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, 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 August 13, 1999
Common stock, $1 par value 8,369,458
KATY INDUSTRIES, INC.
FORM 10-Q
June 30, 1999
INDEX
-----
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 2,3
Statements of Condensed Consolidated Income
Three Months and Six months Ended June 30, 1999
and 1998 4
Statements of Condensed Consolidated Cash Flows
Six months Ended June 30, 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 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
-----------------------------
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Thousands of Dollars)
(Unaudited)
ASSETS
------
June 30, December 31,
1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 10,973 $ 12,898
Accounts receivable, net 84,027 53,449
Inventories 121,091 69,394
Deferred income taxes 13,233 13,268
Other current assets 7,600 6,404
Net current assets of operations to be
disposed of 504 1,203
Net current assets of discontinued operations 4,759 10,959
------- -------
Total current assets 242,187 167,575
------- -------
OTHER ASSETS:
Cost in excess of net assets acquired 63,478 33,576
Other intangibles 24,037 23,621
Miscellaneous 3,577 3,504
Net noncurrent assets of operations to be
disposed of 15,138 15,521
Net noncurrent assets of discontinued operations 2,729 4,279
------- -------
Total other assets 108,959 80,501
------- -------
PROPERTIES:
Land and improvements 2,512 1,435
Buildings and improvements 25,160 10,677
Machinery and equipment 142,314 60,340
------- -------
Accumulated depreciation (34,602) (27,353)
------- -------
Net properties 135,384 45,099
------- -------
$486,530 $293,175
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Thousands of Dollars)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
1999 1998
---- ----
CURRENT LIABILITIES:
Accounts payable $ 46,881 $ 28,017
Accrued compensation 9,450 5,354
Accrued expenses 39,988 31,626
Accrued interest and taxes 3,789 910
Other current liabilities 695 697
------- -------
Total current liabilities 100,803 66,604
------- -------
LONG TERM DEBT, less current maturities 166,933 39,908
------- -------
OTHER LIABILITIES 7,335 9,310
------- -------
EXCESS OF ACQUIRED NET ASSETS OVER COST, Net 4,347 5,198
------- -------
DEFERRED INCOME TAXES 22,157 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 51,284 51,243
Accumulated other comprehensive income (632) (2,309)
Other adjustments (1,128) (1,302)
Retained earnings 113,218 112,784
Treasury stock, at cost, 1,452,746
and 1,483,890 shares (20,509) (20,922)
------- -------
Total stockholders' equity 152,055 149,316
------- -------
$486,530 $293,175
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Thousands of Dollars Except Per Share Data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $129,394 $ 71,626 $255,823 $140,482
Cost of goods sold 88,094 49,282 174,379 98,967
------- ------- ------- -------
Gross profit 41,300 22,344 81,444 41,515
Selling, general and administrative 35,945 19,012 70,416 35,611
Restructuring charge 600 - 600 -
------- ------- ------- -------
Operating income 4,755 3,332 10,428 5,904
Equity in income (loss) of operations
to be disposed of (618) 128 (890) 48
Interest and other, net (3,174) 824 (5,726) 1,214
------- ------- ------- -------
Income before provision for
income taxes 963 4,284 3,812 7,166
Provision for income taxes (337) (1,499) (1,334) (2,508)
------- ------- ------- -------
Income before distributions on
Preferred securities 626 2,785 2,478 4,658
Distributions on preferred interest of
subsidiary (net of tax) (428) - (790) -
------- ------- ------- -------
Income from continuing operations 198 2,785 1,688 4,658
Income from operations of discontinued
businesses (net of tax) - - - -
------- ------- ------- -------
Net income $ 198 $ 2,785 $ 1,688 $ 4,658
======= ======= ======= =======
Earnings per share - Basic
Income from continuing operations $ 0.02 $ 0.34 $ 0.20 $ 0.56
Discontinued Operations $ - $ - $ - $ -
------ ------ ------ ------
Net Income $ 0.02 $ 0.34 $ 0.20 $ 0.56
====== ====== ====== ======
Earnings per share - Diluted
Income from continuing operations $ 0.02 $ 0.33 $ 0.20 $ 0.55
Discontinued Operations $ - $ - $ - $ -
------ ------ ------ ------
Net Income $ 0.02 $ 0.33 $ 0.20 $ 0.55
====== ====== ====== ======
Average shares outstanding
Basic 8,352 8,292 8,348 8,288
====== ====== ====== ======
Diluted 8,420 8,460 8,419 8,459
====== ====== ====== ======
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, 1999 AND 1998
(Thousands of Dollars)
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 1,688 $ 4,658
Depreciation and amortization 9,583 3,123
Net changes in assets and liabilities: (47) (1,037)
------- -------
