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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2002
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)
765 Straits Turnpike, Suite 2000, Middlebury, CT 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 598-0397
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2)
YES |_| NO |X|
The aggregate market value of the voting common stock held by
non-affiliates of the registrant* (based upon its closing transaction price on
the New York Stock Exchange Composite Tape on June 28, 2002), as of April 14,
2003 was $26,347,835. On that date 8,362,427 shares of common stock, $1.00 par
value, were outstanding, the only class of the registrant's common stock.
5,217,393 shares of common stock were held by non-affiliates of the registrant.
* Calculated by excluding all shares held by executive officers and
directors of the registrant without conceding that all such persons are
"affiliates" of the registrant for purposes of federal securities laws.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2003 annual meeting - Part III.
Exhibit index appears on page 88. Report consists of 92 pages.
PART I
Item 1. BUSINESS
Katy Industries, Inc. (Katy or the Company) was organized as a Delaware
corporation in 1967. We carry on our business through two principal operating
groups: Maintenance Products and Electrical/Electronics. We also have a minority
interest in a seafood harvesting company. Each majority-owned company operates
within a broad framework of policies and corporate goals. Katy's corporate
management is responsible for overall planning, financial management,
acquisitions, dispositions, and other related administrative and corporate
matters.
Recapitalization
On June 28, 2001, we completed a recapitalization of the Company. Katy
reached a definitive agreement on June 2, 2001 with KKTY Holding Company, LLC.
(KKTY), an affiliate of Kohlberg Investors IV, L.P. (Kohlberg), regarding the
recapitalization. On June 28, 2001, our stockholders approved proposals to
effectuate the recapitalization at their annual meeting, including
classification of the board of directors into two classes with staggered terms.
Under the terms of the recapitalization, directors designated by KKTY represent
a majority of our Board of Directors. Pursuant to the shareholder vote at the
annual meeting, four of the elected directors are considered Class I directors,
and were elected for an initial term of one year. These directors include C.
Michael Jacobi, President and CEO, and three directors who were not designated
by KKTY. The Class I directors elected at the 2002 stockholders' meeting, and
their successors, will serve two year terms. Five of the elected directors are
considered Class II directors, and will serve terms of two years. All of the
Class II directors are designees of KKTY.
Under the terms of the recapitalization, KKTY purchased 700,000 shares of
newly issued preferred stock, $100 par value per share (Convertible Preferred
Stock), which is convertible into 11,666,666 common shares, for an aggregate
purchase price of $70.0 million. More information regarding the Convertible
Preferred Stock can be found in Note 10 to the Consolidated Financial Statements
of Katy included in Part II, Item 8. The recapitalization allowed us to retire
obligations we had under our former revolving credit agreement which was agented
by Bank of America (Bank of America Credit Agreement). In connection with the
recapitalization, we entered into a new credit agreement, agented by Bankers
Trust Company, a subsidiary of Deutsche Bank (Deutsche Bank Credit Agreement) to
finance the future operations of Katy. More information regarding the Deutsche
Bank Credit Agreement can be found in Note 9 to the Consolidated Financial
Statements of Katy included in Part II, Item 8, and in the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations, included in Part II, Item 7. Our debt obligations
under the Deutsche Bank Credit Agreement were refinanced on February 3, 2003,
under a new credit agreement agented by Fleet Capital (Fleet Credit Agreement).
Also in connection with the recapitalization, we entered into an agreement
with the holder of the preferred interest in our Contico International, L.L.C.
(Contico) subsidiary to redeem early approximately half of such interest at a
discount, plus accrued distributions thereon, which had a stated value prior to
the recapitalization of $32.9 million. See Note 13 to the Consolidated Financial
Statements of Katy included in Part II, Item 8. We utilized approximately $10.2
million of the proceeds from the issuance of the Convertible Preferred Stock for
this purpose. The difference between the amount paid on redemption and the
stated value of preferred interest redeemed ($6.6 million, plus the tax effect
of $0.1 million) was recognized as an increase to Additional Paid-in Capital on
the Consolidated Statements of Stockholders' Equity. This gain is also reflected
in the Consolidated Statement of Operations as a reduction in net loss
attributable to common shareholders. Following is a summary of the sources and
uses of funds from, and in connection with, the recapitalization:
(Thousands of Dollars)
Sources:
Sale of Convertible Preferred Stock $ 70,000
Borrowings under the Deutsche Bank Credit Agreement 93,211
--------
$163,211
========
Uses:
Paydown of principal obligations under the Bank of
America Credit Agreement $144,300
Payment of accrued interest under the Bank of America
Credit Agreement 624
Purchase of one-half of preferred interest of Contico
at a discount 9,900
Payment of accrued distributions on one-half of preferred
interest of Contico 322
Certain costs associated with the recapitalization
8,065
--------
$163,211
========
2
In connection with the Fleet Credit Agreement completed in February 2003,
the remainder of the preferred interest in Contico (carrying value of $16.4
million at December 31, 2002) was redeemed early at a similar 40% discount. More
information regarding this redemption can be found in Note 24 to the
Consolidated Financial Statements of Katy included in Part II, Item 8.
Operations
Selected operating data for each operating group can be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Part II, Item 7. Information regarding foreign and
domestic operations and export sales can be found in Note 18 to the Consolidated
Financial Statements of Katy included in Part II, Item 8. Set forth below is
information about our operating groups and investments and about our business in
general.
We are restructuring many of our operations in order to maintain a low
cost structure, which is essential for us to be competitive in the markets we
serve. These restructuring efforts include consolidation of facilities,
headcount reductions, and evaluation of sourcing strategies to determine the
lowest cost method for obtaining finished product. Costs associated with these
efforts include expenses for recording liabilities for non-cancelable leases at
facilities that are abandoned, severance and other employee termination costs,
costs to move inventory and equipment, consultant costs for sourcing strategy
evaluation, and other exit costs that may be incurred not only with
consolidation of facilities, but potentially the complete shut down of certain
manufacturing operations. We have incurred significant costs in this respect
during 2002 ($19.2 million) and 2001 ($13.4 million), and to a lesser extent in
2000 ($2.7 million). It should be noted that $8.3 million of the costs incurred
during 2001 related mainly to severance and other employee termination costs and
other non-recurring costs associated with the closure of the former corporate
office and a significant changeover in management. We expect to incur additional
costs in 2003 and 2004, although the remaining costs in total are expected to be
significantly lower than those recognized in 2002 and 2001.
