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, 2000 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 11, 2000
Common stock, $1 par value 8,399,158
KATY INDUSTRIES, INC.
FORM 10-Q
June 30, 2000
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 (unaudited) 2,3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended
June 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
June 30, December 31,
2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 3,956 $ 9,988
Accounts receivable, net 85,452 95,153
Inventories 122,521 117,400
Deferred income taxes 8,497 8,497
Other current assets 4,038 6,017
Net current assets of operations to be disposed of 673 737
------- -------
Total current assets 225,137 237,792
OTHER ASSETS:
Cost in excess of net assets acquired 38,815 40,037
Other intangibles 50,787 52,491
Miscellaneous 6,830 6,831
Net noncurrent assets of operations to be disposed of 16,986 15,898
------ ------
Total other assets 113,418 115,257
PROPERTIES:
Land and improvements 1,771 1,771
Buildings and improvements 26,604 26,884
Machinery and equipment 163,622 155,767
------- -------
Accumulated depreciation (55,452) (45,635)
Net properties $ 136,545 $ 138,787
------- -------
$ 475,100 491,836
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2000 1999
CURRENT LIABILITIES:
Accounts payable $ 44,964 $ 56,874
Accrued compensation 5,965 3,902
Accrued expenses 38,520 52,538
Accrued interest and taxes 3,041 2,887
Other current liabilities 699 698
------ ------
Total current liabilities 93,189 116,899
------ ------
LONG TERM DEBT, less current maturities 160,800 150,835
------ ------
OTHER LIABILITIES 7,062 7,359
------ ------
EXCESS OF ACQUIRED NET
ASSETS OVER COST 2,643 3,495
------ ------
DEFERRED INCOME TAXES 20,124 20,037
------ ------
COMMITMENTS AND CONTINGENCIES - Note 2
PREFERRED INTEREST OF SUBSIDIARY 32,900 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 51,127 51,127
Accumulated other comprehensive income (604) (434)
Other adjustments (751) (1,010)
Retained earnings 118,778 120,689
Treasury stock, at cost, 1,422,296
and 1,408,346 shares, respectively (19,990) (19,883)
------- -------
Total stockholders' equity 158,382 160,311
------- --------
$ 475,100 $ 491,836
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
------- ------- ------- -------
Net sales $134,485 $129,394 $268,493 $255,823
Cost of goods sold 96,197 88,094 188,434 174,379
Gross profit 38,288 41,300 80,059 81,444
Selling, general and administrative 36,111 36,545 72,345 71,016
Operating income 2,177 4,755 7,714 10,428
Equity in income (loss) of operations
to be disposed of 17 (618) (627) (890)
Interest and other, net (3,510) (3,174) (6,756) (5,726)
----- ----- ----- -----
(Loss) income before provision for
income taxes and distributions on preferred
interest of subsidiary (1,316) 963 331 3,812
Benefit from (provision for) income taxes 460 (337) (117) (1,334)
----- ----- ----- -----
(Loss) income before distributions on
preferred interest of subsidiary (856) 626 214 2,478
Distributions on preferred interest of
subsidiary (net of tax) (426) (428) (851) (790)
----- ----- ----- -----
(Loss) income from continuing operations (1,282) 198 (637) 1,688
Income from operations of discontinued
businesses (net of tax) - - - -
Net (loss) income ($1,282) $ 198 ($637) $1,688
===== ===== ===== =====
Earnings per share - Basic
(Loss) income from continuing operations ($0.15) $0.02 ($0.08) $0.20
Discontinued operations - - - -
----- ----- ----- -----
Net (loss) income ($0.15) $0.02 ($0.08) $0.20
===== ===== ===== =====
Earnings per share - Diluted
(Loss) income from continuing operations ($0.15) $0.02 ($0.08) $0.20
Discontinued operations - - - -
----- ----- ----- -----
Net (loss) income ($0.15) $0.02 ($0.08) $0.20
===== ===== ===== =====
Average shares outstanding (thousands)
Basic 8,405 8,352 8,410 8,348
===== ===== ===== =====
Diluted 8,405 8,420 8,410 8,419
===== ===== ===== =====
Dividends paid per share - common stock $0.075 $0.075 $0.150 $0.150
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Thousands of Dollars)
(Unaudited)
2000 1999
Cash flows from operating activities: ------ -----
Net (loss) income $ (637) $ 1,688
Depreciation and amortization 11,906 9,583
Net changes in assets and liabilities, other (17,409) (47)
------ -----
Net cash flows (used in) provided by
operating activities (6,140) 11,224
------ ------