Net cash flows provided by operating activities 11,224 6,744
------- -------
Cash flows from investing activities:
Payments for purchase of subsidiaries,
net of cash acquired (135,622) (16,466)
Capital expenditures (7,987) (5,379)
Proceeds from sale of assets 175 10
Collections of notes receivable 610 454
Proceeds from sale of subsidiaries 4,266 12,243
------- -------
Net cash flows used in investing activities (138,558) (9,138)
------- -------
Cash flows from financing activities:
Proceeds from borrowings under revolving credit
facility, net of repayments 127,020 (227)
Payment of dividends (1,252) (1,242)
Purchase of treasury shares (224) (4)
Other - 15
------- -------
Net cash flows provided by
(used in) financing activities 125,544 (1,458)
------- -------
Net decrease in cash and cash equivalents (1,790) (3,852)
Cash and cash equivalents, beginning of period 13,883 24,300
------- -------
Cash and cash equivalents, end of period 12,093 20,448
Cash of discontinued operations and other
operations to be disposed of 1,120 758
------- -------
Cash and cash equivalents of continuing operations $ 10,973 $ 19,690
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 control are reported using the equity method.
The Condensed Consolidated Financial Statements at June 30, 1999 and December
31, 1998 and for the three and six month periods ended June 30, 1999 and June
30, 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 and notes thereto should be read in conjunction 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 may differ from those estimates.
Discontinued Operations and Operations to be Disposed Of
- --------------------------------------------------------
The historical operating results for "Discontinued operations" have been
segregated as "Discontinued operations" 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
Condensed Consolidated Balance Sheets as "Net current assets or Net noncurrent
assets of discontinued operations". Discontinued operations have not been
segregated on the Statements of Condensed Consolidated Cash Flows, except for
cash and cash equivalents. The net income from these operations during the
six months ended June 30, 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 income (loss) of operations to be disposed of"
on the accompanying Statements of Condensed Consolidated Income 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 Statements of Condensed
Consolidated Cash Flows.
Inventories
- -----------
The components of inventories are as follows:
June 30, December 31,
1999 1998
---- ----
(Thousands of dollars)
Raw materials $ 40,827 $ 26,155
Work in process 8,876 6,073
Finished goods 71,388 37,166
------- -------
$121,091 $ 69,394
======= =======
At June 30, 1999, approximately 34% of the Company's inventories are
accounted for using the last-in, first-out ("LIFO") method. The remaining
inventories are accounted for using the first-in, first-out ("FIFO") method.
The LIFO cost of inventory approximated its cost determined by the FIFO method
at June 30, 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 June 30, 1999.
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
Net Income ---- ---- ---- ----
(In thousands, except per share data)
Income from continuing operations $ 198 $2,785 $1,688 $4,658
Income from discontinued operations $ - $ - $ - $ -
----- ----- ----- -----
Total Income $ 198 $2,785 $1,688 $4,658
===== ===== ===== =====
Earnings Per Share - Basic
Weighted Average Shares 8,352 8,292 8,348 8,288
Per share amount
Continuing operations $0.02 $0.34 $0.20 $0.56
Discontinued operations $ - $ - $ - $ -
---- ---- ---- ----
$0.02 $0.34 $0.20 $0.56
==== ==== ==== ====
Effect of potentially dilutive securities
Options 68 168 71 171
Earnings Per Share - Diluted
Weighted Average Shares 8,420 8,460 8,419 8,459
Per share amount
Continuing operations $0.02 $0.33 $0.20 $0.55
Discontinued operations $ - $ - $ - $ -
---- ---- ---- ----
$0.02 $0.33 $0.20 $0.55
==== ==== ==== ====
(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). 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 $30,000,000, 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 six
months ended June 30, 1998. The Company's historical information presented
below excludes a net loss of $578,000 or $0.07 per share (diluted) from
discontinued operations and operations to be disposed of and an after tax
restructuring charge of $390,000 or $.05 per share (diluted) for the six
months ended June 30, 1999. The Company's historical information presented
below excludes net income of $31,000 from discontinued operations and
operations to be disposed of for the six months ended June 30, 1998. Disclosed
results may not be indicative of future results.
