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, 1999 Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303)290-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No_____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at May 13, 1999
Common stock, $1 par value 8,350,558
KATY INDUSTRIES, INC.
FORM 10-Q
March 31, 1999
INDEX
-----
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 2,3
Statements of Condensed Consolidated Income
Three Months Ended March 31, 1999 and 1998 4
Statements of Condensed Consolidated Cash Flows
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
PART I FINANCIAL INFORMATION
----------------------------
Item 1. Financial Statements
-----------------------------
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(Thousands of Dollars)
(Unaudited)
ASSETS
------
March 31, December 31,
1999 1998
CURRENT ASSETS: ---- ----
Cash and cash equivalents $ 11,219 $ 12,898
Accounts receivable, net 86,398 53,449
Inventories 109,652 69,394
Deferred income taxes 13,233 13,268
Other current assets 6,254 6,404
Net current assets of operations to be disposed of 685 1,203
Net current assets of discontinued operations 9,245 10,959
------- -------
Total current assets 236,686 167,575
------- -------
OTHER ASSETS:
Cost in excess of net assets acquired 66,721 33,576
Other intangibles 23,728 23,621
Miscellaneous 3,630 3,504
Net noncurrent assets of operations to be disposed of 15,552 15,521
Net noncurrent assets of discontinued operations 3,930 4,279
------- -------
Total other assets 113,561 80,501
------- -------
PROPERTIES:
Land and improvements 1,921 1,435
Buildings and improvements 15,080 10,677
Machinery and equipment 147,625 60,340
------- -------
Accumulated depreciation (30,638) (27,353)
------- -------
Net properties 133,988 45,099
------- -------
$484,235 $293,175
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(Thousands of Dollars)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, December 31,
1999 1998
CURRENT LIABILITIES: ---- ----
Accounts payable $44,954 $28,017
Accrued compensation 11,327 5,354
Accrued expenses 37,256 31,626
Accrued interest and taxes 4,266 910
Other current liabilities 694 697
------- -------
Total current liabilities 98,497 66,604
------- -------
LONG TERM DEBT, less current maturities 162,883 39,908
------- -------
OTHER LIABILITIES 12,287 9,310
------- -------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net 4,773 5,198
------- -------
DEFERRED INCOME TAXES 20,761 22,839
------- -------
COMMITMENTS AND CONTINGENCIES (Note 2)
PREFERRED INTEREST OF SUBSIDIARY 32,900 -
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized
25,000,000 shares; issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 51,307 51,243
Accumulated other comprehensive income (803) (2,309)
Other adjustments (1,262) (1,302)
Retained earnings 113,647 112,784
Treasury stock, at cost, 1,459,196
and 1,483,890 shares (20,577) (20,922)
------- -------
Total stockholders' equity 152,134 149,316
------- -------
$484,235 $293,175
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Thousands of Dollars Except Per Share Data)
(Unaudited)
1999 1998
---- ----
Net sales $ 126,429 $ 68,856
Cost of goods sold 86,285 49,685
------- -------
Gross profit 40,144 19,171
Selling, general and administrative 34,471 16,599
------- -------
Operating income 5,673 2,572
Equity in loss of operations to be disposed of (272) (80)
Interest and other, net (2,552) 390
------- -------
Income before provision for income taxes 2,849 2,882
Provision for income taxes (997) (1,009)
------- -------
Income before distributions on preferred
securities 1,852 1,873
Distributions on preferred interest of subsidiary
(net of tax) (362) -
------- -------
Income from continuing operations 1,490 1,873
Income from operations of discontinued
businesses (net of tax) - -
------- -------
Net income $ 1,490 $ 1,873
======= =======
Earnings per share - Basic
Income from continuing operations $ 0.18 $ 0.23
Discontinued Operations $ - $ -
------- -------
Net Income $ 0.18 $ 0.23
======= =======
Earnings per share - Diluted
Income from continuing operations $ 0.18 $ 0.22
Discontinued Operations $ - $ -
------- -------
Net Income $ 0.18 $ 0.22
======= =======
Weighted average shares outstanding
Basic 8,344 8,280
======= =======
Diluted 8,470 8,454
======= =======
Dividends paid per share - common stock $ .0750 $ .0750
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Thousands of Dollars)
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Net income $1,490 $1,873
Depreciation and amortization 4,524 1,591
Net changes in assets and liabilities: 5,473 1,597
------- -------
Net cash flows provided by
operating activities 11,487 5,061
------- -------
Cash flows from investing activities:
Payments for purchase of subsidiaries,
net of cash acquired (133,704) -
Capital expenditures (2,878) (2,183)
Proceeds from sale of assets 36 10
Collections of notes receivable 405 128
Proceeds from sale of subsidiary 550 -
------- -------
Net cash flows used in investing activities (135,591) (2,045)
------- -------
Cash flows from financing activities:
Proceeds from borrowings under revolving credit
facility, net of repayments 123,000 -
Principal payments on long-term debt (30) (227)
Payment of dividends (625) (621)
Purchase of treasury shares - (4)
Other 46 2
------- -------
Net cash flows provided by
(used in) financing activities 122,391 (850)
------- -------
Net increase (decrease) in cash and cash equivalents (1,713) 2,166
Cash and cash equivalents, beginning of period 13,883 24,300
------- -------
Cash and cash equivalents, end of period 12,170 26,466
Cash of discontinued operations and other
operations to be disposed of 951 1,310
------- -------
Cash and cash equivalents of continuing operations $ 11,219 $ 25,156
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) Significant Accounting Policies
- ------------------------------------
Consolidation Policy
- --------------------
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% interest, collectively "Katy" or the "Company". All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority owned and
where the Company does not exercise significant influence are reported using
the equity method. The condensed consolidated financial statements at March
31, 1999 and December 31, 1998 and for the three month periods ended March 31,
1999 and March 31, 1998 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 condensed 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, 1998.
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.
Discontinued Operations and Operations to be Disposed Of
- --------------------------------------------------------
The historical operating results have been segregated as "Discontinued
operations" on the accompanying Condensed Consolidated Statements of
Operations for all periods presented. The related assets and liabilities have
been aggregated and separately identified on the 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.
The net income from these operations during the three months ended March 31,
1999 and 1998 has been deferred and will not be recognized until the total of
the gains and losses from the sales of these companies can be determined with
certainty to be a net gain. The Company does not expect the net result of
these dispositions to be material to its financial position or results of
operations.
The historical operating results for "Operations to be disposed of" have
been segregated as "Equity in loss of operations to be disposed of" on the
accompanying Condensed Consolidated Statements of Operations for all periods
presented. The related assets and liabilities have been separately identified
on the Condensed Consolidated Balance Sheets as "Net current assets or Net
noncurrent assets of operations to be disposed of". 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:
March 31, December 31,
1999 1998
---- ----
(Thousands of dollars)
Raw materials $ 38,039 $26,155
Work in process 7,816 6,073
Finished goods 63,797 37,166
------- -------
$109,652 $ 69,394
======= =======
At March 31, 1999, approximately 34% of the Company's inventories are
accounted for using the last-in, first-out ("LIFO") method of costing. The
LIFO cost of inventory approximated its cost determined by the first-in,
first-out ("FIFO") method at March 31, 1999. All inventories were accounted
for using the FIFO method at December 31, 1998.
Earnings Per Share
- ------------------
Basic and diluted earnings per share were arrived at using the
calculations outlined below. 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. Stock options were the
only securities that had a dilutive impact on earnings per share for the
quarter ended March 31, 1999.
Three Months Ended
March 31,
(In thousands, except per share data)
1999 1998
Net Income ---- ----
Income from continuing operations $1,490 $1,873
Income from discontinued operations - -
----- -----
Net Income $1,490 $1,873
===== =====
Earnings Per Share - Basic
Weighted Average Shares 8,344 8,280
Per share amount
Continuing operations $0.18 $0.23
Discontinued operations $ - $ -
----- ----
$0.18 $0.23
==== ====
Effect of potentially dilutive securities
Options 126 174
Earnings Per Share - Diluted
Weighted Average Shares 8,470 8,454
Per share amount
Continuing operations $0.18 $0.22
Discontinued operations $ - $ -
---- ----
$0.18 $0.22
==== ====
(2) Commitments and Contingencies
- ----------------------------------
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.