Cash flows from investing activities:
Payments for purchase of subsidiaries,
net of cash acquired - (135,622)
Capital expenditures (8,464) (7,987)
Proceeds from sale of assets 11 175
Collections of notes receivable 127 610
Proceeds from sale of subsidiaries - 4,266
------ ------
Net cash flows used in investing activities (8,326) (138,558)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of repayments 9,965 127,020
Payment of dividends (1,262) (1,252)
Purchase of treasury shares (262) (224)
Other 83 -
------ ------
Net cash flows provided by financing activities 8,524 125,544
Net decrease in cash and cash equivalents (5,942) (1,790)
Cash and cash equivalents, beginning of period 10,643 13,883
------ ------
Cash and cash equivalents, end of period 4,701 12,093
Cash of discontinued operations and operations
to be disposed of (745) (1,120)
------ ------
Cash and cash equivalents of continuing operations $ 3,956 $ 10,973
====== ======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
(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 exercise significant influence are reported using
the equity method. The condensed consolidated financial statements at
June 30, 2000 and December 31, 1999 and for the three and six month periods
ended June 30, 2000 and June 30, 1999 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, 1999.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Reclassifications
-----------------
Certain amounts from prior years have been reclassified to conform to the
2000 financial statement presentation.
Discontinued Operations and Operations to be Disposed Of
--------------------------------------------------------
The historical operating results for "Discontinued Operations" have been
segregated as "Income from operations of discontinued businesses
(net of tax)" on the accompanying condensed consolidated statements of
operations for the three and six months ended June 30, 1999. 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 and six months ended June 30, 1999 was
deferred and recognized during the fourth quarter of 1999.
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 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 of operations to be disposed of" 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:
June 30, December 31,
2000 1999
------- -------
(Thousands of Dollars)
Raw materials $ 40,206 $ 37,878
Work in process 4,790 5,911
Finished goods 77,525 73,611
------- -------
$122,521 $117,400
At June 30, 2000 and December 31, 1999, 33% and 34% respectively, of the
Company's inventories were accounted for using the last-in, first-out ("LIFO")
method of costing, while the remaining inventories were accounted for using
the first-in, first-out ("FIFO") method. Current cost, as determined using
the FIFO method, exceeded LIFO cost by $1.0 million at June 30, 2000 and
December 31, 1999.
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. There was no dilutive
impact on earnings for the three and six months ended June 30, 2000 as a result
of net losses reported for those periods. Stock options were the only
securities that had a dilutive impact on earnings per share for the three and
six months ended June 30, 1999.
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
(Thousands of Dollars, Except Per Share Data)
2000 1999 2000 1999
(Loss) income from continuing operations ($1,282) $ 198 ($637) $1,688
Income from discontinued operations - - - -
----- ----- ----- -----
Net income ($1,282) $ 198 ($637) $1,688
Earnings Per Share - Basic
Weighted average shares (thousands) 8,405 8,352 8,410 8,348
Per share amount
Continuing operations ($0.15) $0.02 ($0.08) $0.20
Discontinued operations - - - -
----- ----- ----- -----
($0.15) $0.02 ($0.08) $0.20
===== ===== ===== =====
Effect of potentially dilutive securities
Options (thousands) - 68 - 71
Earnings Per Share - Diluted
Weighted average shares (thousands) 8,405 8,420 8,410 8,419
Per share amount
Continuing operations ($0.15) $0.02 ($0.08) $0.20
Discontinued operations - - - -
----- ----- ----- -----
($0.15) $0.02 ($0.08) $0.20
(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 $24.0 million 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) 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 Europe,
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 summarize the key factors in the year-to-year changes
in operating results.