Maintenance Products Group
The Maintenance Products group's principal business is the manufacturing,
distribution and sale of sanitary maintenance supplies, professional cleaning
products, consumer products, abrasives and stains. Total revenues during 2002
were $314.6 million, and operating loss was ($19.9) million. The operating loss
included $20.8 million of impairments of long-lived assets, and $13.6 million of
severance, restructuring and related charges. The group accounted for 68% of the
Company's sales from continuing operations in 2002. Duckback Products, Inc. is
the only business in this group that is subject to significant seasonal sales
trends. The maintenance Products group sells product to both commercial and
consumer end-users. The business units in this group are:
Contico International, L.L.C. (Contico) Contico is headquartered in St.
Louis, Missouri. Contico's U.S. operations consist of three primary business
units. The Janitorial/Sanitation (Jan San) business is a plastics manufacturer
and a distributor of products for the commercial sanitary maintenance and food
service markets. Examples of Contico Jan San products are trash receptacles,
bucket/wringer combo units for mops, wet floor signs, janitorial carts, food
storage bins, and other products designed for commercial cleaning and food
service. The Consumer/Retail (Consumer) business is a plastics and metals
manufacturer of consumer and automotive storage products, sold primarily through
major home improvement and mass market retail outlets. Examples of Contico
Consumer products are metal and plastic storage boxes designed for pickup
trucks, garage shelving, drawer storage units, and clear plastic and heavy duty
storage bins. The Container business is a plastics manufacturer of products for
commercial and industrial use, including storage drums and pails. Contico also
has operations in the United Kingdom. Contico Manufacturing, Ltd. is a
distributor of primarily plastic products for the commercial and sanitary
maintenance markets in the UK. Contico Europe Holdings is a plastics
manufacturer of consumer storage products, sold primarily to major retail
outlets in the UK. Consumer products are sold under the Contico(R) brand name
and Jan San products are sold under the Continental(R) and Contico(R) brand
names. Contico also has operations in southern California and Winters, Texas.
Glit/Disco, Inc. (Disco) Disco, headquartered in McDonough, Georgia, is a
manufacturer and distributor of filtration, cleaning and specialty products sold
to the restaurant/food service industry. Examples of Disco products include
fryer filters, grill bricks, and other food service items.
Duckback Products, Inc. (Duckback) Duckback, headquartered in Chico,
California, is a manufacturer of high quality exterior transparent stains,
coatings and water repellents. These products are sold primarily under the trade
names Superdeck(R), Mason's Select(R) and Supershade(R). Superdeck products are
primarily protective deck stains for use on wood, while Mason's Select products
are protective stains for use on concrete patios, driveways, and other similar
surfaces. Duckback's revenues and operating income are subject to seasonal
trends, with higher sales late in the first quarter and early in the second
quarter, in anticipation of warm weather outdoor work, and lower sales levels in
the fourth quarter.
3
Glit/Microtron Abrasives (Glit/Microtron) Glit/Microtron is headquartered
in Wrens, Georgia, and has an additional manufacturing facility in Pineville,
North Carolina. Glit/Microtron manufactures non-woven floor maintenance pads,
abrasive hand pads, scouring pads and specialty abrasive products for cleaning
and finishing. Glit/Microtron sells certain abrasive products under the Brillo
brand name (under license) through commercial channels. Products are sold
primarily through commercial sanitary maintenance and food service markets, with
some products sold through consumer/retail outlets.
Gemtex, Ltd. (Gemtex) Gemtex, headquartered in Etobicoke, Ontario, Canada,
is a manufacturer and distributor of resin fiber disks and other coated
abrasives for the original equipment manufacturers (OEM), automotive,
industrial, and home improvement markets.
Loren Products (Loren) Loren, headquartered in Lawrence, Massachusetts, is
a manufacturer and distributor of abrasive products and roof ventilation
products for the sanitary maintenance and construction industries.
Wilen Products, Inc. (Wilen) Wilen, headquartered in Atlanta, Georgia, is
a manufacturer and distributor of professional cleaning products, including
mops, brooms, brushes, and plastic cleaning accessories. Wilen's products are
sold primarily through commercial sanitary maintenance and food service markets,
with some products sold through consumer/retail outlets.
Electrical/Electronics Group
The Electrical/Electronics group's principal business is the
manufacturing, distribution, and sale of consumer electric corded products,
electrical and electronic accessories, and electronic components. Revenues in
2002 were $144.2 million and operating income was $2.9 million. Operating income
in 2002 included $0.4 million of impairments of long-lived assets, and $5.2
million of severance, restructuring and related charges. The group accounted for
32% of the Company's consolidated sales in 2002. Both Woods Industries, Inc. and
Woods Industries (Canada), Inc. are subject to seasonal sales trends, with
higher sales in the third and early fourth quarters in connection with the
holiday shopping season. The Electrical/Electronics group sells product to
consumer end-users. On March 6, 2003, we announced that we are exploring the
sale of the Woods and Woods Canada businesses. However, there can be no
assurance that a sale of the Woods and Woods Canada businesses can be completed.
The business units in this group are:
Woods Industries, Inc. (Woods) Woods, headquartered in Carmel, Indiana,
distributes consumer electric corded products, supplies and
electrical/electronics accessories. Examples of Woods products are outdoor and
indoor extension cords, cord reels, surge protectors, power strips, and work
lights. Products are sold under brand names including Woods(R), Yellow
Jacket(R), Tradesman(R), and AC/Delco(R). These products are sold primarily
through major home improvement and mass market retail outlets. Woods' products
are sourced primarily from Asia.
Woods Industries (Canada), Inc. (Woods Canada) Woods Canada, headquartered
in Toronto, Ontario, Canada, manufactures and distributes consumer electric
corded products, supplies and electrical/electronics accessories. In addition to
products listed above for Woods, Woods Canada primary product offerings include
garden lighting and timers. Products are sold under brand names including
Noma(R) and Woods(R). These products are sold primarily through major home
improvement and mass market retail outlets in Canada. Certain of Woods Canada's
products are manufactured in Canada, while the remainder is sourced from Asia.