All of the foregoing is alleged to have occurred prior to the Company's
purchase of Woods. The plaintiff also alleges that it made loans to an entity
controlled by certain officers and directors based upon fraudulent
representations. The plaintiff seeks to hold Woods liable for its alleged
damage under principles of respondeat superior and successor liability. The
plaintiff is claiming damages in excess of $24,000,000 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. The Company may have recourse against the former owner
of Woods and others for, among other things, violations of covenants,
representations and warranties under the purchase agreement through which the
Company acquired Woods, and under state, federal and common law. In addition,
the purchase price under the purchase agreement may be subject to adjustment
as a result of the claims made by Banco del Atlantico. The extent or limit of
any such recourse cannot be predicted at this time.
(3) Acquisitions and Dispositions
- ----------------------------------
Acquisitions
- ------------
On January 8, 1999, the Company purchased all of the common membership
interest (the "Common Interest") in Contico International, L.L.C., (the
"LLC"), the successor to the janitorial, consumer products and industrial
packaging businesses of Contico International, Inc. ("Contico"). Contico had
previously contributed substantially all of the assets and certain of the
liabilities of the business to the LLC and entered into leases with the LLC
for certain real property used in the business and retained by Contico. The
purchase price for the Common Interest was approximately $132,100,000. The
payment of the purchase price was financed by the Company's unsecured
revolving credit agreement agented by Bank of America. Contico has retained a
preferred membership interest in the LLC (the "Preferred Interest"), having a
stated value of $32,900,000, which yields an 8% annual return on its stated
value while outstanding. See Note 7 for further discussion of the Preferred
Interest. The LLC, based in St. Louis, Missouri, manufactures and distributes
janitorial equipment and supplies, consumer storage, home and automotive
products, as well as food service equipment and supplies. The acquisition has
been accounted for under the purchase method and, accordingly, the purchase
price is preliminary and adjustments may be recorded through January 2000. The
accounts of this acquisition have been included in the Company's condensed
consolidated financial statements from the acquisition date. The estimated
cost in excess of net assets acquired of approximately $33,000,000, subject to
additional purchase accounting adjustments, has been recorded as "Cost in
excess of net assets acquired" in the Condensed Consolidated Balance Sheets
and is being amortized on a straight line basis over twenty years. The
following unaudited pro forma information reflects the pro forma results of
operations for the Company giving effect to the Contico acquisition as if the
Contico acquisition occurred on January 1, 1998. The unaudited pro forma
results include the unaudited historical operating results of Contico for the
week ended January 8, 1999 and the three months ended March 31, 1998. The
Company's historical information presented below excludes a net loss of
$177,000 or $0.02 per share (basic) from discontinued operations and
operations to be disposed of for the three months ended March 31, 1999. The
Company's historical information presented below excludes a net loss of
$52,000 or $0.01 per share (diluted) from discontinued operations and
operations to be disposed of for the three months ended March 31, 1998.
Disclosed results may not be indicative of future results.
March 31, 1999 March 31, 1998
-------------- --------------
(In thousands, except per share data)
Katy Pro Katy Pro
Historical Forma Historical Forma
Net Sales $126,429 $130,469 $68,856 $117,333
Operating Income $ 5,673 $ 6,061 $ 2,572 $ 6,829
Net Income $ 1,667 $ 1,759 $ 1,925 $ 2,777
Earnings per share - Basic $ .20 $ .21 $ .24 $ .34
Earnings per share - Diluted $ .20 $ .21 $ .23 $ .32
Dispositions
- ------------
On January 25, 1999, the Company completed the divestiture of Bach
Simpson, Ltd. for approximately $550,000, net of certain assets and
liabilities assumed in the transaction. The Company will retain ownership of
Bach Simpson, Ltd.'s building and will lease it to the buyer. Bach Simpson,
Ltd. is one of the businesses that comprise the discontinued operations.
Accordingly, the loss on disposal has been deferred pending the disposal of
all of the discontinued operations (See Note 1).
(4) Industry Segment Information
- --------------------------------
The Company is a manufacturer and distributor of a variety of industrial
and consumer products, including sanitary maintenance supplies, coated
abrasives, stains, electrical and electronic components, and nonpowered hand
tools. Principal markets are in the United States, Canada and the United
Kingdom, and include the sanitary maintenance, restaurant supply, retail,
electronic, automotive, and computer markets. These activities are grouped
into two industry segments: Electrical/Electronics and Maintenance Products.