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- -------- -------
(Thousands of Dollars)
Electrical/Electronics
Net external sales $40,175 $40,119 $79,970 $84,955
Net intercompany sales 8,517 18,432 21,503 27,887
Income from operations 1,078 125 2,472 841
Operating margin 2.7% 0.3% 3.1% 1.0%
Depreciation & amortization 715 734 1,440 1,394
Identifiable assets 119,349 126,026 119,349 126,026
Capital expenditures 627 869 1,185 1,607
Maintenance Products
Net external sales 94,310 89,275 188,523 170,868
Net intercompany sales 2,132 2,758 4,549 4,684
Income from operations 3,352 7,592 9,630 15,461
Operating margin 3.6% 8.5% 5.1% 9.1%
Depreciation & amortization 5,187 4,224 10,401 7,936
Identifiable assets 320,284 312,523 320,284 312,523
Capital expenditures 2,586 4,042 6,524 6,118
Discontinued Operations
Net external sales - 4,203 - 7,826
Net intercompany sales - - - -
Income from operations - 279 - 381
Operating margin - 6.6% - 4.9%
Depreciation & amortization - 83 - 215
Identifiable assets - 8,266 - 8,266
Capital expenditures - 28 - 68
Operations to be Disposed Of
Net external sales $ 806 $ 822 $ 1,636 $ 1,645
Net intercompany sales - - - -
Loss from operations (485) (263) (1,019) (528)
Operating margin (60.1%) (32.0%) (62.2%) (32.1%)
Depreciation & amortization 32 - 37 -
Identifiable assets 18,615 17,437 18,615 17,437
Equity investments 7,358 6,644 7,358 6,644
Capital expenditures 691 7 755 7
Corporate
Corporate expenses (2,253) (2,962) (4,388) (5,874)
Depreciation & amortization 14 18 28 38
Identifiable assets 17,809 24,851 17,809 24,851
Capital expenditures - 163 - 187
Company
Net external sales [a] 135,291 134,419 270,129 265,294
Net intercompany sales 10,649 21,190 26,052 32,571
Income from operations[a] 1,692 4,771 6,695 10,281
Operating margin [a] 1.3% 3.6% 2.5% 3.9%
Depreciation & amortization [a] 5,948 5,059 11,906 9,583
Identifiable assets [a] 476,057 489,103 476,057 489,103
Capital expenditures 3,904 5,109 8,464 7,987
[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.
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- -------- -------
(Thousands of Dollars)
Revenues
Total net sales for reportable segments $145,940 $155,609 $296,181 $297,865
Elimination of net intercompany sales (10,649) (21,190) (26,052) (32,571)
Net Sales included in equity in income of
operations to be disposed of (806) (822) (1,636) (1,645)
Net sales included in discontinued operations - (4,203) - (7,826)
------ ------ ------ -------
Total consolidated net sales $ 134,485 $ 129,394 $ 268,493 $ 255,823
======= ======= ======= =======
Operating income
Total income from operations for
reportable segments $ 1,692 $ 4,771 $ 6,695 $ 10,281
Operating loss included in equity in
income of operations to be disposed of 485 263 1,019 528
Operating income included in discontinued
operations - (279) - (381)
------ ----- ----- -----
Total consolidated operating income $ 2,177 $ 4,755 $ 7,714 $ 10,428
====== ===== ===== =====
Assets
Total assets for reportable segments $476,057 $489,103 $476,057 $489,103
Liabilities included in net assets from
operations to be disposed of (957) (1,051) (957) (1,051)
Liabilities included in net assets from
discontinued operations - (1,522) - (1,522)
------ ------- ------- -------
Total consolidated assets $475,100 $486,530 $475,100 $486,530
(4) Comprehensive (Loss)Income
--------------------------
Comprehensive income (loss) for the six months ended June 30, 2000, and 1999
are as follows:
June 30, June 30,
2000 1999
------ ------
(Thousands of Dollars)
Net (loss) income $ (637) $ 1,688
Foreign currency translation adjustments (170) 1,677
Comprehensive (loss) income ------ ------
$ (807) $ 3,365
====== ======
(5) Supplemental Cash Flow Information
----------------------------------
During the six months ended June 30, 1999, the Company incurred additional
debt of $2.3 million relating to capital equipment. Additionally, a portion
of the net assets included in the condensed consolidated financial statements
as a result of the acquisition of the business of Contico International, Inc,
("Contico") which occurred during the first quarter of 1999, was financed
through a preferred membership interest in the acquiring company, held by the
former owners of the business. This interest has a stated value of $32.9
million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months Ended June 30, 2000
--------------------------------
Following are summaries of sales and operating income (loss)for the three
months ended June 30, 2000 and 1999 by industry segment (Thousands of Dollars):
Net Sales Increase (Decrease)
--------- -------------------
2000 1999 Amount Percent
----- ----- ----- -----
Electrical/Electronics $40,175 $40,119 $ 56 0.1%
Maintenance Products 94,310 89,275 5,035 5.6%
Operations to be Disposed Of 806 822 (16) (1.9)%
Discontinued Operations - 4,203 (4,203) (100.0)%
Operating Income (Loss) Increase (Decrease)
--------- -------------------
2000 1999 Amount Percent
----- ----- ----- -----
Electrical/Electronics $ 1,078 $ 125 $ 953 762.4%
Maintenance Products 3,352 7,592 (4,240) (55.8)%
Operations to be Disposed Of (485) (263) (222) (84.4)%
Discontinued Operations - 279 (279) (100.0)%
The Electrical/Electronics Group's sales were comparable to prior year.
