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, 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 May 12, 2000
Common stock, $1 par value 8,405,558
KATY INDUSTRIES, INC.
FORM 10-Q
March 31, 2000
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
March 31, December 31,
2000 1999
CURRENT ASSETS: ---------- ---------
Cash and cash equivalents $ 3,267 $ 9,988
Accounts receivable, net 83,095 95,153
Inventories 130,061 117,400
Deferred income taxes 7,800 8,497
Other current assets 4,427 6,017
Net current assets of operations to be disposed of - 737
---------- ---------
Total current assets 228,650 237,792
OTHER ASSETS:
Cost in excess of net assets acquired 39,804 40,037
Other intangibles 51,289 52,491
Miscellaneous 8,093 6,831
Net noncurrent assets of operations to be disposed of 15,813 15,898
-------- ---------
Total other assets 114,999 115,257
PROPERTIES:
Land and improvements 1,771 1,771
Buildings and improvements 26,508 26,884
Machinery and equipment 160,503 142,627
Accumulated depreciation (50,653) (32,495)
---------- ---------
Net properties 138,129 138,787
---------- ---------
$481,778 $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
March 31, December 31,
2000 1999
CURRENT LIABILITIES: ----------- -----------
Accounts payable $ 53,179 $ 56,874
Accrued compensation 5,353 3,902
Accrued expenses 39,470 52,538
Accrued interest and taxes 3,861 2,887
Net current liabilities of operations
to be disposed of 447 -
Other current liabilities 698 698
----------- ----------
Total current liabilities 103,008 116,899
----------- ----------
LONG TERM DEBT, less current maturities 155,817 150,835
----------- ----------
OTHER LIABILITIES 7,385 7,359
----------- ----------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net 3,069 3,495
----------- ----------
DEFERRED INCOME TAXES 19,660 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 (961) (434)
Other adjustments (847) (1,010)
Retained earnings 120,690 120,689
Treasury stock, at cost, 1,411,946 ---------- ----------
and 1,408,346 shares, respectively (19,892) (19,883)
---------- ----------
Total stockholders' equity 159,939 160,311
---------- ----------
$481,778 $491,836
========== ==========
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
2000 1999
------- -------
Net sales $ 134,008 $ 126,429
Cost of goods sold 92,237 86,285
------- -------
Gross profit 41,771 40,144
Selling, general and administrative expenses 36,234 34,471
------- -------
Operating income 5,537 5,673
Equity in loss of operations to be disposed of (644) (272)
Interest and other, net (3,246) (2,552)
------- -------
Income before provision for income taxes and
distributions on preferred interest of subsidiary 1,647 2,849
Provision for income taxes (577) (997)
------- -------
Income before distributions on preferred
interest of subsidiary 1,070 1,852
Distributions on preferred interest of subsidiary
(net of tax) (425) (362)
Income from continuing operations 645 1,490
Income from operations of discontinued
businesses (net of tax) - -
------- -------
Net income $ 645 $ 1,490
======= =======
Earnings per share - Basic
Income from continuing operations $ 0.08 $ 0.18
Discontinued operations - -
------- -------
Net Income $ 0.08 $ 0.18
======= =======
Earnings per share - Diluted
Income from continuing operations $ 0.08 $ 0.18
Discontinued operations - -
------- -------
Net Income $ 0.08 $ 0.18
======= =======
Weighted average shares outstanding
Basic 8,416 8,344
======= =======
Diluted 8,426 8,470
======= =======
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, 2000 AND 1999
(Thousands of Dollars)
(Unaudited)
2000 1999
Cash flows from operating activities: ----- -----
Net income $ 645 $ 1,490
Depreciation and amortization 5,958 4,524
Net changes in assets and liabilities (13,790) 5,473
------ -----
Net cash flows provided by
(used in) operating activities (7,187) 11,487
------ ------
Cash flows from investing activities:
Payments for purchase of subsidiaries,
net of cash acquired (121) (133,704)
Capital expenditures (4,560) (2,878)
Proceeds from sale of assets 11 36
Collections of notes receivable 89 405
Proceeds from sale of subsidiary - 550
------ ------
Net cash flows used in investing activities (4,581) (135,591)
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net of repayments 4,982 122,970
Payment of dividends (631) (625)
Purchase of treasury shares (109) -
Other 181 46
------ ------
Net cash flows provided by financing activities 4,423 122,391
------ ------
Net decrease in cash and cash equivalents (7,345) (1,713)
Cash and cash equivalents, beginning of period 10,643 13,883
Cash and cash equivalents, end of period 3,298 12,170
Cash of discontinued operations and
operations to be disposed of 31 951
Cash and cash equivalents of continuing operations $ 3,267 $ 11,219
====== ======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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
March 31, 2000 and December 31, 1999 and for the three month periods ended
March 31, 2000 and March 31, 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 sho
uld be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 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.