Other Operations
The businesses in this group include a 43% equity investment in a shrimp
harvesting and farming operation, and a waste-to-energy facility.
Sahlman Holding Company, Inc. (Sahlman) Sahlman harvests shrimp off the
coast of South and Central America and owns shrimp farming operations in
Nicaragua. Sahlman has a number of competitors, some of which are larger and
have greater financial resources. Katy's interest in this company is an equity
investment.
Savannah Energy Systems Company (SESCO). SESCO operated a waste-to-energy
facility in Savannah, Georgia. On March 15, 2002, we signed agreements with a
third party that turned over operation of the facility to a partnership managed
by an affiliate of Montenay Power Corporation. See Note 8 to Consolidated
Financial Statements of Katy included in Part II, Item 8.
4
Discontinued Operations
We have identified certain operations that we consider non-core to the
future operations of the Company. Hamilton Precision Metals L.P. (Hamilton), a
reroller of precision metal foils and strips located in Lancaster, Pennsylvania,
was sold in October 2002 for gross proceeds of $13.9 million. Hamilton was
formerly part of the Electrical/Electronics group. Prior to its sale, Hamilton
generated $10.4 million of net sales and $1.6 million of operating income.
GC/Waldom Electronics, Inc. (GC/Waldom), described below, was still owned by
Katy at December 31, 2002, but was considered held for sale, and was
subsequently sold on April 2, 2003 for gross proceeds of $8.3 million. GC/Waldom
is headquartered in Rockford, Illinois. During 2002, GC/Waldom generated $22.5
million in net sales, and incurred a net operating loss of ($6.3) million. We do
not expect to report a significant gain or loss on the sale of GC/Waldom.
GC/Waldom is a leading value-added distributor of high quality, brand name
electrical and electronic parts, components and accessories. In addition, the
company produces a full line of home entertainment component parts and service
technician products. GC/Waldom distributes primarily to the electronic,
automotive and communication industries. A significant portion of GC/Waldom's
products is sourced from Asia. GC/Waldom was formerly a part of the
Electrical/Electronics group, but has been classified in discontinued operations
as the business was held for sale at December 31, 2002, and has met the other
criteria established by Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Customers
We have several large customers in the mass merchant/discount/home
improvement retail markets. One customer accounted for 17% of consolidated net
sales. Sales to this particular customer are made by Contico, Woods and
Glit/Microtron. A significant loss of business at this retail outlet could have
an adverse impact on our results.
Backlog
Maintenance Products:
Our aggregate backlog position for the Maintenance Products group was $8.1
million and $11.9 million as of December 31, 2002 and 2001, respectively. The
orders placed in 2002 are firm and are expected to be shipped during 2003.
Electrical/Electronics:
Our aggregate backlog position for the Electrical/Electronics group was
$3.6 million and $3.0 million as of December 31, 2002 and 2001, respectively.
The orders placed in 2002 are firm and are expected to be shipped during 2003.
Markets and Competition
Maintenance Products:
We market a variety of professional cleaning products to the commercial
janitorial/sanitation markets. Sales and marketing of these products is handled
through a combination of direct sales personnel, manufacturers' sales
representatives, and wholesale distributors. Cleaning products sold by the
Company include 1) plastic items, such as trash receptacles, buckets, carts, and
signs, 2) abrasive products, including floor cleaning and polishing pads, and
hand scouring pads, 3) mops, brooms, and brushes, and 4) items for the food
service industry, including filters, grill cleaning supplies, and food storage
containers.
The commercial distribution channels for these products are highly
fragmented, resulting in a large number of small customers, mainly distributors
of janitorial cleaning products. The markets for our maintenance products are
highly competitive. Competition is based primarily on price and the ability to
provide superior customer service in the form of complete on-time product
delivery. Other competitive factors include brand recognition and product
design, quality and performance. We compete for market share with a number of
different competitors, depending upon the specific product. In large part, our
competition is unique in each area of 1) plastics, 2) abrasives, and 3) mops,
brooms and brushes. We believe that we have established long standing
relationships with our major customers based on quality products and service,
while continuing to strive to be a low cost provider in this industry. Our
ability to remain a low cost provider in the industry is highly dependent on the
price of our raw materials, primarily resin. Resin prices are influenced to a
certain degree by market prices for natural gas and crude oil, as well as supply
and demand factors within the plastics manufacturing industry. Being a low cost
producer is also dependent upon our ability to reduce and subsequently control
our cost structure, which is further dependent upon our ongoing restructuring
efforts.
We market branded consumer in-home and automotive storage, protective
sealant stains, and to a lesser extent, abrasive products and mops and brooms,
to consumer/retail outlets in the U.S. The consumer distribution channels for
these products, especially the in-home and automotive storage, are highly
concentrated, with several large "mass-market" retailers
5
representing a very significant portion of the customer base. However, the
Company continues to develop new markets for its products, including sporting
goods. Distribution channels for protective sealant stains are primarily through
paint distribution channels, with products ultimately being sold in
specialty/high-end paint stores and hardware stores. Sales and marketing of
these products is generally handled by direct sales personnel. Our ability to
remain competitive in these consumer markets is dependent upon our position as a
low cost producer, and also upon our development of new and innovative products.
Being a low cost producer is also dependent upon our ability to reduce and
subsequently control our cost structure, which is further dependent upon our
ongoing restructuring efforts. Our restructuring efforts include consolidation
of facilities and headcount reductions.
Less significant amounts (based on net sales dollars) are sold to
different markets, such as roofing ventilation products to the construction
trade, and resin fiber disks and other abrasive disks to the OEM trade.
Electrical/Electronics:
We market branded electrical and electronics products primarily in North
America through a combination of direct sales personnel and manufacturers' sales
representatives. Our primary customer base consists of major national retail
chains that service the home improvement, hardware, mass merchant, discount and
automotive markets, and smaller regional concerns serving a similar customer
base.
Electrical and electronic products sold by the Company are generally used
by consumers and include such items as extension cords, work lights, surge
suppressors, power taps and strips, and outdoor lights and timers. We have
entered into license agreements pursuant to which we market certain of our
products using certain other companies' proprietary brand names. Overall demand
for our products is highly correlated with consumer demand, the performance of
the general economy and, to a lesser extent, home construction and resale
activity.