Higher volumes at the precision metals business were offset by reduced volumes
in the electric corded and electronic parts and accessories businesses.
The Group's operating income increased $0.9 million mainly as a result of a
higher gross margins at the precision metals business and reductions in
selling, general and administrative costs associated with the consumer electric
corded products businesses
Sales from the Maintenance Products Group increased $5.0 million or 5.6%
primarily as a result of increased volumes in the plastic products businesses.
The Group's operating income decreased $4.2 million or 55.8%. The decrease is
primarily due to decreased margins in plastic maintenance and storage products
resulting from increased resin costs. Excluding the increase in resin costs,
operating income decreased $1.0 million, primarily as a result of poor
performance in the mop and broom operations.
Sales from Operations to be Disposed Of were comparable to prior year, while
operating income for this group declined $0.2 million or 84.4% primarily due
to higher plant maintenance costs.
All Discontinued Operations were completely disposed of during 1999.
Selling, general and administrative expenses for the Company's continuing
segments decreased as a percentage of sales to 26.9% in the second quarter
of 2000 from 28.2% for the same period in 1999. The decrease was primarily
attributed to the impact of a restructuring charge incurred by the consumer
electric corded business during the second quarter of 1999, and the resulting
favorable impact on second quarter 2000 costs.
Interest and other, net increased $0.3 million for the second quarter of
2000 compared to the second quarter of 1999. The increase is primarily due
to higher variable interest rates on the Company's long-term debt.
Six months Ended June 30, 2000
------------------------------
Following are summaries of sales and operating income for the six months
ended June 30, 2000 and 1999 by industry segment (In thousands):
Net Sales Increase (Decrease)
--------- -------------------
2000 1999 Amount Percent
----- ----- ----- -----
Electrical/Electronics $ 79,970 $84,955 $ (4,985) (5.9)%
Maintenance Products 188,523 170,868 17,655 10.3 %
Operations to be Disposed Of 1,636 1,645 (9) (0.5)%
Discontinued Operations - 7,826 (7,826) (100.0)%
Operating Income Increase (Decrease)
--------- -------------------
2000 1999 Amount Percent
----- ----- ----- -----
Electrical/Electronics $ 2,472 $ 841 $ 1,631 194.0%
Maintenance Products 9,630 15,461 (5,831) (37.7)%
Operations to be Disposed Of (1,019) (528) (491) (93.0)%
Discontinued Operations - 381 (381) (100.0)%
The Electrical/Electronics Group's sales decreased $5.0 million or 5.9%
primarily due to decreased volumes in the consumer electric corded products
and electrical and electronic parts and accessories businesses, partially
offset by increased volumes in the precision metals business.
The Group's operating income increased $1.6 million or 194.0% mainly as a
result of a higher gross margins at the precision metals business and reduction
in selling, general and administrative costs associated with the consumer
electric corded products businesses.
The sales from the Maintenance Products Group increased $17.7 million or
10.3% due in part to the inclusion of a full six months of results for Contico
in 2000 and the exclusion of one week of pre-acquisition Contico results in
1999. Excluding the additional period of sales for Contico, sales increased
$8.1 million primarily as a result of higher sales volumes in the plastics
business.