June 30, 1999 June 30, 1998
------------- -------------
(In thousands, except per share data)
Katy Pro Katy Pro
Historical Forma Historical Forma
Net Sales $255,823 $259,863 $140,482 $236,843
Operating Income $ 11,028 $ 11,416 $ 5,904 $ 14,753
Net Income $ 2,656 $ 2,748 $ 4,627 $ 6,347
Earnings per share - Basic $ .32 $ .33 $ .56 $ .77
Earnings per share - Diluted $ .32 $ .33 $ .55 $ .75
Dispositions
- ------------
On January 25, 1999, the Company completed the divestiture of Bach
Simpson, Ltd. for approximately $550,000. The Company has retained ownership
of Bach Simpson, Ltd.'s building and has leased 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).
On May 7, 1999, the Company completed the divestiture of Diehl Machines,
Inc. for approximately $3,700,000. 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).
(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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Thousands of Dollars)
Electrical/Electronics
Net External Sales $40,119 $47,058 $84,955 $93,940
Net Internal Sales 18,432 5,097 27,887 7,399
Operating Income 125 3,057 841 4,968
Operating Margin 0.31% 6.50% 0.99% 5.29%
Depreciation & Amortization 734 400 1,394 746
Identifiable Assets 126,026 117,914 126,026 117,914
Capital Expenditures 869 2,612 1,607 3,701
Maintenance Products
Net External Sales 89,275 24,568 170,868 46,542
Net Internal Sales 2,758 1,692 4,684 2,891
Operating Income 7,592 2,518 15,461 5,283
Operating Margin 8.50% 10.25% 9.05% 11.35%
Depreciation & Amortization 4,224 641 7,936 1,274
Identifiable Assets 312,523 58,678 312,523 58,678
Capital Expenditures 4,042 670 6,118 1,080
Discontinued Operations
Net External Sales 4,203 6,172 7,826 12,477
Net Internal Sales - - - -
Operating Income 279 755 381 1,410
Operating Margin 6.64% 12.23% 4.87% 11.30%
Depreciation & Amortization 83 172 215 325
Identifiable Assets 8,266 18,348 8,266 18,348
Capital Expenditures 28 167 68 291
Operations to be Disposed Of
Net External Sales 822 1,951 1,645 4,320
Net Internal Sales - - - -
Operating Income (263) (97) (528) (173)
Operating Margin (32.00%) (4.97%) (32.10%) (4.00%)
Depreciation & Amortization - 297 - 736
Identifiable Assets 17,437 19,547 17,437 19,547
Equity Investments (421) - 6,644 6,712
Capital Expenditures 7 1,958 7 4,785
Corporate
Corporate Expenses (2,962) (2,243) (5,874) (4,347)
Depreciation & Amortization 18 22 38 42
Identifiable Assets 24,851 35,788 24,851 35,788
Capital Expenditures 163 94 187 129
Company
Net External Sales [a] 134,419 79,749 265,294 157,279
Net Internal Sales 21,190 6,789 32,571 10,290
Operating Income [a] 4,771 3,990 10,281 7,141
Operating Margin [a] 3.55% 5.00% 3.88% 4.54%
Depreciation & Amortization [a] 5,059 1,532 9,583 3,123
Identifiable Assets [a] 489,103 250,275 489,103 250,275
Capital Expenditures 5,109 5,501 7,987 9,986
[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 Statements of Condensed Consolidated Income
and Condensed Consolidated Balance Sheets.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Thousands of dollars)
Revenues
Total Revenues for Reportable
Segments $155,609 $86,538 $297,865 $167,569
Elimination of Intersegment
Revenues (21,190) (6,789) (32,571) (10,290)
Revenues included in Equity in
Income Of Operations to be
Disposed Of (822) (1,951) (1,645) (4,320)
Revenues included in
Discontinued Operations (4,203) (6,172) (7,826) (12,477)
------- ------- ------- -------
Total Consolidated Revenues 129,394 71,626 255,823 140,482
======= ======= ======= =======
Operating Income
Total Operating Income for
Reportable Segments 4,771 3,990 10,281 7,141
Operating Loss included in
Equity in Income Of
Operations to be Disposed Of 263 97 528 173
Operating Income included in
Discontinued Operations (279) (755) (381) (1,410)
------- ------- ------- -------
Total Consolidated Operating
Income 4,755 3,332 10,428 5,904
======= ======= ======= =======
Assets
Total Assets for Reportable
Segments 489,103 250,275 489,103 250,275
Liabilities included in Net
Assets from Operations to be
Disposed Of (1,051) (697) (1,051) (697)
Liabilities included in Net
Assets from Discontinued
Operations (1,522) (2,535) (1,522) (2,535)
------- ------- ------- -------
Total Consolidated Assets $486,530 $247,043 $486,530 $247,043
======= ======= ======= =======
(5) Comprehensive Income
--------------------
Comprehensive income for the six months ended June 30, 1999, is as follows:
Net Income $1,688
Foreign Currency Translation Adjustments 1,677
-----
Comprehensive Income $3,365
=====
The foreign currency translation adjustment relates primarily to the sale
of Bach Simpson, Ltd. on January 25, 1999 (see Note 3). The company did not
have any significant adjustments for comprehensive income for the six months
ended June 30, 1998.