The markets for our electrical and electronic products are highly
competitive. Competition is based primarily on price and the ability to provide
superior customer service in the form of complete on-time product delivery.
Other competitive factors include brand recognition, product design, quality and
performance. Foreign competitors, especially from Asia, provide an increasing
level of competition. Our ability to remain competitive in these markets is
dependent upon continued efforts to remain a low-cost provider of these
products.
Raw Materials
Our operations have not experienced significant difficulties in obtaining
raw materials, fuels, parts or supplies for their activities during the most
recent fiscal year, but no prediction can be made as to possible future supply
problems or production disruptions resulting from possible shortages. Our
Electrical/Electronics businesses are highly dependent upon products sourced
from Asia, and therefore remain vulnerable to potential disruptions in that
supply chain. We are also subject to uncertainties involving labor relations
issues at entities involved in our supply chain, both at suppliers and in the
transportation and shipping area. Our Contico subsidiary (and some others to a
lesser extent) uses polyethylene, polypropylene and other thermoplastic resins
as raw materials in a substantial portion of its plastic products. Prices of
plastic resins, such as polyethylene and polypropylene, have increased during
the early months of 2003. Management has observed that the prices of plastic
resins are driven to an extent by prices for crude oil and natural gas, in
addition to other factors specific to the supply and demand of the resins
themselves. We cannot predict the longevity of the current price increase, or if
resin prices may increase further or be reduced through the rest of 2003. We are
also exposed to price changes for copper (used by Woods and Woods Canada),
corrugated packaging material and other raw materials. Copper prices have also
increased in recent months. We have not employed an active hedging program
related to our commodity price risk, but are employing other strategies for
mitigating the risk. In a climate of rising raw material costs, we experience
difficulty in raising prices to shift these higher costs to our customers. Our
future earnings may be negatively impacted to the extent increased costs for raw
materials cannot be recovered or offset.
Employees
As of December 31, 2002, we employed 2,261 people. Approximately 585 of
these employees were members of various unions. Our labor relations are
generally satisfactory and there have been no strikes in recent years. Our
operations can be impacted by labor relations issues involving other entities in
our supply chain.
6
Regulatory and Environmental Matters
We do not anticipate that federal, state or local environmental laws or
regulations will have a material adverse effect on our consolidated operations
or financial position. We anticipate making additional expenditures for
environmental matters during 2003, in accordance with terms agreed upon with the
United States Environmental Protection Agency and various state environmental
agencies. See Environmental and Other Contingencies in Part II, Item 7.
Licenses, Patents and Trademarks
The success of our products historically has not depended largely on
patent, trademark and license protection, but rather on the quality of our
products, proprietary technology, contract performance, customer service and the
technical competence and innovative ability of our personnel to develop and
introduce salable products. However, we do rely to a certain extent on patent
protection, trade marks and licensing arrangements in the marketing of certain
products. Examples of key licensed and protected trade marks include Yellow
Jacket(R), Woods(R), Tradesman(R), AC/Delco(TM) (Woods); Noma(R) (Woods Canada);
Contico(R) and Continental(R) (Contico); Glit(R), Microtron(R), Brillo(TM), and
Kleenfast(R) (Glit/Microtron); Wilen(R); Trim-Kut(R) (Gemtex); and Superdeck(R),
and Mason's Select(R) (Duckback). Divisions most reliant upon patented products
and technology are Contico, Woods, and Gemtex. Further, we are renewing our
emphasis on new product development, which will increase our reliance on patent
and trademark protection across all business units.
Available Information
We maintain a website at http://www.katyindustries.com. We make available,
free of charge through our website, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and, if applicable, all
amendments to these reports, as soon as reasonably practicable after such
reports are electronically filed or furnished to the SEC. The information on our
website is not, and shall not be deemed to be, a part of this report or
incorporated into any other filings we make with the SEC.
7
Item 2. PROPERTIES
As of December 31, 2002, our total building floor area owned or leased was
4,570,000 square feet, of which 1,038,000 square feet were owned and 3,532,000
square feet were leased. The following table shows by industry segment a summary
of the size (in square feet) and character of the various facilities included in
the above totals together with the location of the principal facilities.
Industry Segment Owned Leased Total
- ---------------- ------ ------ ------
(In thousands of square feet)
Maintenance Products - primarily
plant and office facilities with principal
facilities located in Chico, Norwalk and
Santa Fe Springs, California; Wrens, Thomson,
McDonough and Atlanta, Georgia; Bridgeton,
St. Louis, Earth City and
Hazelwood, Missouri;
Pineville, North Carolina; Buffalo, New York;
Lawrence, Massachusetts; Winters, Texas;
Etobicoke and Mississauga, Ontario, Canada; and
Redruth, Cornwall, England 561 2,995 3,556
Electrical/Electronics - primarily plant and
office facilities with principal facilities
located in Carmel and Indianapolis, Indiana,
Toronto, Ontario, Canada,
and Taipei, Taiwan 477 532 1,009
Corporate - office facility in Middlebury, Connecticut 5 5
During 2002, we consolidated a majority of our Warson Road facility in St.
Louis, Missouri into our Bridgeton, Missouri building. We have abandoned 40% of
the Earth City, Missouri facility at December 31, 2002, and plan to abandon the
remaining 60% during 2003, consolidating these operations into the Bridgeton,
Missouri facility. At December 31, 2002, we also owned a building occupied by
GC/Waldom Electronics, Inc. (GC/Waldom). The building contains 176,000 square
feet. GC/Waldom is classified as a discontinued operation at December 31, 2002.
We believe that our current facilities meet our needs in our existing markets
for the foreseeable future.
8
Item 3. LEGAL PROCEEDINGS
Except as set forth below, no cases or legal proceedings are pending
against Katy, other than ordinary routine litigation incidental to Katy and our
businesses and other non-material cases and proceedings.
1. Environmental Claims - Administrative Order on Consent - W.J. Smith Wood
Preserving Company (W.J. Smith) and Katy Industries, Inc., U.S. EPA Docket No.
RCRA-VI-7003-93-02 and Texas Water Commission Administrative Enforcement Action.