The Group's operating income decreased $5.8 million or 37.7%. The
decrease is primarily due to decreased margins in plastic maintenance and
storage products resulting from increased resin costs. Excluding the
increase in resin costs, operating income increased $0.2 million primarily as
a result of the above mentioned volume increases, offset by poor performance
in the mop and broom business.
Sales from Operations to be Disposed Of were comparable to prior year, while
operating income for this group declined $0.5 million or 93.0% primarily due
to higher plant maintenance costs.
All Discontinued Operations were completely disposed of during 1999.
Selling, general and administrative expenses for the Company's continuing
segments decreased slightly as a percentage of sales to 26.9% for the first
six months of 2000 from 27.8% for the same period in 1999. The decrease was
primarily attributed to reduced costs in the consumer electric corded business.
Interest and other, net increased $1.0 million for the first six months of
2000 compared to the same period of 1999. The increase is primarily due to
higher interest rates on the Company's long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents from continuing operations decreased
60.4% to $4.0 million on June 30, 2000 compared to $10.0 million on
December 31, 1999 primarily due to an effort to operate on lower cash
balances to minimize outstanding borrowings on the Company's unsecured
revolving credit agreement (the "Credit Agreement"). Current ratios were
2.4 to 1.0 at June 30, 2000 compared to 2.0 to 1.0 at December 31, 1999.
Working capital increased $8.0 million to $128.9 at June 30, 2000 from $120.9
million on December 31, 1999 primarily as a result of anticipated increased
seasonal sales (inventories), settlements of customer sales and allowance
plans (accrued expenses) and lower accounts payable. These factors were
partially offset by lower accounts receivable.
Katy expects to commit an additional $8.4 million for capital projects
in the continuing businesses during the remainder of the year for a total
of $16.9 million during 2000. Funding for these expenditures and for working
capital needs is expected to be accomplished through the use of available
cash and internally generated funds.
At June 30, 2000, Katy had short and long-term indebtedness for money
borrowed of $160.9 million, substantially all of which was outstanding under
the Credit Agreement. The Credit Agreement has certain covenants, which
limit the Company's borrowing capacity. The Company was in compliance with
these covenants at June 30, 2000. With the Credit Agreement scheduled to
expire in late 2001, the Company intends to negotiate a new or
restated credit agreement. Total debt was 45.7% of total capitalization
at June 30, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101").
SAB 101 provides interpretive guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company is required to
determine the impact of SAB 101 no later than the end of the fourth quarter
of fiscal 2000. Depending on the results of the evaluation, the
implementation of SAB 101 may require the Company to restate its current
year results to reflect any cumulative effect of change in accounting
principal as if SAB 101 had been implemented on January 1, 2000. The Company
is currently reviewing SAB 101 to determine what impact, if any, the
adoption of SAB 101 will have on its financial position or results of
operations. However, based upon a preliminary review, the Company does not
believe that the adoption of SAB 101 will have a material impact.
ENVIRONMENTAL 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 $3.7 million at June 30, 2000. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with changes in interest
rates relates primarily to its debt obligations and temporary cash
investments. The Company currently does not use derivative financial
instruments relating to either of these exposures. The Company's debt
obligations are generally indexed from short-term LIBOR rates, and its
temporary cash investments earn rates of interest available on securities
with maturities of three months or less. Book value approximates fair value
for both obligations and temporary cash investments. The holder of the
preferred interest has a put option which allows, at certain times beginning on
January 8, 2001, or upon the occurrence of certain events, the preferred
interest to be exchangeable for Katy common stock.
OUTLOOK
Net sales are expected to increase in 2000 over 1999, due mainly to the
introduction of new products and core growth in the Maintenance Products Group,
offset by lower sales in the electrical and mop and broom businesses.
Cost of goods sold are expected to continue to be negatively impacted
in 2000 by higher costs for polyethylene, polypropylene, and other
thermoplastic resins that are used in the Company's production processes,
especially at Contico. Katy estimates the full-year (1999 to 2000) impact
on earnings of increased resin prices to be approximately $11.7 million,
pre-tax. Prices for copper, a significant raw material in the
Electrical/Electronics Group, have also increased in 2000. The Company
anticipates mitigating these costs by creating efficiencies in and
improvements to its production processes. The Company's mop and broom
business, Wilen Products, has also under performed significantly during
2000, which is expected to have a negative pre-tax impact on 2000 earnings
compared to 1999 of $2.8 million.