The table below and the narrative, which follows, summarize the key factors
in the year-to-year changes in operating results.
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(Thousands of dollars)
Electrical/Electronics
Net External Sales $44,836 $46,882
Net Internal Sales 9,455 2,302
Income From Operations 716 1,911
Operating Margin 1.60% 4.08%
Depreciation & Amortization 660 346
Identifiable Assets 119,245 98,484
Capital Expenditures 738 1,089
Maintenance Products
Net External Sales 81,593 21,974
Net Internal Sales 1,926 1,199
Income From Operations 7,869 2,765
Operating Margin 9.64 12.58%
Depreciation & Amortization 3,712 633
Identifiable Assets 312,169 50,046
Capital Expenditures 2,076 410
Discontinued Operations
Net External Sales 3,623 6,305
Net Internal Sales - -
Income From Operations 102 655
Operating Margin 2.82% 10.39%
Depreciation & Amortization 132 153
Identifiable Assets 14,722 16,984
Capital Expenditures 40 124
Operations to be Disposed Of
Net External Sales 823 2,369
Net Internal Sales - -
Income From Operations (265) (76)
Operating Margin (32.20%) (3.21%)
Depreciation & Amortization - 439
Identifiable Assets 17,742 40,428
Equity Investments 7,065 6,712
Capital Expenditures - 2,827
Corporate
Corporate Expenses (2,912) (2,104)
Depreciation & Amortization 20 20
Identifiable Assets 23,409 42,211
Capital Expenditures 24 35
Company
Net External Sales [a] 130,875 77,530
Net Internal Sales 11,381 3,501
Income From Operations [a] 5,510 3,151
Operating Margin [a] 4.21% 4.06%
Depreciation & Amortization [a] 4,524 1,591
Identifiable Assets [a] 487,287 248,153
Capital Expenditures 2,878 4,485
[a] Company balances include amounts from both "Discontinued Operations" and
"Operations to be Disposed of", whereas the Condensed Consolidated Financial
Statements separately classify such amounts as "Discontinued Operations" and
"Operations to be Disposed of".
The following tables reconcile the Company's total revenues, operating
income and assets to the Company's Condensed Consolidated Statements of
Operations and Condensed Consolidated Balance Sheets.
March 31, March 31,
1999 1998
---- ----
(Thousands of dollars)
Revenues
Total Revenues for Reportable Segments $142,256 $ 81,031
Elimination of Intersegment Revenues (11,381) (3,501)
Revenues included in Equity in Income
Of Operations to be Disposed Of (823) (2,369)
Revenues included in Discontinued
Operations (3,623) (6,305)
------- -------
Total Consolidated Revenues 126,429 68,856
======= =======
Operating Income
Total Operating Income for
Reportable Segments 5,510 3,151
Operating Income included in Equity in
Income Of Operations to be
Disposed Of 265 76
Operating Income included in
Discontinued Operations (102) (655)
------- -------
Total Consolidated Operating Income 5,673 2,572
======= =======
Assets
Total Assets for Reportable Segments 487,287 248,153
Liabilities included in Net Assets from
Operations to be Disposed Of (762) (11,555)
Liabilities included in Net Assets from
Discontinued Operations (2,290) (3,677)
------- -------
Total Consolidated Assets $484,235 $232,921
======= =======
(5) Comprehensive Income
- -------------------------
Net Income $1,490
Foreign Currency Translation Adjustments 1,506
-----
Comprehensive Income $2,996
=====
The foreign currency translation adjustment relates primarily to the sale
of Bach Simpson, Ltd. on January 25, 1999 (See Note 3).
