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: September 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 November 13, 2000
Common stock, $1 par value 8,396,933
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(unaudited) 2,3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000
and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K 16
Signatures 16
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
September 30, December 31,
2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 6,231 $ 9,988
Accounts receivable, net 99,765 95,153
Inventories 118,477 117,400
Deferred income taxes 8,497 8,497
Other current assets 2,773 6,017
Net current assets of operations
to be disposed of 692 737
______ ______
Total current assets 236,435 237,792
OTHER ASSETS:
Cost in excess of net assets acquired 37,821 40,037
Other intangibles 50,343 52,491
Miscellaneous 6,252 6,831
Net noncurrent assets of operations to
be disposed of 16,788 15,898
______ ______
Total other assets 111,204 115,257
PROPERTIES:
Land and improvements 3,764 4,077
Buildings and improvements 23,204 24,074
Machinery and equipment 164,304 156,485
_______ _______
Accumulated depreciation (57,961) (45,849)
Net properties 133,311 138,787
_______ _______
$480,950 $491,836
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2000 1999
CURRENT LIABILITIES:
Accounts payable $58,063 $56,874
Accrued compensation 6,782 3,902
Accrued expenses 41,284 52,538
Accrued interest and taxes 1,426 2,887
Other current liabilities 696 698
_______ _______
Total current liabilities 108,251 116,899
LONG TERM DEBT, less current maturities 155,789 150,835
OTHER LIABILITIES 7,278 7,359
EXCESS OF ACQUIRED NET ASSETS OVER COST 2,218 3,495
DEFERRED INCOME TAXES 21,636 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 (3,027) (434)
Other adjustments (629) (1,010)
Retained earnings 115,602 120,689
Treasury stock, at cost, 1,425,271
and 1,408,346 shares, respectively (20,017) (19,883)
________ ________
Total stockholders' equity 152,878 160,311
$480,950 $491,836
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
Net sales $ 144,973 $ 145,548 $413,466 $401,371
Cost of goods sold 106,165 98,978 294,599 273,357
Gross profit 38,808 46,570 118,867 128,014
Selling, general and
administrative expenses 38,081 36,520 110,426 107,536
Operating income 727 10,050 8,441 20,478
Equity in loss of operations
to be disposed of (270) (32) (897) (922)
Interest and other, net (3,701) (2,675) (10,457) (8,401)
(Loss) income before
income taxes and
distributions on
preferred interest of
subsidiary (3,244) 7,343 (2,913) 11,155
Benefit from (provision for)
income taxes 1,128 (2,570) 1,011 (3,904)
_____ _____ _____ _____
(Loss) income before distributions
on preferred interest of
subsidiary (2,116) 4,773 (1,902) 7,251
Distributions on preferred
interest of subsidiary
(net of tax) (430) (465) (1,281) (1,255)
(Loss) income from continuing
operations (2,546) 4,308 (3,183) 5,996
Income from operations of discontinued
businesses (net of tax) - - - -
Net (loss) income $(2,546) $ 4,308 $ (3,183) $ 5,996
Earnings per share - Basic
(Loss) income from continuing
operations $ (0.30) $ 0.52 $ (0.38) $ 0.72
Discontinued operations - - - -
____ ____ ____ ____
Net (loss) income $ (0.30) $ 0.52 $ (0.38) $ 0.72
Earnings per share - Diluted
(Loss) income from continuing
operations $ (0.30) $ 0.48 $ (0.38) $ 0.71
Discontinued operations - - - -
____ ____ ____ ____
Net (loss) income $ (0.30) $ 0.48 $ (0.38) $ 0.71
Average shares outstanding (thousands)
Basic 8,399 8,351 8,406 8,349
Diluted 8,399 9,960 8,406 8,412
Dividends paid per share -
common stock $ 0.075 $ 0.075 $ 0.225 $ 0.225
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Thousands of Dollars)
(Unaudited)
2000 1999
Cash flows from operating activities:
Net (loss) income $ (3,183) $ 5,996
Depreciation and amortization 18,056 14,491
Net changes in assets and liabilities, other (10,708) 1,100