The W. J. Smith case originated in the 1980s when the United States and
the State of Texas, through the Texas Water Commission, initiated environmental
enforcement actions against W.J. Smith alleging that certain conditions on the
W.J. Smith property (the Property) violated environmental laws. Following these
enforcement actions, W.J. Smith engaged in a series of cleanup activities on the
Property and implemented a groundwater monitoring program.
In 1993, the Texas Water Commission referred the matter to the United
States Environmental Protection Agency (EPA), which initiated a proceeding under
Section 7003 of the Resource Conservation and Recovery Act (RCRA) against W.J.
Smith and Katy. The proceeding sought certain actions at the site and certain
off-site areas, as well as development and implementation of additional cleanup
activities to mitigate off-site releases. In December 1995, W.J. Smith, Katy and
the EPA agreed to resolve the proceeding through an Administrative Order on
Consent under Section 7003 of RCRA. W.J. Smith and Katy completed cleanup
activities required by the Order. W.J. Smith is currently implementing an RCRA
facility investigation of the site and an investigation of certain off-site
areas pursuant to the request of the EPA.
While ultimate liability with respect to this matter is not easily
determinable, we have recorded and accrued amounts that we deem reasonable and
probable for prospective costs with respect to this matter and we believe that
any additional costs with respect to this matter in excess of the accrual will
not be material.
In addition to the claim specifically identified above, a purported class
action lawsuit was filed by twenty individuals in federal court in the Marshall
Division of the Eastern District of Texas, on behalf of "landowners and persons
who reside and/or work in" an identified geographical area surrounding the W.J.
Smith facility in Denison, Texas. The lawsuit purported to allege claims under
state law for negligence, trespass, nuisance and assault and battery. It sought
damages for personal injury and property damage, as well as punitive damages.
The named defendants were Union Pacific Corporation, Union Pacific Railroad
Company, Katy Industries and W.J. Smith. On June 10, 2002, Katy and W.J. Smith
filed a motion to dismiss the case for lack of federal jurisdiction, or in the
alternative, to transfer the case to the Sherman Division of the Eastern
District of Texas. In response, plaintiffs filed a motion for leave to amend the
complaint to add a federal claim under RCRA. On July 30, 2002, the court
dismissed plaintiffs' lawsuit in its entirety.
On July 31, 2002, plaintiffs filed a new lawsuit against the same
defendants, again in the Marshall Division of the Eastern District of Texas,
alleging class claims under the federal Comprehensive Environmental Liability
and Compensation Act (CERCLA) and state law negligence, trespass, nuisance,
assault and battery and unjust enrichment theories. Katy and W.J. Smith have
filed a motion to dismiss the lawsuit or, in the alternative, to transfer venue
to the Sherman Division. In response, plaintiffs filed a motion for leave to
amend the complaint. The court granted plaintiffs' motion to amend and denied
Katy and W. J. Smith's motion to dismiss or transfer venue. Plaintiff's counsel
has informed legal counsel for the Company that he is no longer seeking
class-wide relief for personal injury claims. Plaintiff's counsel has therefore
prepared and circulated a draft amended complaint clarifying that this lawsuit
is not a personal injury class action. A determination of ultimate liability
with respect to this matter is not estimable at this time.
General Environmental Claims
Katy and certain of our current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by EPA, state
environmental agencies and private parties as potentially responsible parties at
a number of waste disposal sites under CERCLA or equivalent state laws, and, as
such, may be liable for the costs of cleanup and other remedial activities at
these sites. The costs involved in these matters are, by nature, difficult to
estimate and subject to substantial change as litigation or negotiations with
the United States, states and other parties proceed. While ultimate liability
with respect to these matters is not easily determinable, we have recorded and
accrued amounts that we deem reasonable and probable for prospective costs and
we believe that any costs with respect to such matters in excess of the accruals
will not be material.
9
2. Banco del Atlantico, S.A. v. Woods Industries, Inc., et al., Civil Action No.
L-96-139 (U.S. District Court, Southern District of Texas).
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of Katy, 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 (RICO) 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 Katy's purchase of Woods. The plaintiff also alleged that it
made loans to an entity controlled by certain past officers and directors of
Woods based upon fraudulent representations. The plaintiff seeks to hold Woods
liable for its alleged damages directly, and 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 RICO. Because certain
threshold procedural and jurisdictional issues have not yet been fully
adjudicated in this litigation, it is not possible at this time for the Company
to reasonably determine an outcome or accurately estimate the range of potential
exposure. Katy 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 Katy 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 or other issues related to the litigation. The extent or limit of
any such adjustment cannot be predicted at this time. An adverse judgment in
this matter could have a material impact on Katy's liquidity and financial
position if the Company were not able to exercise recourse against the former
owner of Woods.
3. General
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. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final outcome on certain 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 to the Company or its insurance providers, 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of 2002.
10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange (NYSE). The
following table sets forth high and low sales prices for the common stock in
composite transactions as reported on the NYSE composite tape for the prior two
years and cash dividends declared during the respective periods.
Dividends
Period High Low Declared
------ ---- --- --------
2002
First Quarter $6.75 $3.40 $.000
Second Quarter 6.28 4.85 .000
Third Quarter 4.99 2.90 .000
Fourth Quarter 3.70 2.50 .000
2001
First Quarter $8.00 $5.60 $.000
Second Quarter 7.35 4.05 .000
Third Quarter 4.80 2.95 .000
Fourth Quarter 3.55 3.00 .000
Dividends are paid at the discretion of the Board of Directors. On March
30, 2001, our Board of Directors decided to suspend quarterly dividends in order
to preserve cash for operations. Additionally, under the restrictions related to
our Fleet Credit Agreement, the payment of dividends has been suspended through
the term of that agreement.
As of April 1, 2003, there were approximately 596 holders of record of our
common stock, in addition to approximately 1,353 holders in street name, and
there were 8,362,177 shares of Common Stock outstanding.