(6) Indebtedness
- ----------------
Long-term debt includes: March 31, December 31,
1999 1998
---- ----
(Thousands of dollars)
Revolving loans payable, interest at various LIBOR Base
Rates (7.31% - 7.65%), due through 2001, unsecured $162,000 $39,000
Real estate and chattel mortgages, with interest
at fixed rates (7.14%), due through 2002 950 980
Less current maturities, included in other current
liabilities (67) (72)
------- -------
$162,883 $ 39,908
======= =======
Aggregate scheduled maturities of long-term debt are as follows:
(Thousands of dollars)
1999 $ 67
2000 71
2001 162,071
2002 71
2003 and beyond 670
-------
Total $ 162,950
=======
(7) Preferred Interest of Subsidiary
- ------------------------------------
Upon the Company's purchase of the Common Interest of the LLC during the
first quarter of 1999, the former owners of Contico retained a Preferred
Interest in the LLC, represented by 329 preferred units, each with a stated
value of $100,000, for an aggregate stated value of $32,900,000. The
Preferred Interest yields an 8% cumulative annual return on its stated value
while outstanding. The holders of the Preferred Interest have a put option
which allows, at certain times beginning on January 8, 2001, or upon the
occurrence of certain events, each preferred unit to be exchangeable for 4,762
shares of Katy common stock. Upon the exercise of the put, Katy has the option
to settle in cash, in lieu of delivering Katy common stock, in an amount equal
to the then market value of Katy common stock multiplied by the number of
shares implied by the exchange.
(8) Supplemental Cash Flow Information
- --------------------------------------
A portion of the net assets included in the condensed consolidated
financial statements as a result of the Contico acquisition was financed
through a preferred membership interest in the LLC held by Contico's former
owners. This interest has a stated value of $32,900,000. See Notes 3 and 7.
During the first quarter ended March 31, 1998, the Company incurred
additional debt of $2,302,000 relating to capital equipment.
(9) Subsequent Events
- ---------------------
On May 7, 1999, the Company completed the divestiture of Diehl Machines,
Inc. for approximately $4,000,000. Diehl Machines, Inc. is one of the
businesses that comprise the discontinued operations. Accordingly, the loss
on disposal will be deferred as a component of net income from discontinued
operations pending the disposal of all of the discontinued operations (See
Note 1).
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999
- ---------------------------------
Following are summaries of sales and operating income for the three
months ended March 31, 1999 and 1998 by industry segment:
Net Sales Increase (Decrease)
- --------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronic $44,836 $46,882 $(2,046) (4.4)%
Maintenance Products 81,593 21,974 59,619 271.3
Operations to be Disposed Of 823 2,369 (1,546) (65.3)
Discontinued Operations 3,623 6,305 (2,682) (42.5)
Operating Income Increase (Decrease)
- --------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronic $ 716 $1,911 $(1,195) (62.5)%
Maintenance Products 7,869 2,765 5,104 184.6
Operations to be Disposed Of (265) (76) (189) (248.7)
Discontinued Operations 102 655 (553) (84.4)
The Electrical/Electronics Group's sales decreased $2,046,000 or 4.4%
primarily due to decreased volumes in the consumer electric corded products
and electrical and electronic parts and accessories businesses, offset by
increased volumes associated with the Company's Woods Canada acquisition in
May of 1998. Excluding this acquisition, the Electrical/Electronics Group's
sales decreased $8,318,000. These lower volumes were primarily a result of
the loss of consumer electric corded products business announced on November
4, 1998.
The Group's operating income decreased $1,195,000 or 62.5% mainly a
result of decreased volumes and higher selling, general and administrative
costs as a percentage of sales in the above mentioned areas, offset slightly
by the increased operating income associated with the Woods Canada acquisition
in May of 1998. Excluding the acquisition, operating income decreased
$1,305,000. Higher selling, general and administrative costs as a percentage
of sales was primarily a result of increased sales efforts to reduce the
impact of the loss of business mentioned above. Unfavorable product mix and
competitive market pressures in the electrical and electronic components
business further contributed to the decrease.
The sales from the Maintenance Products Group increased $59,619,000 or
271.3% primarily as a result of the Contico acquisition in January of 1999,
the Disco acquisition in May of 1998 and the Wilen acquisition in August of
1998. Excluding these acquisitions, the Group's sales increased $1,926,000,
primarily due to increased volumes in the Group's stain business and coated
abrasives businesses.
The Group's operating income increased $5,104,000 or 184.6%. Excluding
the acquisitions mentioned above, operating income increased $644,000. The
increase was primarily a result of the increased volumes, complemented with
increased margins in the stain business. The increased margins were a result
of the introduction of new products and favorable product mix.