______ ______
Net cash flows provided by operating activities 4,165 21,587
Cash flows from investing activities:
Payments for purchase of subsidiaries,
net of cash acquired - (135,821)
Capital expenditures (11,728) (11,256)
Proceeds from sale of assets 850 187
Collections of notes receivable 167 647
Proceeds from sale of subsidiaries - 7,222
______ _______
Net cash flows used in investing activities (10,711) (139,021)
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net of repayments 4,948 117,937
Payment of dividends (1,892) (1,880)
Purchase of treasury shares (262) (160)
Other 83 -
_____ _______
Net cash flows provided by financing activities 2,877 115,897
Net decrease in cash and cash equivalents (3,669) (1,537)
Cash and cash equivalents, beginning of period 10,643 13,883
______ ______
Cash and cash equivalents, end of period 6,974 12,346
Cash of discontinued operations and operations
to be disposed of (743) (873)
______ ______
Cash and cash equivalents of continuing operations $ 6,231 $ 11,473
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
September 30, 2000 and December 31, 1999 and for the three and nine months
ended September 30, 2000 and September 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
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.
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 nine months ended September 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
nine months ended September 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" and "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:
September 30, December 31,
2000 1999
(Thousands of Dollars)
Raw materials $ 47,004 $ 37,878
Work in process 4,426 5,911
Finished goods 67,047 73,611
______ ______
$118,477 $117,400
At September 30, 2000 and December 31, 1999, 33% and 36% respectively,
of the Company's inventories were accounted for using the last-in,
first-out ("LIFO") method. The remaining inventories are accounted for
using the first-in, first-out ("FIFO") method. Current cost, as determined
using the FIFO method, exceeded LIFO cost by $1.9 million at September 30,
2000, and by $1.0 million as of 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 and convertible preferred shares, 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 nine months ended September 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 nine
months ended September 30, 1999. For the quarter ended September 30,
1999 stock options and convertible preferred shares had a dilutive impact
on earnings per share.
Three Months Nine Months
Ended September 30, Ended September 30,
(Thousands of Dollars, Except Per Share Data)
2000 1999 2000 1999
(Loss) income from continuing operations- Basic $(2,546) $4,308 $(3,183) $5,996
Income from discontinued operations - - - -
_____ _____ _____ _____
Net (loss) income - Basic $(2,546) $4,308 $(3,183) $5,996
(Loss) income from continuing operations-
Diluted $(2,546) $4,308 $(3,183) $5,996
Income from discontinued operations - - - -
Distributions on preferred interest of subsidiary
(net of tax) - 465 - -
_____ _____ _____ _____
Net (loss) income - Diluted $(2,546) $4,773 $(3,183) $5,996
Earnings Per Share - Basic
Weighted average shares (thousands) 8,399 8,351 8,406 8,349
Per share amount
Continuing operations $(0.30) $0.52 $(0.38) $0.72
Discontinued operations - - - -
____ ____ ____ ____
$(0.30) $0.52 $(0.38) $0.72
Effect of potentially dilutive securities
Options (thousands) - 43 - 63
Convertible preferred shares (thousands) - 1,566 - -
Earnings Per Share - Diluted
Weighted average shares (thousands) 8,399 9,960 8,406 8,412
Per share amount
Continuing operations $(0.30) $0.48 $(0.38) $0.71
Discontinued operations - - - -
____ ____ ____ ____
$(0.30) $0.48 $(0.38) $0.71
(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 tables below summarize the key factors in the year-to-year
changes in operating results.