(6) Indebtedness
------------
Long-term debt includes: June 30, December 31,
1999 1998
---- ----
(Thousands of dollars)
Revolving loans payable, interest at various
LIBOR Base Rates (7.31% - 7.65%), due through
2001, unsecured $166,000 $ 39,000
Real estate and chattel mortgages, with interest
at fixed rates (7.14%), due through 2002 1,000 980
Less current maturities, included in other current
liabilities (67) (72)
------- -------
$166,933 $ 39,908
======= =======
Aggregate scheduled maturities of long-term debt are as follows:
(Thousands of dollars)
1999 $ 67
2000 71
2001 166,071
2002 71
2003 and beyond 720
--------
Total $ 167,000
========
As of June 30, 1999, the Company is no longer contingently liable for
$8,000,000 (original face value) of 8-1/8% Subordinated Industrial Development
Bonds issued by Bee Gee Holding Company, Inc. an unconsolidated subsidiary in
which Katy holds a 43% equity investment. As of June 30, 1999, these bonds
have been paid in full.
(7) Preferred Interest of Subsidiary
--------------------------------
Upon the Company's purchase of the Common Interest of the LLC during the
first quarter of 1999, 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, payable in
cash. 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) Restructuring Charge
--------------------
During the second quarter of 1999, the Company undertook a restructuring
of the Electrical/Electronics businesses, which included severance and related
costs for certain employees. Approximately 22 employees accepted severance
packages. Total severance and related costs were $600,000, which are shown as
a Restructuring Charge on the Statements of Condensed Consolidated Income.
These costs will be paid out during fiscal 1999.
(9) 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 six months ended June 30, 1998, the Company incurred
additional debt of $4,607,000 relating to capital equipment.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
Three months Ended June 30, 1999
- --------------------------------
Following are summaries of sales and operating income for the three
months ended June 30, 1999 and 1998 by industry segment:
Net Sales Increase (Decrease)
- --------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $40,119 $47,058 $(6,939) (14.7)%
Maintenance Products 89,275 24,568 64,707 263.4 %
Operations to be Disposed Of 822 1,951 (1,129) (57.9)%
Discontinued Operations 4,203 6,172 (1,969) (31.9)%
Operating Income Increase (Decrease)
- ---------------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $ 125 $3,057 $(2,932) (95.9)%
Maintenance Products 7,592 2,518 5,074 201.5 %
Operations to be Disposed Of (263) (97) (166) (171.1)%
Discontinued Operations 279 755 (476) (63.0)%
The Electrical/Electronics Group's sales decreased $6,939,000 or 14.7%
primarily due to decreased volumes in the consumer electric corded products
and electrical and electronic parts and accessories businesses, offset
partially 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 $11,006,000. 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 $2,932,000 or 95.9% mainly as a
result of decreased volumes and lower than expected margins in the electric
corded products and electrical and electronic parts and accessories
businesses, offset slightly by the increased operating income associated with
the Woods Canada acquisition in May of 1998. Excluding the acquisition,
operating income decreased $3,148,000. A pre-tax restructuring charge of
$600,000 relating primarily to severance costs for the elimination of 22
positions in the Electrical/Electronics businesses and competitive market
pressures in the electrical and electronic components business further
contributed to the decrease.
Sales from the Maintenance Products Group increased $64,707,000 or 263.4%
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 $1,277,000,
primarily due to increased volumes in the coated abrasives business.
