Income from operations of discontinued
businesses (net of tax) 0 600 0 1,103
------- ------- ------- -------
Net income $ 2,785 $ 2,559 $ 4,658 $ 5,049
======= ======= ======= =======
Earnings per share - Basic
Income from continuing
operations $ 0.34 $ 0.24 $ 0.56 $ 0.48
Discontinued Operations $ 0.00 $ 0.07 $ 0.00 $ 0.13
------ ------ ------ ------
Net Income $ 0.34 $ 0.31 $ 0.56 $ 0.61
====== ====== ====== ======
Earnings per share - Diluted
Income from continuing
operations $ 0.33 $ 0.23 $ 0.55 $ 0.47
Discontinued Operations $ 0.00 $ 0.07 $ 0.00 $ 0.13
------ ------ ------ ------
Net Income $ 0.33 $ 0.30 $ 0.55 $ 0.60
====== ====== ====== ======
Average shares outstanding
Basic 8,292 8,263 8,288 8,271
====== ====== ====== ======
Diluted 8,460 8,401 8,459 8,395
====== ====== ====== ======
Dividends paid per
share - common stock $ .0750 $ .0750 $ .1500 $ .1500
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
Six Months
Ended June 30,
--------------
1998 1997
---- ----
(Thousands of dollars)
Cash flows from operating activities:
Net income $4,658 $ 5,049
Depreciation and amortization 3,123 2,363
Adjustments to reconcile net income to net cash
flows provided by (used in) operating activities
(mainly changes in working capital): (1,037) (16,946)
------- -------
Net cash flows provided by (used in)
operating activities 6,744 (9,534)
------- -------
Cash flows from investing activities:
Proceeds from sale of assets 10 302
Collections of notes receivable 454 211
Proceeds from sale of subsidiary 12,243 -
Payments for purchase of subsidiaries (16,466) -
Capital expenditures (5,379) (4,812)
------- -------
Net cash flows used in investing activities (9,138) (4,299)
------- -------
Cash flows from financing activities:
Principal payments on long-term debt (227) (346)
Payment of dividends (1,242) (1,245)
Purchase of treasury shares (4) (566)
Other 15 20
------- -------
Net cash flows used in financing activities (1,458) (2,137)
------- -------
Net increase (decrease) in cash and
cash equivalents (3,852) (15,970)
Cash and cash equivalents, beginning of period 24,300 27,321
------- -------
Cash and cash equivalents, end of period 20,448 11,351
Cash of discontinued operations and other
Operations to be disposed of 758 2,215
------- -------
Cash and cash equivalents of continuing operations $ 19,690 $ 9,136
======= =======
Noncash investing and financing activities: During the six months ended June
30, 1998, the Company incurred additional debt of $4,607,000 relating to
capital equipment.
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Consolidation Policy
- --------------------
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries (the "Company") in which it
has a greater than 50% voting interest. Investments in affiliates which are
not majority owned are reported using the equity method. The condensed
consolidated financial statements at June 30, 1998 and December 31, 1997 and
for the three and six month periods ended June 30, 1998 and June 30, 1997 are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of financial condition and results of operations. Interim figures
are subject to year-end audit adjustments and may not be indicative of results
to be realized for the entire year. The condensed consolidated financial
statements 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, 1997.
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.
Significant estimates used by management in the preparation of these condensed
financial statements include the valuation of accounts receivable, the
carrying value of inventories, the useful lives and recoverability of
property, plant and equipment and cost in excess of net assets of businesses
acquired, potential product liability and workers compensation claims, and
environmental claims.
Discontinued Operations and Other Operations to be Disposed of
- --------------------------------------------------------------
The historical operating results for "Discontinued operations" have been
segregated on the accompanying Statements of Condensed Consolidated Income for
all periods presented. The related assets and liabilities have been aggregated
and separately identified on the June 30, 1998 and December 31, 1997 Condensed
Consolidated Balance Sheets as "Net current assets or Net noncurrent assets of
discontinued operations". Discontinued operations have not been segregated on
the Condensed Consolidated Statements of Cash Flows, except for cash and cash
equivalents. Net Income from discontinued operations has been classified as
"Income from operations of discontinued businesses" for the three and six
months ended June 30, 1997. During the three and six months ended June 30,
1998, the income before taxes from the discontinued businesses is included as
a deferred gain in "Accrued expenses". The income from the discontinued
businesses will be recognized at such time that all of the businesses are
disposed of, or when a gain on disposition of all such businesses becomes
reasonably assured.