Three Months Ended Nine Months Ended
September 30,September 30,September 30,September 30,
2000 1999 2000 1999
(Thousands of Dollars)
Electrical/Electronics
Net external sales $51,782 $49,682 $131,752 $134,637
Net intercompany sales 22,383 12,348 43,886 40,235
Operating Income 2,615 3,795 5,087 4,636
Operating margin 5.0% 7.64% 3.86% 3.44%
Depreciation & amortization 722 454 2,162 1,848
Identifiable assets 127,963 143,917 127,963 143,917
Capital expenditures 208 479 1,393 2,086
Maintenance Products
Net external sales 93,191 95,866 281,714 266,734
Net intercompany sales 2,295 3,422 6,844 8,106
Operating Income 1,181 8,565 10,811 24,026
Operating margin 1.27% 8.93% 3.84% 9.01%
Depreciation & amortization 4,957 4,380 15,358 12,316
Identifiable assets 314,808 314,757 314,808 314,757
Capital expenditures 3,051 2,638 9,575 8,756
Discontinued Operations
Net external sales - 1,565 - 9,391
Net intercompany sales - - - -
Operating Income - (43) - 338
Operating margin - (2.75)% - 3.60%
Depreciation & amortization - 34 - 249
Identifiable assets - 3,559 - 3,559
Capital expenditures - 12 - 80
Operations to be Disposed Of
Net external sales 838 961 2,474 2,606
Net intercompany sales - - - -
Operating Loss (172) (178) (1,191) (706)
Operating margin (20.53)% (18.52)% (48.14)% (27.09)%
Depreciation & amortization 39 1 76 1
Identifiable assets 18,610 16,843 18,610 16,843
Equity investments 7,204 6,779 7,204 6,779
Capital expenditures - 140 755 147
Three Months Ended Nine Months Ended
September 30,September 30,September 30,September 30,
2000 1999 2000 1999
(Thousands of Dollars)
Corporate
Corporate expenses $(3,069) $(2,310) $(7,457) $(8,184)
Depreciation & amortization 432 39 460 77
Identifiable assets 20,700 19,412 20,700 19,412
Capital expenditures 5 - 5 187
Company
Net external sales [a] 145,811 148,074 415,940 413,368
Net intercompany sales 24,678 15,770 50,730 48,341
Operating Income[a] 555 9,829 7,250 20,110
Operating margin [a] 0.38% 6.64% 1.74% 4.86%
Depreciation & amortization [a] 6,150 4,908 18,056 14,491
Identifiable assets [a] 482,081 498,488 482,081 498,488
Capital expenditures 3,264 3,269 11,728 11,256
[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 Nine Months Ended
September 30,September 30,September 30,September 30,
2000 1999 2000 1999
(Thousands of Dollars)
Revenues
Total net sales for
reportable segments $170,489 $163,844 $466,670 $461,709
Elimination of net
intercompany sales (24,678) (15,770) (50,730) (48,341)
Net sales included in
equity in income of
operations to be disposed of (838) (961) (2,474) (2,606)
Net sales included in
discontinued operations - (1,565) - (9,391)
_______ _______ ________ _______
Total consolidated net sales $144,973 $145,548 $413,466 $401,371
Operating income
Total income from
operations for
reportable segments $555 $9,829 $7,250 $20,110
Operating loss included in
equity in income of
operations to be disposed of 172 178 1,191 706
Operating income included in
discontinued operations - 43 - (338)
_______ _______ ________ _______
Total consolidated operating
income $727 $10,050 $8,441 $20,478
Assets
Total assets for reportable
segments $482,081 $498,488 $482,081 $498,488
Liabilities included in net
assets from operations to
be disposed of (1,131) (1,230) (1,131) (1,230)
Liabilities included in net
assets from discontinued
operations - (237) - (237)
_______ _______ ________ _______
Total consolidated assets $480,950 $497,021 $480,950 $497,021
(4) Comprehensive (Loss) Income
Comprehensive (loss) income for the nine months ended
September 30, 2000 and 1999 are as follows:
September 30, September 30,
2000 1999
(Thousands of Dollars)
Net (loss) income $ (3,183) $ 5,996
Foreign currency translation adjustments (2,521) 1,714
Comprehensive (loss) income $ (5,704) $ 7,710
(5) Indebtedness
On October 27, 2000, the Company amended its unsecured revolving credit
agreement (the "Credit Agreement"). The Credit Agreement provides for
borrowings of up to $16,750,000 under its Facility A commitment expiring
June 30, 2001 and $161,160,000 under its Facility B commitment expiring
December 11, 2001. As a part of the amendment, compliance with certain
covenants required by the Credit Agreement was waived as of September 30,
2000, and new ratio levels for certain covenants were established for
measurement at December 31, 2000. Also as part of the amendment, the
Company agreed to grant the lenders under the Credit Agreement a security
interest in all of its and its subsidiaries' assets on March 31, 2001,
if certain events do not occur before that date. A security interest
will not be required to be granted if (1) on or before February 28, 2001,
a letter of intent (satisfactory to the bank group) exists for the sale
of the Company as a whole or (ii) one or more of its material
subsidiaries if (in the case of clause (ii)) the Company demonstrates
that following such sale the Company would be in compliance with a
specified leverage ratio, or (2) the Company is in compliance with
certain covenants at pre-amendment ratio levels.