The Group's operating income increased $5,074,000 or 201.5%. Excluding
the acquisitions mentioned above, operating income increased $375,000. The
increase was primarily a result of the increased volumes.
Sales from Operations to be Disposed Of decreased $1,129,000 or 57.9%,
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 $166,000 or 171.1% 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 $1,969,000 or 31.9%.
Excluding Bach Simpson, Ltd., which was sold in January of 1999, and Diehl
Machines, Inc., which was sold in May of 1999, sales increased $224,000
primarily due to higher volumes in the cookie sandwich machinery business.
The Group's operating income decreased $476,000 or 63.0% primarily as a
result of the above-mentioned dispositions. Excluding the dispositions,
operating income remained relatively stable compared to the prior year.
Selling, general and administrative expenses for the Company's continuing
segments increased as a percentage of sales to 28.2% in the second quarter of
1999 from 26.6% 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 second quarter
of 1999 compared to the second quarter of 1998. The higher costs are
primarily due to increased interest expense associated with bank borrowings to
fund the Company's acquisitions.
Six months Ended June 30, 1999
- ------------------------------
Following are summaries of sales and operating income for the six months
ended June 30, 1999 and 1998 by industry segment:
Net Sales Increase (Decrease)
- --------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $ 84,955 $93,940 $ (8,985) (9.6)%
Maintenance Products 170,868 46,542 124,326 267.1 %
Operations to be Disposed Of 1,645 4,320 (2,675) (61.9)%
Discontinued Operations 7,826 12,477 (4,651) (37.3)%
Operating Income Increase (Decrease)
- ---------------- --------------------
1999 1998 Amount Percent
---- ---- ------ -------
Electrical/Electronics $ 841 $ 4,968 $(4,127) (83.1)%
Maintenance Products 15,461 5,283 10,178 192.7 %
Operations to be Disposed Of (528) (173) (355) (205.2)%
Discontinued Operations 381 1,410 (1,029) (73.0)%
The Electrical/Electronics Group's sales decreased $8,985,000 or 9.6%
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 $19,324,000. 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 $4,127,000 or 83.1% mainly as a
result of decreased volumes, offset slightly by the increased operating income
associated with the Woods Canada acquisition in May of 1998. Excluding the
acquisition, operating income decreased $4,453,000. A pre-tax restructuring
charge of $600,000 relating primarily to severance costs for the elimination
of 22 positions in the Electrical/Electronics businesses and competitive
market pressures in the electrical and electronic components business
contributed to the decrease.
The sales from the Maintenance Products Group increased $124,326,000 or
267.1% 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 $3,203,000,
primarily due to increased volumes in the Group's stain and coated abrasives
businesses.
The Group's operating income increased $10,178,000 or 192.7%. Excluding
the acquisitions mentioned above, operating income increased $1,019,000. The
increase was primarily a result of the increased volumes and higher margins in
the stain business. The higher margins resulted from the introduction of new
products and a favorable product mix.
Sales from Operations to be Disposed Of decreased $2,675,000 or 61.9%,
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 $355,000 or 205.2% 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 $4,651,000 or 37.3%.
Excluding Bach Simpson, Ltd., which was sold in January of 1999, and Diehl
Machines, Inc., which was sold in May of 1999, sales decreased $1,257,000
primarily due to lower volumes in the cookie sandwich machinery business.
The Group's operating income decreased $1,029,000 or 73.0% 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 27.8% in 1999 from 25.3% 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 six months
of 1999 compared to the same period of 1998. The higher costs are 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 15% to $10,973,000 on June
30, 1999 compared to $12,898,000 on December 31, 1998. Current ratios were
2.40 to 1.00 at June 30, 1999 compared to 2.52 to 1.00 at December 31, 1998.
Working capital increased to $141,384,000 at June 30, 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 $15,000,000 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 June 30, 1999, $166 million was outstanding under this
facility. Certain terms and conditions in the credit agreement may limit the
amount available at any given time.
At June 30, 1999, Katy had short and long-term indebtedness for money
borrowed of $167,000,000. Total debt was 47.4% of total capitalization at
June 30, 1999.