The historical operating results for "Other operations to be disposed of"
have been segregated on the accompanying Statements of Condensed Consolidated
Income for all periods presented. The related assets and liabilities have been
separately identified on the June 30, 1998 and December 31, 1997 Condensed
Consolidated Balance Sheets as "Net current assets or Net noncurrent assets of
other operations to be disposed of". Other operations to be disposed of have
not been segregated on the Condensed Consolidated Statements of Cash Flows.
Inventories
- -----------
The components of inventories are as follows:
June 30, December 31,
1998 1997
---- ----
(Thousands of dollars)
Raw materials $22,177 $17,432
Work in process 2,554 1,591
Finished goods 41,017 34,346
------ ------
$65,748 $53,369
====== ======
Earnings Per Share
- ------------------
In accordance with the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", the Company's earnings per share for the three and six
months ended June 30, 1998 and 1997 are computed by dividing net income by the
weighted average number of shares of common stock outstanding for Basic EPS,
and weighted average number of shares of common stock and potentially dilutive
securities outstanding for Diluted EPS, during the period. Potentially
dilutive securities, in the form of stock options, have been included in the
calculation of weighted average shares outstanding under the treasury stock
method.
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
Net Income 1998 1997 1998 1997
---- ---- ---- ----
Income from continuing operations $2,785 $1,959 $4,658 $3,946
Income from discontinued operations $ 0 $ 600 $ 0 $1,103
----- ----- ----- -----
Total Income $2,785 $2,559 $4,658 $5,049
===== ===== ===== =====
Earnings Per Share - Basic
Weighted Average Shares 8,292 8,263 8,288 8,271
Per share amount
Continuing operations $0.34 $0.24 $0.56 $0.48
Discontinued operations $0.00 $0.07 $0.00 $0.13
----- ----- ----- -----
$0.34 $0.31 $0.56 $0.61
===== ===== ===== =====
Effect of potentially dilutive securities
Options 168 138 171 124
Earnings Per Share - Diluted
Weighted Average Shares 8,460 8,401 8,459 8,395
Per share amount
Continuing operations $0.33 $0.23 $0.55 $0.47
Discontinued operations $0.00 $0.07 $0.00 $0.13
----- ----- ----- -----
$0.33 $0.30 $0.55 $0.60
===== ===== ===== =====
(2) COMMITMENTS AND CONTINGINCIES
-----------------------------
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company,
and against certain past and then present officers and directors and former
owners of Woods, alleging that the defendants participated in a violation of
the Racketeer Influenced and Corrupt Organizations Act involving allegedly
fraudulently obtained loans from Mexican banks, including the plaintiff, and
"money laundering" of the proceeds of the illegal enterprise. 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 $24,000,000 and is requesting treble damages under the statutes. The
defendants have filed a motion, which has not been ruled on, to dismiss this
action on jurisdictional grounds. Because the litigation is in preliminary
stages, it is not possible at this time for the Company to determine an
outcome or reasonably estimate the range of potential exposure. Katy 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, 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) ACQUISITIONS AND DISPOSITIONS
-----------------------------
Acquisitions
- ------------
On May 21, 1998, the Company purchased the Noma Consumer Electrical
Division, ("CE Division"), of Noma Industries, Limited. The CE Division is a
North American leader in the design, manufacturing and marketing of a wide
variety of consumer corded products including low voltage garden lighting,
extension cords, multiple outlet and surge strips, specialty cord products,
automotive products and electronic timers. On May 11, 1998, the Company
purchased substantially all of the assets of Disco, Inc. ("Disco"). Disco is
a manufacturer and distributor of cleaning and specialty products sold to the
restaurant/food service industry. Both acquisitions have been accounted for
under the purchase method and accordingly the purchase price is preliminary
and adjustments may be recorded through May 1999. The accounts of these
acquisitions have been included in the Company's Consolidated Financial
Statements from the acquisition date.
The estimated aggregate purchase price for the CE Division and Disco was
approximately $16,500,000. The estimated costs in excess of the net assets
acquired of approximately $1,900,000 has been recorded as cost in excess of
net assets of businesses acquired in the Consolidated Balance Sheet and is
being amortized over twenty years.
Dispositions
- ------------
On June 11, 1998, the Company completed its divestiture of C.E.G.F. (USA),
Inc. for approximately $12,200,000. C.E.G.F. (USA), Inc. is one of the
businesses included in the Divestiture and Reorganization Plan and,
accordingly, the gain on disposal has been deferred pending the disposal of
all the planned businesses, at which time the Company expects to recognize a
net gain. The Company believes that the businesses will be fully divested and
the plan completed during the year ending December 31, 1998.