Sale of Unregistered Securities
On June 28, 2001, we sold 700,000 shares of preferred stock, $100
par value per share, to KKTY Holding Company, L.L.C. (KKTY) for a total purchase
price of $70,000,000. These shares were sold to KKTY based on exemption from
registration under Section 4(2) of the Securities Act of 1933 since the stock
was not sold in a public offering. The preferred stock is convertible into
11,666,666 shares of our common stock at the option of KKTY at any time after
the earlier of 1) June 28, 2006, 2) board approval of a merger, consolidation or
other business combination involving a change in control of Katy, or a sale of
all or substantially all of the assets or liquidation of Katy, or 3) a contested
election for directors of the Company nominated by KKTY. The preferred shares 1)
are non-voting (with limited exceptions), 2) are non-redeemable, except in
whole, but not in part, at the Company's option (as approved by the Class I
directors) at any time after June 30, 2021, 3) are entitled to receive
cumulative payment in kind (PIK) dividends through December 31, 2004, at a rate
of 15% percent, 4) have no preemptive rights with respect to any other
securities or instruments issued by the Company, and 5) have registration rights
with respect to any common shares issued upon conversion.
As discussed above, the preferred shares are entitled to a 15% PIK
dividend (that is, dividends in the form of additional shares of preferred
stock), compounded annually, which started accruing on August 1, 2001, and are
payable on the first day in August in each of 2002, 2003, 2004, and on December
31, 2004. No dividends will accrue or be payable after December 31, 2004. As a
result, KKTY received an additional 105,000 shares of convertible preferred
stock on August 1, 2002. If KKTY continues to hold the preferred stock through
December 31, 2004, it will receive, including the 105,000 shares already
received, a total of 431,555 shares of preferred stock through PIK dividends,
which would be convertible into an additional 7,192,598 shares of common stock.
11
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ------------ ----------
(Thousands of Dollars, except per share data and ratios)
Net sales $ 459,990 $ 460,176 $ 523,639 $ 526,809 $ 295,245
=========== =========== =========== ============ ==========
(Loss) income from continuing operations [a] $ (51,391) $ (62,867) $ (7,781) $ 10,845 $ 9,933
Discontinued operations [b] (2,844) 787 2,323 (390) 3,149
Extraordinary loss on early extinguishment of
debt [b] [e] -- (1,182) -- -- --
Cumulative effect of a change in accounting
principle [b] [f] (2,514) -- -- -- --
----------- ----------- ----------- ------------ ----------
Net (loss) income $ (56,749) $ (63,262) $ (5,458) $ 10,455 $ 13,082
=========== =========== =========== ============ ==========
(Loss) earnings per share - Basic:
(Loss) income from continuing operations (7.47) (7.23) (0.93) 1.29 1.20
Discontinued operations (0.34) 0.09 0.28 (0.04) 0.38
Extraordinary loss on early extinguishment of debt -- (0.14) -- -- --
Cumulative effect of a change in accounting principle (0.30) -- --
----------- ----------- ----------- ------------ ----------
(Loss) earnings per common share $ (8.11) $ (7.28) $ (0.65) $ 1.25 $ 1.58
=========== =========== =========== ============ ==========
(Loss) earnings per share - Diluted:
(Loss) income from continuing operations (7.47) (7.23) (0.93) 1.25 1.18
Discontinued operations (0.34) 0.09 0.28 (0.04) 0.37
Extraordinary loss on early extinguishment of debt -- (0.14) -- -- --
Cumulative effect of a change in accounting principle (0.30) -- --
----------- ----------- ----------- ------------ ----------
(Loss) earnings per common share $ (8.11) $ (7.28) $ (0.65) $ 1.21 $ 1.55
=========== =========== =========== ============ ==========
Total assets $ 275,977 $ 347,955 $ 446,723 $ 493,104 $ 294,131
Total liabilities 157,405 173,691 263,490 299,893 144,815
Preferred interest in subsidiary 16,400 16,400 32,900 32,900 --
Stockholders' equity 102,172 157,864 150,333 160,311 149,316
Long-term debt, excluding current portion -- 12,474 771 150,835 39,908
Current portion of long-term debt 700 14,619 133,067 67 72
Revolving credit agreement, classified current 44,751 57,000 -- -- --
Depreciation and amortization [c] 19,403 20,728 21,608 18,283 5,195
Capital expenditures 10,118 12,566 14,196 21,066 11,314
Working capital [d] 35,206 65,733 97,258 112,463 87,775
Free cash flow [g] 21,370 5,086 7,485 14,306 8,727
Ratio of debt to capitalization 27.7% 32.5% 42.2% 43.8% 21.1%
Weighted average common shares outstanding - Basic 8,370,815 8,393,210 8,403,701 8,366,178 8,289,915
Weighted average common shares outstanding -Diluted 8,370,815 8,393,210 8,403,701 10,015,238 8,443,591
Number of employees 2,261 2,922 3,509 3,834 2,472
Cash dividends declared per common share $ 0.00 $ 0.00 $ 0.30 $ 0.30 $ 0.30
[a] Includes distributions on preferred securities in 2002, 2001, 2000 and
1999.
[b] Presented net of tax.
[c] From continuing operations only.
[d] Defined as current assets minus current liabilities, exclusive of 1)
current balances of deferred tax assets and liabilities, and 2) current
classifications of debt.
[e] This amount represents the write-off of previously capitalized debt
issuance costs related to the credit agreement in effect at the time of
the Recapitalization, which occurred on June 28, 2001.
[f] This amount is a transitional impairment of goodwill recorded with the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
[g] Free cash flow is defined as cash flow from operations less capital
expenditures and cash dividends paid. Below is a table detailing free cash
flow:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Cash flow from operations $ 31,488 $ 18,281 $ 24,201 $ 37,917 $ 22,533
Capital expenditures (10,118) (12,566) (14,196) (21,066) (11,314)
Cash dividends paid -- (629) (2,520) (2,508) (2,492)
-------- -------- -------- -------- --------
Free cash flow $ 21,370 $ 5,086 $ 7,485 $ 14,343 $ 8,727
======== ======== ======== ======== ========
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For purposes of this discussion and analysis section, reference is made to
the table below and the Company's Consolidated Financial Statements included in
Part II, Item 8. We have two principal operating groups: Maintenance Products
and Electrical/Electronics. The segment labeled as other consists of a minority
equity investment in a seafood harvesting and farming company, as well as an
operation exited by Katy in May 2002 which operated a waste-to-energy facility.
Two businesses formerly included in the Electrical/Electronics group, GC/Waldom
and Hamilton, have been classified as Discontinued Operations. GC/Waldom was
held for sale at December 31, 2002 and was sold on April 2, 2003, and Hamilton
was sold in October 2002. Gross proceeds on the sale of GC/Waldom were $8.3
million. We do not expect to record a significant gain or loss in 2003 related
to the sale of GC/Waldom.