(6) Supplemental Cash Flow Information
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.
(7) Restructuring Charge
During the third quarter of 2000, the Company implemented a workforce
reduction that reduced headcount by approximately 90. Employees affected
were primarily in general and administrative functions, with the largest
number of affected employees coming from the Maintenance Products
Segment.
The workforce reduction included severance and related costs for
certain employees. Total severance and related costs was $2.1 million
pre-tax, which are included as selling, general and administrative
expenses in the condensed consolidated statements of operations.
Approximately 64% of these costs were paid during the third quarter
of 2000.
In the second quarter of 1999, the Company undertook a restructuring
of the Electrical/Electronics businesses. Approximately 22 employees
accepted severance packages. Total severance and related costs were
$600,000. Substantially all of these costs were paid during the third
quarter of 1999.
(8) Subsequent Event
On November 6, 2000, the Company announced that it is exploring
strategic alternatives, including the possible sale of the Company.
The Company indicated that it is in discussions with one potential
purchaser relating to a transaction that would involve the purchase
of the Company at a premium to its current market price. Katy
indicated, however, that there can be no assurance that an agreement
will be reached, or if reached, that a sale will be completed.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months Ended September 30, 2000
Following are summaries of sales and operating income (loss) for the
three months ended September 30, 2000 and 1999 by industry segment
(thousands of dollars):
Net Sales Increase (Decrease)
2000 1999 Amount Percent
Electrical/Electronics $51,782 $49,682 $2,100 4.2%
Maintenance Products 93,191 95,866 (2,675) (2.8)%
Operations to be Disposed Of 838 961 (123) (12.8)%
Discontinued Operations - 1,565 (1,565) (100.0)%
Operating Income (Loss) Increase (Decrease)
2000 1999 Amount Percent
Electrical/Electronics $ 2,615 $ 3,795 $(1,180) (31.1)%
Maintenance Products 1,181 8,565 (7,384) (86.2)%
Operations to be Disposed Of (172) (178) (6) (3.4)%
Discontinued Operations - (43) 43 100.0)%
The Electrical/Electronics Group's sales increased $2.1 million or 4.2%
primarily because of higher volumes in the precision metals and consumer
electric corded businesses.
The Electrical/Electronics Group's operating income decreased $1.2 million
or 31.1% mainly as a result of decreased margins in the consumer electric
corded products business and the non-powered hand tools business. Operating
results were also negatively impacted by a $0.8 million product recall in
the consumer electric corded products business during the three months
ended September 30, 2000.
Sales from the Maintenance Products Group decreased $2.7 million or
2.8% primarily as a result of decreased volumes in the mop and broom and
abrasive businesses. .
The Maintenance Products Group's operating income decreased $7.4 million
or 86.2%. The decrease is partially attributable to decreased margins in
the plastic maintenance and storage products business resulting from
increased resin costs. The Company estimates that resin costs negatively
impacted third quarter operating income versus prior year by $2.9 million.