Sales from Operations to be Disposed Of decreased $1,546,000 or 65.3%,
mainly as a result of decreased volumes associated with the disposal of the
refrigeration and cold storage facilities business in June of 1998. Excluding
the disposition, sales remained relatively stable compared to the prior year.
The Group's operating income decreased $189,000 or 248.7% primarily as
a result of the disposition mentioned above. Excluding the disposition,
operating income increased slightly from the prior year due to lower
depreciation costs resulting from the impairment recorded at the waste-to-
energy facility during the fourth quarter of 1998.
Sales from Discontinued Operations decreased $2,682,000 or 42.5%.
Excluding Bach Simpson, Ltd., which was sold in January of 1999, sales
decreased $1,654,000 primarily due to lower volumes in the cookie sandwich
machinery business.
The Group's operating income decreased $553,000 or 84.4% primarily as a
result of the above-mentioned issues.
Selling, general and administrative expenses for the Company's continuing
segments increased as a percentage of sales to 27.3% in 1999 from 24.1% for
the same period in 1998. The increase was primarily a result of the increased
amortization of goodwill and other intangibles associated with the
acquisitions during 1998 and the first part of 1999.
Interest and other, net decreased substantially for the first quarter of
1999 compared to the first quarter of 1998. The decrease is primarily due to
increased interest expense associated with bank borrowings to fund the
Company's acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents decreased 13% to $11,219,000 on March
31, 1999 compared to $12,898,000 on December 31, 1998 primarily due to
principal payments on long-term debt offset in large part by increased cash
flow from operations due to better management of the Company's working
capital. Current ratios were 2.40 to 1.00 at March 31, 1999 compared to 2.52
to 1.00 at December 31, 1998. Working capital increased to $138,189,000 at
March 31, 1999 from $100,971,000 on December 31, 1998 primarily as a result of
the Contico acquisition in January of 1999, offset partially by better
management of working capital.
Katy expects to commit an estimated $20,000,000 for capital projects in
the continuing businesses during the remainder of 1999. 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 $215 million
credit line. As of March 31, 1999, $45 million was available under the credit
agreement.
At March 31, 1999, Katy had short and long-term indebtedness for money
borrowed of $162,950,000. Total debt was 46.8% of total capitalization at
March 31, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position and requires that those assets and liabilities be measured
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and its resulting designation.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. While the Company is still evaluating the potential
effect of this statement, its adoption is not expected to have a significant
impact on the Company's financial position or results of operations.
ENVIRONMENAL AND OTHER CONTINGENCIES
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties ("PRPs") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and
severally liable, thus subjecting them to potential individual liability for
the entire cost of cleanup at the site. Based on its estimate of allocation
of liability among PRPs, the probability that other PRPs, many of whom are
large, solvent, public companies, will fully pay the costs apportioned to
them, currently available information concerning the scope of contamination,
estimated remediation costs, estimated legal fees and other factors, the
Company has recorded and accrued for indicated environmental liabilities in
the aggregate amount of approximately $5,000,000 at December 31, 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.
YEAR 2000
The year 2000 issue is a problem that has a potentially material adverse
impact on the Company as well as governments, businesses, and individuals
throughout the world. The year 2000 issue affects computer programs and
microchips that cannot properly recognize the first two digits of a year,
beginning after December 31, 1999. The problem has the potential to disrupt
the operation of products and services that rely on these computer programs or
microchips.
Based on assessment activities conducted by the Company beginning in 1997
regarding the year 2000 problem, Katy determined that the Company required
modification or replacement of a moderate number of computer programs and
microchips. The changes required are necessary for a wide variety of assets
which include, but are not limited to, computer hardware and software,
production machinery and phone systems. The Company believes that it has
identified the major sources of potential internal year 2000 issues and
implemented a company wide year 2000 remediation program (the "Y2K Program")
during 1998 which includes the performance of due diligence procedures for all
acquisitions made by the Company. The Company has significantly completed the
Y2K Program as of March 31, 1999 and expects to fully complete the Y2K Program
by July 31, 1999, however, testing of new systems will continue throughout the
year. The Company believes that completion of the Y2K Program will
substantially mitigate all known significant potential internal year 2000
problems by July 31, 1999. The Company will continue to investigate
additional year 2000 risks as they come to the attention of the Company.