Key elements in achieving profitability in the Maintenance Products group
include 1) maintaining a low cost structure, both from a production and
administrative standpoint, and 2) providing outstanding customer service. Most
of our products in the Maintenance Products group do not rely upon strong brand
equity (the exception being Duckback's products), so achieving and maintaining a
position as a low cost producer is a necessity, given that our comparative price
point on many products is below those of our competitors. New product
development is especially important in the consumer/retail markets for
Maintenance Products, as new products or beneficial modifications of existing
products increase demand from our customers, provide novelty to the consumer,
and offer an opportunity for favorable pricing from customers in the national
mass market retail area. Retention of customers, or more specifically, product
lines with those customers, is also very important in the mass market retail
area, given the vast size of these national accounts. Prices for raw materials,
especially plastic resins, have a very significant impact on Contico, the
largest division within the Maintenance Products group.
Key elements in achieving profitability in the Electrical/Electronics
group are in many ways similar to those mentioned for our Maintenance Products
group. Achieving and maintaining a low cost structure is critical given the
significant level of foreign competition, primarily from Asia and Latin America.
For this reason, in December 2002, Woods ceased all U.S. manufacturing and
initiated a fully outsourced strategy for its consumer electrical corded
products. Customer service, specifically the ability to fill orders at a rate
designated by our customers, is very important to customer retention, given
seasonal sales pressures in the consumer electrical area. Retention of customers
is critical in the Electrical/Electronics group, given the size of national
accounts.
The table below and the narrative that follows summarize the key factors
in the year-to-year changes in operating results.
13
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(Thousands of dollars)
Maintenance Products Group
Net external sales $ 314,571 $ 324,642 $362,922
Operating income (loss) (19,915) (39,699) 10,298
Operating margin (deficit) -6% -12% 3%
Impairments of long-lived assets 20,812 36,087 --
Severance, restructuring and related charges 13,629 3,489 1,177
Depreciation and amortization 17,769 19,926 20,238
Capital expenditures 9,306 10,060 11,737
Total assets 197,865 231,179 299,292
Electrical/Electronics Group
Net external sales $ 144,242 $ 130,949 $157,027
Operating income (loss) 2,874 (166) 4,511
Pretax margin (deficit) 2% 0% 3%
Impairments of long-lived assets 392 1,565 --
Severance, restructuring and related charges 5,239 1,552 385
Depreciation and amortization 1,484 220 810
Capital expenditures 601 301 723
Total assets 48,228 51,591 75,062
Total Company [a]
Net external sales [b] $ 459,990 $ 460,176 $523,639
Operating income (loss) [b] (35,028) (70,886) 4,662
Operating margin (deficit) [b] -8% -15% 1%
Severance, restructuring and related charges [b] 19,155 13,380 2,651
Impairments of long-lived assets [b] 21,204 47,469 --
Depreciation and amortization [b] 19,403 20,728 21,608
Capital expenditures [b] 10,065 11,064 13,215
Total assets [c] 275,977 347,955 446,723
[a] Included in "Total Company" are certain amounts in addition to those shown
for the Maintenance Products and Electrical/Electronics segments,
including amounts associated with 1) unallocated corporate expenses, 2)
our equity investment in a shrimp harvesting and farming operation, and 3)
our waste-to-energy facility (SESCO). See Note 18 to Consolidated
Financial Statements for detailed reconciliations of segment information
to the Consolidated Financial Statements.
[b] Excludes discontinued operations.
[c] Includes discontinued operations.
2002 Compared to 2001
Maintenance Products Group
The Maintenance Products group had a mixed year in 2002. Operating income,
excluding severance, restructuring, and impairment charges, was up over 2001, as
the various cost reduction programs put into place over the last two years have
begun to impact results. While the improvement in profitability was a positive
step, significant improvement over 2001 was expected since 2001 was an
especially weak year in the Maintenance Products group. Sales volumes were down
overall from 2001, with the largest decrease in the Contico Consumer products
business.
Sales from the Maintenance Products group decreased from $324.6 million in
2001 to $314.6 million in 2002, a decrease of 3%. The largest sales decrease
occurred within the consumer business, which sells primarily to mass market
retail customers. While certain product lines with retail customers remained
stable, the revenue declines were caused by the loss of certain product lines,
as well as selected price erosion with retail customers through allowance,
rebate, and other pricing programs. In addition to continually striving to
reduce our cost structure, we are seeking to offset these challenges by
developing new products for the retail markets. The development of new products
is essential to remaining competitive and to maintaining strong relationships
with large national mass market retail customers. Sales in the Maintenance
Products divisions serving commercial markets (primarily janitorial/sanitation)
were essentially flat versus 2001. Glit/Microtron's abrasives business saw a
significant increase in sales from 2001, with sales increasing year over year
for seven of their top ten customers. Glit/Microtron's sales increases included
increases with several key, sizable, janitorial/sanitation distributors.
Glit/Microtron
14
also grew its business with a large national retail chain, for which
Glit/Microtron supplies their full stock of floor cleaning abrasive pads for
internal use at their stores nationwide. Sales were also higher in the
international markets of Katy's janitorial/sanitation businesses, primarily in
the U.K. and Canada. These positive sales trends were offset by lower sales at
Contico's janitorial/sanitation business (Continental) and at Wilen (mops,
brooms and brushes). We believe that these negative sales comparisons are in
part due to the downturn in the travel (hotels, airports), restaurant, and
hospitality sectors of the economy, to which many of our maintenance products
are sold. Other factors resulting from the worsening overall economic
environment are higher vacancy rates in office buildings, distribution
facilities, and other commercial facilities where professional cleaning products
are used. The Maintenance Products group also made positive steps in 2002 toward
managing the various janitorial/sanitation supply divisions as one group,
consolidating more of the customer service and administrative functions of these
divisions in St. Louis, Missouri. By the end of 2003, we expect to have
centralized customer service and administrative functions for Continental,
Glit/Microtron, Wilen and Disco in place, allowing customers to order products
from any division on one purchase order. We believe that operating these
businesses as a cohesive unit will improve customer service in that our
customers' purchasing processes will be simplified, as will follow up on order
status, billing, collection and other related functions. This should increase
customer loyalty, help in attracting new customers and lead to increased top
line sales in future years.