In addition, unusual items including a $0.9 million increase to a LIFO
inventory reserve and a $1.2 million charge for severance and restructuring
costs also impacted the decrease. Excluding the aforementioned factors,
operating income decreased $2.3 million, primarily as a result of poor
performance in the mop and broom operations.
Sales from Operations to be Disposed Of decreased $0.1 million, or
12.8%, primarily as a result of lower volumes in the waste-to-energy
business. Operating income for this group remained flat for the three
months ended September 30, 2000.
All Discontinued Operations were disposed of during 2000.
Selling, general and administrative expenses for the Company's
continuing segments increased as a percentage of sales to 26.3% in the third
quarter of 2000 from 25.1% for the same period in 1999. The increase was
primarily attributed to unusual items associated with severance and a product
recall both previously mentioned. Excluding these unusual items, selling,
general and administrative costs decreased as a percentage of sales to
24.2%.
Interest and other, net increased $1.0 million for the third quarter of
2000 compared to the third quarter of 1999. The increase is primarily due
to higher variable interest rates on the Company's long-term debt.
Nine months Ended September 30, 2000
Following are summaries of sales and operating income for the nine months
ended September 30, 2000 and 1999 by industry segment (In thousands):
Net Sales Increase (Decrease)
2000 1999 Amount Percent
Electrical/Electronics $ 131,752 $134,637 $ (2,885) (2.1)%
Maintenance Products 281,714 266,734 14,980 5.6 %
Operations to be Disposed Of 2,474 2,606 (132) (5.1)%
Discontinued Operations - 9,391 (9,391) (100.0)%
Operating Income (Loss) Increase (Decrease)
2000 1999 Amount Percent
Electrical/Electronics $ 5,087 $ 4,636 $ 451 9.7%
Maintenance Products 10,811 24,026 (13,215) (55.0)%
Operations to be Disposed Of (1,191) (706) (485) (68.7)%
Discontinued Operations - 338 (338) (100.0)%
The Electrical/Electronics Group's sales decreased $2.9 million or 2.1%
primarily due to decreased volumes in the consumer non-powered hand tools
and electrical and electronic parts and accessories businesses, partially
offset by increased volumes in the precision metals and the electric corded
businesses.
The Electrical/Electronics Group's operating income increased $0.5 million
or 9.7%, mainly as a result of higher gross margins at the precision metals
and electrical and electronic parts businesses. Operating results were
reduced in 2000 by a $0.8 million product recall in the consumer electric
corded products business.
The Maintenance Products Group's sales increased $15.0 million or 5.6%
due primarily to higher sales volumes in the plastic maintenance and storage
business. Sales in 1999 were lower also as a result of the exclusion of one
week of pre-acquisition Contico activity.
The Maintenance Products Group's operating income decreased $13.2 million
or 55.0%. The decrease is partially attributable to reduced margins in
plastic maintenance and storage products resulting from increased resin
costs. The Company estimates that resin costs negatively impacted the nine
months ended operating income by $8.9 million. In addition, unusual items
including a $0.9 million inventory LIFO adjustment and a $1.2 million
charge for severance and restructuring also impacted the decrease.
Excluding these factors, operating income decreased $2.2 million or 9.2%,
primarily as a result of the 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 68.7%
primarily due to higher plant maintenance costs.
All Discontinued Operations were disposed of during 1999.
Selling, general and administrative expenses as a percentage of sales
for the Company's continuing segments remained unchanged, 26.9% for the
first nine months of 2000 and 26.7% for the same period in 1999. Excluding
third quarter restructuring charges of $2.9 million in 2000, sales, general
and administrative expenses as a percentage of sales were 26.0%. The
decrease was primarily attributable to reduced costs in the consumer
electric corded business and the cleaning and specialty food service
products.
Interest and other, net increased $2.0 million for the first nine 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.