RESTRUCTURING AND EVALUATION OF ALTERNATIVES FOR ELECTRICAL/ELECTRONICS SEGMENT
In June 1999, the Company announced a restructuring plan for its
Electrical/Electronics businesses as a result of weaker than expected sales
performance and lower margins. The restructuring plan includes (i) making
substantial cost reductions in these operations, (ii) intensifying the
marketing and product development efforts initiated earlier this year; and,
(iii) accelerating the consolidation of operations within the segment begun
earlier in the second quarter. It is expected that the foregoing actions will
help return these operations to their planned level of profitability during
the second half of 1999.
The cost of this restructuring, which includes severance costs related
to the elimination of 22 management employees, resulted in a pre-tax charge to
earnings to be recognized in the second quarter of approximately $600,000.
Additionally, plant personnel levels were reduced in excess of 100 persons and
24 unfilled administrative positions were eliminated.
The Company also announced that it has retained Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") to assist in exploring strategic
alternatives relating to the Electrical/Electronics businesses, including the
possible sale thereof. The Electrical/Electronics businesses: Woods
Industries, Inc., Woods Industries (Canada) Inc., GC Thorsen and Waldom
Electronics, Inc., account for approximately one-third of Katy's 1999
forecasted sales and approximately 20% of Katy's total 1999 forecasted
earnings before interest, taxes, depreciation and amortization, respectively.
Hamilton Precision Metals, Inc., which is part of the Electrical/Electronics
segment, will not be included in DLJ's assignment.
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.
In June 1999, the FASB issued statement No. 137, which delays the required
implementation of Statement No. 133 to years beginning after June 15, 2000.
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 were necessary for a wide variety of assets
which include, but were 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 June 30, 1999 and expects to fully complete the Y2K Program
by October 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 October 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 $1,037,000 of costs incurred to
date related to the Y2K Program. Approximately $212,000 was expensed in the
first half of 1999. The total remaining costs of remediation are estimated to
be $238,000. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
An Annual Meeting of the Shareholders of the Company was held on May 19,
1999 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, Lester I. Miller, William H. Murphy,
Lutz R. Raettig, Charles W. Sahlman, Jacob Saliba and Glenn W. Turcotte to the
Board of Directors, and the transaction of such other business as may properly
come before the meeting. Additional business conducted at the May 19, 1999
Annual Meeting of the Shareholders included ratifying Arthur Andersen LLP as
the Company's auditors for the year ending December 31, 1999.
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. 7,292,208 22,494 0 0
William F. Andrews 7,292,208 22,494 0 0
Amelia M. Carroll 7,286,799 27,903 0 0
Daniel B. Carroll 7,287,208 27,494 0 0
Wallace E. Carroll Jr. 7,286,848 27,854 0 0
Arthur R. Miller 7,292,208 22,494 0 0
Lester I. Miller 7,291,448 23,254 0 0
William H. Murphy 7,291,848 22,854 0 0
Lutz R. Raettig 7,291,048 23,654 0 0
Charles W. Sahlman 7,291,848 22,854 0 0
Jacob Saliba 7,291,848 22,854 0 0
Glenn W. Turcotte 7,291,848 22,854 0 0
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,
1999
Votes Votes Votes
For Against Abstained Nonvotes
--- ------- --------- --------
7,299,878 13,038 1,786 0
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter ended
June 30, 1999.
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 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,973,000
<SECURITIES> 0
<RECEIVABLES> 84,027,000<F1>
<ALLOWANCES> 0
<INVENTORY> 121,091,000
<CURRENT-ASSETS> 242,187,000
<PP&E> 169,986,000
<DEPRECIATION> 34,602,000
<TOTAL-ASSETS> 486,530,000
<CURRENT-LIABILITIES> 100,803,000
<BONDS> 166,933,000
32,900,000
0
<COMMON> 9,822,000
<OTHER-SE> 142,233,000
<TOTAL-LIABILITY-AND-EQUITY> 152,055,000
<SALES> 255,823,000
<TOTAL-REVENUES> 255,823,000
<CGS> 174,379,000
<TOTAL-COSTS> 245,395,000
<OTHER-EXPENSES> 6,616,000<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,071,816
<INCOME-PRETAX> 3,812,000
<INCOME-TAX> 1,334,000
<INCOME-CONTINUING> 2,478,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,688,000
<EPS-BASIC> $ 0.20
<EPS-DILUTED> $ 0.20
<FN>
<F1>Net of Allowances
<F2>Includes equity in income of other operations to be disposed of, ($890,000).
</FN>
</TABLE>