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 months ended March 31, 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 months ended March 31, 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 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, Net
current liabilities 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,
2000 1999
------- -------
(Thousands of Dollars)
Raw materials $ 40,943 $ 37,878
Work in process 4,199 5,911
Finished goods 84,919 73,611
------- -------
$ 130,061 $ 117,400
======= =======
At March 31, 2000 and December 31, 1999, approximately 34% of the Company's
inventories are 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 March 31, 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. Stock options were the only securities that
had a dilutive impact on earnings per share for the quarters ended
March 31, 2000 and 1999.
Three Months Ended
March 31,
(Thousands of Dollars, Except Per Share Data)
Net Income 2000 1999
------ ------
Income from continuing operations $ 645 $ 1,490
Income from discontinued operations - -
------ ------
Net Income $ 645 $ 1,490
------ -----
Earnings Per Share - Basic
Weighted Average Shares 8,416 8,344
Per share amount
Continuing operations $ 0.08 $ 0.18
Discontinued operations - -
------ -----
$ 0.08 $ 0.18
====== =====
Effect of potentially dilutive securities
Options 10 126
Earnings Per Share - Diluted
Weighted Average Shares 8,426 8,470
Per share amount
Continuing operations $ 0.08 $ 0.18
Discontinued operations - -
------ ------
$ 0.08 $ 0.18
====== ======
(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 and the narrative, which follows, summarize the key
factors in the year-to-year changes in operating results.
Three Months Ended March 31,
----------------------------
2000 1999
(Thousands of Dollars)
Electrical/Electronics
Net external sales $39,794 $44,836
Net intercompany sales 12,986 9,455
Income from operations 1,394 716
Operating margin 3.50% 1.60%
Depreciation & amortization 724 660
Identifiable assets 124,603 119,245
Capital expenditures 559 738
Maintenance Products
Net external sales 94,214 81,593
Net intercompany sales 2,417 1,926
Income from operations 6,278 7,869
Operating margin 6.67% 9.64%
Depreciation & amortization 5,213 3,712
Identifiable assets 325,919 312,169
Capital expenditures 3,938 2,076
Discontinued Operations
Net external sales - 3,623
Net intercompany sales - -
Income from operations - 102
Operating margin - 2.82%
Depreciation & amortization - 132
Identifiable assets - 14,722
Capital expenditures - 40
Operations to be Disposed Of
Net external sales 830 823
Net intercompany sales - -
Income from operations (534) (265)
Operating margin (64.34%) (32.20%)
Depreciation & amortization 5 -
Identifiable assets 16,580 17,742
Equity investments 6,845 7,065
Capital expenditures 63 -
Corporate
Corporate expenses (2,135) (2,912)
Depreciation & amortization 14 20
Identifiable assets 15,445 23,409
Capital expenditures - 24
Company
Net external sales [a] 134,838 130,875
Net intercompany sales 15,403 11,381
Income from operations [a] 5,003 5,510
Operating margin [a] 3.71% 4.21%
Depreciation & amortization [a] 5,956 4,524
Identifiable assets [a] 482,547 487,287
Capital expenditures 4,560 2,878
[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,
2000 1999
-------- --------
(Thousands of Dollars)
Revenues
Total revenues for reportable segments $150,241 $142,256
Elimination of intersegment revenues (15,403) (11,381)
Revenues included in equity in loss
of operations to be disposed of (830) (823)
Revenues included in discontinued operations - (3,623)
-------- --------
Total consolidated revenues 134,008 126,429
======== ========
Operating Income
Total operating income for
reportable segments 5,003 5,510
Operating loss included in equity in
loss of operations to be disposed of 534 265
Operating income included in
discontinued operations - (102)
-------- --------
Total consolidated operating income 5,537 5,673
======== ========
Assets
Total assets for reportable segments $ 482,547 $ 487,287
Liabilities included in net assets from
operations to be disposed of (769) (762)
Liabilities included in net assets from --------- --------
discontinued operations - (2,290)
--------- --------
Total consolidated assets $ 481,778 $ 484,235
========= ========
(4) Comprehensive Income
--------------------
March 31, March 31,
2000 1999
---------- ----------
(Thousands of Dollars)
Net income $ 645 $ 1,490
---------- ----------
Foreign currency translation adjustments (527) 1,506
---------- ----------
Comprehensive income $ 118 $ 2,996
========== ==========
(5) Supplemental Cash Flow Information
During the first quarter ended March 31, 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 Contico International, LLC ("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
$32.9 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000
Following are summaries of sales and operating income for the three months
ended March 31, 2000 and 1999 by industry segment (In thousands):
Net Sales Increase (Decrease)
-------- --------
2000 1999 Amount Percent
------ ------ ------ ------
Electrical/Electronics $39,794 $ 44,836 $ (5,042) (11.2)%
Maintenance Products 94,214 81,593 12,621 15.5
Operations to be Disposed Of 830 823 7 0.9
Discontinued Operations - 3,623 (3,623) (100.0)
Operating Income Increase (Decrease)
-------- --------
2000 1999 Amount Percent
------ ------ ------ ------
Electrical/Electronics $ 1,394 $ 716 $ 678 94.7%
Maintenance Products 6,278 7,869 (1,591) (20.2)
Operations to be Disposed Of (534) (265) (269) (101.5)
Discontinued Operations - 102 (102) (100.0)
The Electrical/Electronics Group's sales decreased $5.0 million or 11.2%
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 metal business.