Accumulated other comprehensive income was negatively impacted during
the first nine months of 2000 by adjustments resulting from the
translation of results and financial position of operations in the
United Kingdom and Canada.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents from continuing operations decreased
37.6% to $6.2 million on September 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 2.7 to 1.0 at September 30, 2000 compared to 2.0 to 1.0 at
December 31, 1999. Working capital increased $9.0 million to $128.2 at
September 30, 2000 from $120.9 million on December 31, 1999, primarily as
a result of, increased accounts receivable and settlements of customer
sales and allowance plans (accrued expenses).
Katy expects to commit an additional $3.9 million for capital projects
in the continuing businesses during the remainder of the year for a total
of $15.6 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 September 30, 2000, Katy had short and long-term indebtedness for money
borrowed of $155.9 million, substantially all of which was outstanding under
the Credit Agreement. On October 27, 2000, the Company amended its unsecured
revolving credit agreement (the "Credit Agreement"). The Credit Agreement
provides for borrowings of up to $16,750,000 under its Facility A commitment
expiring June 30, 2001 and $161,160,000 under its Facility B commitment
expiring December 11, 2001. As a part of the amendment, compliance with
certain covenants required by the Credit Agreement was waived as of
September 30, 2000, and new ratio levels for certain covenants were
established for measurement at December 31, 2000. Also as part of the
amendment, the Company agreed to grant the lenders under the Credit
Agreement a security interest in all of its and its subsidiaries' assets
on March 31, 2001, if certain events do not occur before that date. A
security interest will not be required to be granted if (1) on or before
February 28, 2001, a letter of intent (satisfactory to the bank group)
exists for the sale of the Company as a whole or (ii) one or more of its
material subsidiaries if (in the case of clause (ii)) the Company
demonstrates that following such sale the Company would be in compliance
with a specified leverage ratio, or (2) the Company is in compliance with
certain covenants at pre-amendment ratio levels. Total debt was 45.6% of
total capitalization at September 30, 2000.
If the Company does grant the lenders such security interest by
March 31, 2001, then the new ratio levels will continue to apply for
the quarter ending March 31. If not, then the Company would either have
to be in compliance with the pre-amendment ratios or seek a new waiver for
lack of compliance at March 31, 2001. The Company believes that the financing
available to it under the Credit Agreement is sufficient for its purposes
through March 31, 2001 and, assuming it either grants the lenders thereunder
such security interest or otherwise comes into compliance with the
pre-amendment ratios or obtains further waivers of compliance thereunder,
until June 30, 2001, when the Company will need to refinance the Facility A
revolving loan facility under its Credit Agreement and, unless it is then
in compliance with the ratios thereunder, the Facility B facility as well.
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 $3.2 million at September 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 the debt 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 be relatively flat for the full year 2000
versus 1999, due mainly to the introduction of new products and core growth
in the Maintenance Products Group offset by lower sales in the electrical
segment 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 $12.0 million,
pre-tax. 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 $3.0 million.
Selling, general and administrative costs as a percentage of sales in
the aggregate are expected to improve from 1999 levels, excluding the
impact of a $2.2 million third quarter charge for restructuring and a
$0.8 million product recall.
Interest expense is expected to increase in 2000 by approximately $2.5
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 expects increased
efficiencies through its plans to reorganize plant assets, implement
further workforce reductions, outsourcing of some manufacturing through
partnering, and the consolidation of certain operating systems and
financial functions. The results are expected to have a significant
impact on Katy's effectiveness and ability to control costs going
forward.
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, 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 on
favorable terms.
- 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.
- The potential impact of the strategic alternatives now under
consideration by the Company or any failure to reach agreement on
a possible sale of the company or to consummate such a transaction
if an agreement is reached.
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
None
(b) Exhibits
4.1 First Amendment to Amended and Restated Credit Agreement dated as of
November 18, 1999.
4.2 Second Amendment to Amended and Restated Credit Agreement dated as of
March 22, 2000
4.3 Waiver and Third Amendment to Credit Agreement dated as of
October 27, 2000.
27. Financial Data Schedule
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: November 11, 2000 By /s/ Stephen P. Nicholson
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