(4) SUBSEQUENT EVENTS
-----------------
On August 5, 1998, the Company announced that it had terminated negotiations
concerning the sale of five companies to Publicker Industries, Inc. The
negotiations terminated due to the inability of the parties to reach agreement
on certain aspects of the transaction. The businesses involved in this
transaction were Airtronics, Inc., Bach-Simpson Limited, Diehl Machines Inc.,
Hamilton Precision Metals, Inc. and Peters Machinery Company. All of the
companies mentioned above except Hamilton Precision Metals, Inc. are reported
as discontinued operations on the consolidated financial statements. Hamilton
Precision Metals, Inc. is included in other operations to be disposed of on
the consolidated financial statements. The Company intends to place all of the
above mentioned operations back on the market as soon as the offering
statements for each business is updated.
On August 11, 1998, the Company purchased the business of Wilen Companies,
Incorporated ("Wilen") for approximately $50,000,000 including certain
indebtedness. Wilen is a premier manufacturer and distributor of a wide
variety of professional cleaning products including mops, brooms and plastic
cleaning products. Wilen has annual sales of approximately $42,000,000.
KATY INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998
- --------------------------------
Following are summaries of sales and operating income for the three months
ended June 30, 1998 and 1997 by industry segment:
Net Sales Increase (Decrease)
- --------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $42,971 $44,669 $(1,698) (3.8)%
Maintenance Products 24,568 16,149 8,419 52.1
Other Operations to be Disposed Of 6,038 5,156 882 17.1
Operating Income Increase (Decrease)
- ---------------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $ 2,129 $2,424 $(295) (12.2)%
Maintenance Products 2,518 2,150 368 17.1
Other Operations to be Disposed Of 831 44 787 1,788.6
The Electrical/Electronics' group sales decreased primarily due to
decreased volumes in the consumer electric corded products business and the
distribution of electrical and electronic components business. These lower
volumes were a result of program pressures in the entire
Electrical/Electronics group. This decrease was partially offset by new
contracts awarded to the consumer electric corded products business and
increased volumes attributable to the acquisition of the CE Division in May
1998.
The decrease in the group's operating income was mainly a result of the
lower volumes in the above mentioned areas. In addition, the group
sustained higher selling, general and administrative costs as a percentage
of sales during the quarter. The decrease was slightly offset by income
attributable to the acquisition of the CE Division.
The increase in sales from the Maintenance Products group was primarily
due to the acquisition of Loren Products in August 1997 and Disco in May
1998 complemented by increased volumes in the group's stain and sanitary
maintenance businesses.
The group's operating income increased primarily as a result of the Loren
Products and Disco acquisitions mentioned above, offset slightly by higher
selling, general and administrative costs as a percentage of sales in the
sanitary maintenance businesses.
The sales for Other Operations to be Disposed Of increased mainly as a
result of higher volumes in the precision metal business offset partially by
lower volumes in the refrigeration and cold storage business. These lower
volumes resulted from the disposition of C.E.G.F. (USA), Inc. in early June
1998.
The group's operating income increased primarily due to the increased
volumes in the precision metal business mentioned above, complemented by an
overall increase in gross margins and a general decrease in the selling,
general and administrative expenses for the entire group.
Selling, general and administrative expenses increased as a percentage of
sales to 27.6% in the second quarter of 1998 from 24.8% for the same period
in 1997. The increase was primarily a result of higher selling, general and
administrative expenses as a percentage of sales in the
Electrical/Electronics and Maintenance Products group, previously mentioned
above.
Interest and other, net increased primarily as a result of maintaining
higher cash levels during the three months ended June 30, 1998 compared to
the same period of 1997.
Six Months Ended June 30, 1998
- ------------------------------
Following are summaries of sales and operating income for the six months
ended June 30, 1998 and 1997 by industry segment:
Net Sales Increase (Decrease)
- --------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $86,190 $91,076 $(4,886) (5.4)%
Maintenance Products 46,542 32,075 14,467 45.1
Other Operations to be Disposed Of 12,070 10,220 1,850 18.1
Operating Income Increase (Decrease)
- ---------------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $3,545 $5,436 $(1,891) (34.8)%
Maintenance Products 5,283 4,180 1,103 26.4
Other Operations to be Disposed Of 1,250 108 1,142 1,057.4
The Electrical/Electronics' group sales decreased primarily due to
decreased volumes in the consumer electric corded products business and the
distribution of electrical and electronic components business. These lower
volumes were a result of unfavorable line reviews from major customers
pertaining to our consumer electric corded products business and additional
program pressures in the Electrical/Electronics group. This decrease was
partially offset by new contracts awarded to the consumer electric corded
products business, increases in the distribution of electrical parts,
accessories and nonpowered hand tool businesses and the acquisition of the
CE Division in May 1998.