The Group's operating income increased $0.7 million or 94.7% mainly as a
result of restructuring efforts undertaken in mid-1999 by Woods. Improved
margins in the precision metals business also contributed.
The sales from the Maintenance Products Group increased $12.6 million or
15.5% primarily due to the inclusion of a full quarter 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
$3.0 million in the plastics business as of a result of higher sales volumes.
In addition, increases in sales volumes were experienced in the abrasives
businesses.
The Group's operating income decreased $1.6 million or 20.2%. 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 $1.2 million primarily as a result
of the above mentioned volume increases complemented with higher margins in
the abrasives businesses.
Sales from Operations to be Disposed Of remained relatively stable compared
to prior year.
The Group's operating income decreased $269,000 or 101.5% primarily as a
result of higher labor and 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 27.0% in 2000 from
27.3% for the same period in 1999.
Interest and other, net increased $0.7 million for the first quarter of 2000
compared to the first quarter of 1999. The increase is primarily due to higher
interest rates and a full quarter of outstanding principal in 2000, whereas
1999 excluded one week of borrowings associated with the purchase of Contico,
which occurred on January 8, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents decreased 67.3% to $3.3 million on
March 31, 2000 compared to $10.0 million on December 31, 1999 primarily due
to working capital and capital expenditure investments offset by additional
borrowings on the Company's unsecured credit line. Current ratios were
2.22 to 1.00 at March 31, 2000 compared to 2.03 to 1.00 at December 31, 1999.
Working capital increased to $125.6 million at March 31, 2000 from $120.9
million on December 31, 1999 primarily as a result of expected increased
sales, (inventories) and settlements of customer sales and allowance plans
(accrued expenses).
Katy expects to commit an estimated $20.6 million for capital projects
in the continuing businesses during the remainder of 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. 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 $185.0 million
credit line. The revolving credit agreement has certain covenants which
limit the Company's borrowing capacity.
At March 31, 2000, Katy had short and long-term indebtedness for money
borrowed of $155.9 million. Total debt was 44.7% of total capitalization at
March 31, 2000.
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 $4,100,000
at March 31, 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.
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against 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.
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. 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.
YEAR 2000
The Company completed the Year 2000 compliance program including the
testing efforts by December 31, 1999. The Company did not incur any
disruptions to the normal operations as a result of any Year 2000 issues
encountered during the rollover to January 1, 2000. The Company will
continue to investigate additional year 2000 risks as they come to the
attention of the Company. The Company has no reason to believe that any
Year 2000 issues will occur later in the current year.
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 second quarter of
fiscal 2000. Depending on the results of the evaluation, the implementation
of SAB 101 may require the Company to restate its first quarter 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.
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.
Cost of goods sold are expected to continue to be negatively impacted in
2000 by higher costs for polyethylene, polypropylene, and other thermoplastic
resins (based on price levels in early 2000) that are used in the Company's
roduction processes, especially at
Contico. Prices for copper, a significant raw material in the
Electrical/Electronics Group, may also increase in 2000. The Company
anticipates mitigating these costs by creating efficiencies in and improvements
to its production processes.
Selling, general and administrative costs are expected to remain stable
from 1999 levels.
Interest expense is expected to increase in 2000, with higher short-term
rates of interest offset in part by expected lower debt levels.
The effective tax rate for 2000 is not expected to differ significantly
from the federal statutory rate.
The above factors indicate that full year results from continuing segments
for 2000 will be comparable to 1999. While many factors will impact the
eventual results, an important component will certainly be the impact of
plastic resin costs. Improved results for 2000 will depend on either softening
resin prices or the Company achieving price increases on resin-based and other
products.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
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, paper board packaging
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.
* 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 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 first quarter ended
March 31, 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: May 12, 2000 By /s/ Stephen P. Nicholson
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
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<PERIOD-END> MAR-31-2000
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