The Company has contacted many of its critical suppliers, financial
institutions, public utilities and other entities to determine the year 2000
readiness of its material business relationships. While the Company has not
been informed of any material risks associated with these entities, there is
no guarantee of the year 2000 readiness of those entities or the potential
material adverse effect on the Company.
The Company has expensed approximately $833,000 of costs incurred to date
related to the Y2K Program. Approximately $8,000 was been expensed in the
first quarter of 1999. The total remaining costs of remediation are estimated
to be $510,000. The costs of the Y2K Program to date and estimated future
costs, as well as Y2K Program completion dates are based on management's best
estimates. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty of the year 2000 readiness of third-party suppliers, customers and
others, the Company is unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on its results
of operations, liquidity or financial condition. However, the Y2K Program is
expected to significantly reduce Katy's level of uncertainty about the year
2000 problem.
OTHER FACTORS
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 stockholders 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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Reports on Form 8-K
On January 15, 1999, the Company filed a current report on Form 8-K
providing information in response to Item 2 to Form 8-K with respect to the
acquisition of Contico International, LLC.
On March 22, 1999, the Company filed a current report on Form 8-K/A
providing information in response to Item 7 to Form 8-K/A with respect to the
pro forma financial statements related to the acquisition of Contico
International, LLC.
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 13, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,219,000
<SECURITIES> 0
<RECEIVABLES> 86,398,000<F1>
<ALLOWANCES> 0
<INVENTORY> 109,652,000
<CURRENT-ASSETS> 236,686,000
<PP&E> 164,626,000
<DEPRECIATION> 30,638,000
<TOTAL-ASSETS> 484,235,000
<CURRENT-LIABILITIES> 98,497,000
<BONDS> 162,883,000
32,900,000
0
<COMMON> 9,822,000
<OTHER-SE> 142,312,000
<TOTAL-LIABILITY-AND-EQUITY> 152,134,000
<SALES> 126,429,000
<TOTAL-REVENUES> 126,429,000
<CGS> 86,285,000
<TOTAL-COSTS> 120,756,000
<OTHER-EXPENSES> 53,000<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,771,000
<INCOME-PRETAX> 2,849,000
<INCOME-TAX> 997,000
<INCOME-CONTINUING> 1,852,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,490,000
<EPS-PRIMARY> $ 0.18
<EPS-DILUTED> $ 0.18
<FN>
<F1>Net of allowance for doubtful accounts.
<F2>Includes equity in income of other operations to be disposed of,
( $ 272,000).
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000054681
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 11,351,000 7,393,000
<SECURITIES> 0 0
<RECEIVABLES> 44,903,000<F1> 62,534,000<F1>
<ALLOWANCES> 0<F1> 0<F1>
<INVENTORY> 82,559,000 78,528,000
<CURRENT-ASSETS> 166,551,000 169,639,000
<PP&E> 82,364,000 83,449,000
<DEPRECIATION> (38,085,000) (35,101,000)
<TOTAL-ASSETS> 240,663,000 253,914,000
<CURRENT-LIABILITIES> 57,552,000 66,426,000
<BONDS> 0 8,733,000
0 0
0 0
<COMMON> 9,822,000 9,822,000
<OTHER-SE> 124,205,000 126,371,000
<TOTAL-LIABILITY-AND-EQUITY> 240,663,000 253,914,000
<SALES> 150,584,000 234,104,000
<TOTAL-REVENUES> 150,584,000 234,104,000
<CGS> 104,921,000 165,126,000
<TOTAL-COSTS> 142,749,000 222,686,000
<OTHER-EXPENSES> (306,000) (511,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0<F2> 0<F2>
<INCOME-PRETAX> 8,141,000 11,929,000
<INCOME-TAX> 2,849,000 4,294,000
<INCOME-CONTINUING> 5,049,000 7,635,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,049,000 7,659,000
<EPS-PRIMARY> $0.61 $0.93
<EPS-DILUTED> $0.60 $0.91
<FN>
<F1>Accounts receivable, trade are reported net of allowance for doubtful
accounts in the condensed consolidated balance sheet.
<F2>Interest and Other, net includes interest expense.
</FN>
</TABLE>