The decrease in the group's operating income was mainly a result of the
decreased volumes associated with the consumer electric corded products
business mentioned above. Higher selling, general and administrative
expenses as a percentage of sales also contributed to the decrease. The
decrease was offset slightly by the acquisition of the CE Division.
The increase in sales from the Maintenance Products group was primarily
due to the acquisition of Loren Products in August 1997 and Disco in May
1998. The group also experienced general volume increases in the stain and
sanitary maintenance businesses.
The group's operating income increased primarily as a result of the above
mentioned volume increases complemented by lower selling, general and
administrative expenses as a percentage of sales for the group.
Sales from Other Operations to be Disposed Of increased primarily due to
increased volumes for the precision metal business. The increase was
slightly offset by lower volumes associated with the refrigeration and cold
storage facility, which resulted from the disposition of C.E.G.F. (USA),
Inc., in June 1998.
The increase in the group's operating income was primarily due to the
previously mentioned volume increases in the precision metals business,
complemented by lower selling, general and administrative expenses as a
percentage of sales for the group.
Selling, general and administrative expenses as a percentage of sales
increased to 26.2% for the first half of 1998 from 25.0% in the same period
in 1997. The increase is primarily due to the previously mentioned increase
in the Electrical/Electronics group.
Interest and other, net increased primarily as a result of maintaining
higher cash levels during the six months ended June 30, 1998 compared to the
same period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Combined cash and cash equivalents decreased to $19,690,000 on June 30, 1998
compared to $22,327,000 on December 31, 1997. This decrease is a result of
acquiring both the CE Division and Disco in May 1998, offset partially by the
sale of C.E.G.F. (USA), Inc., and an increased focus on managing the Company's
working capital.
Katy expects to commit an additional $4,474,000 for capital projects in the
continuing businesses during the remainder of 1998. 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 using the Company's unsecured $80 million credit
line.
At June 30, 1998, Katy had short and long-term indebtedness of $1,018,000
incurred for the purpose of capital expenditures. The Company has a committed
unsecured $80 million credit agreement agented by Bank of America. Katy may
secure additional commitments in amounts it determines appropriate for future
acquisitions.
ACQUISITIONS AND DISPOSITIONS
- -----------------------------
Acquisitions
- ------------
On May 21, 1998, the Company purchased the Noma Consumer Electrical
Division, ("CE Division"), of Noma Industries, Limited. The CE Division is a
North American leader in the design, manufacturing and marketing of a wide
variety of consumer corded products including low voltage garden lighting,
extension cords, multiple outlet and surge strips, specialty cord products,
automotive products and electronic timers. On May 11, 1998, the Company
purchased substantially all of the assets of Disco, Inc. ("Disco") Disco is a
manufacturer and distributor of cleaning and specialty products sold to the
restaurant/food service industry. Both acquisitions have been accounted for
under the purchase method and accordingly the purchase price is preliminary
and adjustments may be recorded through May 1999. The accounts of these
acquisitions have been included in the Company's Consolidated Financial
Statements from the acquisition date.
The estimated purchase price for the CE Division and Disco was approximately
$16,500,000. The estimated costs in excess of the net assets acquired of
approximately $1,900,000 has been recorded as cost in excess of net assets of
businesses acquired in the Consolidated Balance Sheet and is being amortized
over twenty years.
Dispositions
- ------------
On June 11, 1998, the Company completed its divestiture of C.E.G.F. (USA),
Inc. for approximately $12,200,000. C.E.G.F. (USA), Inc. is one of the
businesses included in the Divestiture and Reorganization Plan and
accordingly, the gain on disposal has been deferred pending the disposal of
all the planned businesses, at which time the Company expects to recognize a
net gain.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans
and standardizes the disclosure requirements to the extent practicable. This
statement is effective for the Company's financial statements for the year
ending December 31, 1998. The Company does not expect the adoption of SFAS
132 to materially impact the financial statement presentation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way public business enterprises report information about operating
segments. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement
is effective for the Company's financial statement for the year ending
December 31, 1998 and the Company does not expect the adoption of SFAS 131 to
materially impact the financial statement presentation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of
comprehensive income in financial statements. Under this statement, all
components of comprehensive income shall be reported in the financial
statements for the period in which they are recognized. This statement divides
comprehensive income into net income and other comprehensive income. Other
comprehensive income shall be classified separately into foreign currency
items, minimum pension liability adjustments, and unrealized gains and losses
on certain investments in debt and equity securities. The accumulated balance
of other comprehensive income shall be reported in the equity section of the
balance sheet separately from retained earnings and additional paid-in-capital.