Selling, general and administrative costs as a percentage of sales in the
aggregate are expected to remain stable from 1999 levels.
Interest expense is expected to increase in 2000 by over $2.0 million, due
mainly to higher short-term interest rates.
The above factors indicate that full year results from continuing segments
for 2000 will not meet prior expectations and will fall well short of 1999's
results. While many factors will impact the eventual results, an important
component will certainly be the impact of plastic resin costs. Improved
results for 2000 and beyond will depend on softening resin prices and/or
the Company achieving price increases on resin-based and other products.
Also, the Company is evaluating alternatives to restructure and reorganize
its operations and administrative functions including movement and
reorganization of plant assets, workforce reductions, and outsourcing of
some manufacturing through partnering, and the consolidation of certain
operating systems and financial functions. Plans for these actions should be
finalized by the end of 2000, and are expected to have a significant impact
on Katy's effectiveness and ability to control costs going forward. Costs
related to any potential restructuring and reorganization have not been
determined, and have not been reflected in the results of operations.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
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Securities Litigation Reform Act of 1995
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This report contains "forward-looking statements" within the meaning of
the federal securities laws. The forward-looking statements include, among
others, statements concerning the Company's outlook for 2000, cost reduction
strategies and their results, the Company's expectations for funding its
2000 capital expenditures and operations and other statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ dramatically from
those expressed in or implied by the statements.
To improve its financial performance, the Company must reduce its cost
structure and improve its production efficiency, improve its management
of working capital, and grow its existing base of retail and distribution
customers. The most important factors that could influence the achievement
of these goals, and cause actual results to differ materially from those
expressed in the forward-looking statements, include, but are not limited
to the following:
- Increases in the cost of plastic resins, copper, and other raw materials.
- The Company's inability to reduce manufacturing costs.
- The inability of the Company to achieve product price increases, especially
as they relate to potentially higher raw material costs.
- The potential impact of losing lines of business at large retail outlets in
the discount and do-it-yourself markets.
- Competition from foreign competitors.
- The potential impact of new distribution channels, such as e-commerce,
negatively impacting the Company and its existing channels.
- The potential impact of rising interest rates on the Company's LIBOR-based
credit facility.
- The Company's inability to negotiate a new credit facility with terms as
favorable as anticipated.
- Labor issues, including union activities that require an increase in
production costs or lead to a strike, thus impairing production and
decreasing sales.
- Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
These and other risks and uncertainties affecting the Company are
discussed in greater detail in this report and in the Company's other filings
with the Securities and Exchange Commission.
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 Stockholders of the Company was held on May 10, 2000
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, 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 10, 2000 Annual Meeting of the Stockholders included ratifying Arthur
Andersen LLP as the Company's auditors for the year ending December 31, 2000.
The following votes were cast by the stockholders with respect to the
election of directors:
Votes Votes Votes
For Against Abstained Nonvotes
------- ------ ------ ------
John R. Prann Jr. 7,350,754 64,390 0 0
William F. Andrews 7,340,514 74,630 0 0
Amelia M. Carroll 7,340,589 74,555 0 0
Daniel B. Carroll 7,340,989 74,155 0 0
Wallace E. Carroll Jr. 7,340,989 74,155 0 0
Arthur R. Miller 7,350,814 64,330 0 0
Lester I. Miller 7,351,214 63,930 0 0
William H. Murphy 7,340,614 74,530 0 0
Charles W. Sahlman 7,346,614 68,530 0 0
Jacob Saliba 7,335,939 79,205 0 0
Glenn W. Turcotte 7,350,754 64,390 0 0
The following votes were cast by the stockholders 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, 2000.
Votes Votes Votes
For Against Abstained Nonvotes
------- ------ ------ ------
7,396,330 14,479 4,335 0
Item 5. OTHER INFORMATION
-----------------
Mr. William H. Murphy, Director and former President, Chief Operating Officer
and Chief Financial Officer of the Company, died on July 26, 2000. Mr Murphy
served on the Executive Committee and was chairman of the Audit Committee
of the Board of Directors.
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 quarter ended June, 2000.
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 11, 2000 By /s/ Stephen P. Nicholson
-------------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