On January 1, 1998, the Company implemented SFAS No. 130. The Company
believes that other comprehensive income is not material and as such the
Company has not included a separate presentation of other comprehensive income
in its Condensed Consolidated Financial Statements.
OTHER FACTORS
- -------------
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.
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. Under the federal Superfund statute, parties
are held to be jointly and severally liable, thus subjecting them to potential
individual liability for the entire cost of cleanup at the site. The Company
is also involved in remedial response and voluntary environmental cleanup 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
June 30, 1998. The ultimate cost will depend on a number of factors and the
amount currently accrued represents management's best current estimate of the
total cost to be incurred. The Company expects this amount to be
substantially paid over the next one to four years.
Katy also has a number of product liability and workers' compensation claims
pending against it and its subsidiaries. Many of these claims are proceeding
through the litigation process and the final outcome will not be known until
a settlement is reached with the claimant or the case is adjudicated. It can
take up to 10 years from the date of the injury to reach a final outcome for
such claims. With respect to the product liability and workers' compensation
claims, Katy has provided for its share of expected losses beyond the
applicable insurance coverage, including those incurred but not reported,
which are developed using actuarial techniques. Such accruals are developed
using currently available claim information, and represent management's best
estimates. The ultimate cost of any individual claim can vary based upon,
among other factors, the nature of the injury, the duration of the disability
period, the length of the claim period, the jurisdiction of the claim and the
nature of the final outcome.
Some of the statements in this Form 10-Q, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareholders in the course of presentations about
the Company and conference calls following earning releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
the forward-looking statements.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of the Shareholders of the Company was held on May 19,
1998 in Greenwood Village, Colorado, for the purpose of re-electing Mr. John
R. Prann Jr., William F. Andrews, Amelia M. Carroll, Daniel B. Carroll,
Wallace E. Carroll Jr., Arthur R. Miller, William H. Murphy, Lutz R. Raettig,
Charles W. Sahlman, Jacob Saliba and Glenn W. Turcotte to the Board of
Directors, adopting a long-term performance incentive plan, and transaction of
such other business as may properly come before the meeting. Additional
business conducted at the May 19, 1998 Annual Meeting of the Shareholders
included ratifying Arthur Andersen LLP as the Company's auditors for the year
ending December 31, 1998.
The following votes were cast by the shareholders with respect to the
election of directors:
Votes Votes Votes
For Against Abstained Nonvotes
--- ------- --------- --------
John R. Prann Jr. 7,073,758 17,780 0 0
William F. Andrews 7,074,038 17,500 0 0
Amelia M. Carroll 7,074,184 17,354 0 0
Daniel B. Carroll 7,071,733 19,805 0 0
Wallace E. Carroll Jr. 7,071,706 19,832 0 0
Arthur R. Miller 7,074,358 17,180 0 0
William H. Murphy 7,074,358 17,180 0 0
Lutz R. Raettig 7,074,468 17,070 0 0
Charles W. Sahlman 7,073,858 17,680 0 0
Jacob Saliba 7,073,613 17,925 0 0
Glenn W. Turcotte 7,074,558 16,980 0 0
The following votes were cast by the shareholders with respect to the
resolution to adopt the Katy Industries, Inc. 1997 Long-Term Incentive Plan:
Votes Votes Votes
For Against Abstained Nonvotes
--- ------- --------- --------
6,139,009 242,975 67,456 642,098
The following votes were cast by the shareholders with respect to the
resolution to ratify the Board of Directors' selection of Arthur Andersen LLP
as the Company's independent auditors for the fiscal year ending December 31,
1998:
Votes Votes Votes
For Against Abstained Nonvotes
--- ------- --------- --------
7,091,438 0 100 0
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
On April 6, 1998, the Company filed a current report on Form 8-K providing
information in response to Item 4 to Form 8-K with respect to a change in the
Company's certifying accountant.
On May 20, 1998, the Company filed a current report on Form 8-K providing
information in response to Item 4 to Form 8-K with respect to a change in the
Company's certifying accountant.
On May 22, 1998, the Company filed a current report on Form 8-K providing
information in response to Item 5 to Form 8-K with respect to a press release
filed by the Company on May 21, 1998. The press release announced the
acquisition of the Noma Consumer Electrical Division, of Noma Industries,
Limited.
On June 9, 1998 the Company filed a current report on form 8-K providing
information in response to Item 5 to Form 8-K with respect to a press release
filed by the company on June 3, 1998. The press release announced the
Company's intention to acquire the businesses of Wilen Companies,
Incorporated.
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
Registrant
DATE: August 12, 1998 By /s/ Stephen P. Nicholson
--------------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
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