The group's operating loss improved by $19.8 million from ($39.7) million
in 2001 to ($19.9) million in 2002, an improvement of 50%. The operating loss
was primarily a result of costs for severance, restructuring and related costs,
and asset impairments, which are discussed further below. Excluding those items,
operating income improved by $14.7 million from ($0.1) million in 2001 to $14.6
million in 2002. The improvement in income was primarily driven by
Glit/Microtron, Contico and Wilen. Glit/Microtron's operating income improvement
was driven by strong sales volume and cost reductions in numerous areas,
including raw materials, freight, and headcount. Contico's operating income
improved mainly due to cost reductions implemented on a continuing basis
throughout 2001 and 2002 producing results. The Wilen business deteriorated
during 2000 and 2001 due to operational problems that were largely remedied in
2002. In addition, significant new business was gained in early 2003 from a
large national mass market retail store chain, who will use Wilen mops for their
in-store floor care needs, providing meaningful levels of new sales to use
capacity existing at the Wilen plant. During 2001, the Maintenance Products
group recorded significant valuation reserve adjustments associated with
inventory and receivables, totaling $3.5 million. Operating income improved by
$1.8 million as a result of the cessation of goodwill amortization per the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
Operating results in 2002 were negatively impacted by several unusual
charges. The group incurred severance and restructuring charges of $13.6
million. The largest of these charges was the establishment of $10.8 million of
liabilities for non-cancelable lease payments at abandoned Contico facilities,
the operations of which have been or will be consolidated into Contico's
largest, most modern plant in Bridgeton, Missouri. The establishment of these
liabilities involves estimates of future sub-lease income. We generally assumed
that there will be no sub-lease income on these facilities until January 2004,
at which time a portion of the facility costs are expected to be recovered.
Adjustments to these liabilities are possible in the future depending upon the
accuracy of sub-lease assumptions made. Charges of $0.5 million were incurred in
2002 related to the movement of equipment and inventory from an abandoned
facility, and severance payments of $0.1 million were made to employees impacted
by this move. The Maintenance Products group incurred approximately $0.8 million
in consulting fees associated with outsourcing strategies, relating mainly to
the Wilen business. While current plans call for Wilen to continue in a
manufacturing capacity, the outsourcing project resulted in improved prices from
some new vendors on products that had already been outsourced. The group
incurred $0.4 million of severance costs related to various headcount
reductions, primarily at the executive level of operating divisions. The
Maintenance Products group also incurred $0.5 million associated with
transitioning administrative and accounting functions of Wilen and
Glit/Microtron to St. Louis, Missouri, where those functions are now performed
by Contico.
The Maintenance Products group recognized impairment charges on certain
long-lived assets totaling $20.8 million in 2002. Certain Contico property,
plant and equipment, primarily molds and tooling assets, were impaired by $15.3
million, and a customer list intangible was impaired by $3.6 million. The
majority of these impairments were associated with assets used in the Contico
Consumer business, and were the result of analyses indicating insufficient
future cash flows to cover the carrying values of the assets. It was determined
that portions of the carrying values of certain assets would not be recovered by
future cash flows over the remaining useful life of the assets. Given the unique
nature of molds for specific products, the fair values, if any, are often less
than historical cost, resulting in impairments. The Wilen business unit recorded
asset impairments of $1.9 million, resulting from management decisions on the
future use of certain manufacturing assets in the Atlanta, Georgia plant.
Operating results in 2001 for the Maintenance Products group were also
negatively impacted by several unusual charges. We recorded an impairment charge
of $33.0 million at Wilen because consistently poor operating performance led us
to conclude that the carrying values of certain long-lived assets were not
recoverable through future cash flows. In addition to the impairment at Wilen,
an additional $3.1 million of impairment charges were taken, related primarily
to management decisions regarding the discontinuance of certain property, plant
and equipment. Additional items that negatively impacted operating results
during 2001 include severance and restructuring charges of $3.5 million,
primarily at Contico and Wilen.
15
Identifiable assets for the group decreased primarily as a result of the
impairments noted above, and due to the fact that normal depreciation expense
exceeded capital expenditures for the group.
Electrical/Electronics Group
The Electrical/Electronics group had a positive year in 2002, driven
primarily by improved sales volume over 2001, and secondarily, by higher margins
over the prior year. In addition, during 2002 a major restructuring occurred at
the Woods business. After significant study and research into different sourcing
alternatives, we decided that Woods would source all of its products from Asia.
In December 2002, Woods shut down all U.S. manufacturing facilities, which were
in suburban Indianapolis and in southern Indiana. As a result of these plant
closures, 361 employees were terminated. The following charges were recorded
related to the shut down: severance and other closure costs of $2.4 million,
asset impairments of $0.4 million, and write-offs of excess raw material
inventory on hand at the time of the shut down of $0.9 million.
The Electrical/Electronics group's sales increased from $130.9 million in
2001 to $144.2 million in 2002, an increase of 10%. Higher sales volumes to the
two largest customers of Woods, both national mass market retailers, drove the
sales increase. Sales to these two customers combined were up $13.2 million, or
21%, from 2001. Higher volumes of direct import merchandise, which are shipped
directly from our suppliers to our customers, such as extension cords and power
strips, drove the higher sales to one of these customers. The strong
relationships with these large customers have provided a solid foundation for
growth in the Woods business. Woods Canada also experienced a significant sales
increase to its largest customer, also a large mass market retailer, to whom
sales were higher by 21%. A portion of the sales growth at Woods from 2001 to
2002 was due to a significant increase in purchases from a large customer, and
some portion of the sales may not occur again in 2003.
The group's operating income increased from ($0.2) million in 2001 to $2.9
million in 2002. Operating income was reduced by costs for severance,
restructuring and related costs, and asset impairments, which are discussed
further below. Excluding these costs, operating income increased from $3.0
million in 2001 to $8.5 million in 2002, an increase of 183%. Higher sales
volumes aided in maintaining margins, and ongoing cost control has allowed Woods
and Woods Canada to reduce product and variable costs. During 2002, Woods
incurred a loss of $0.9 million related to obsolete raw material and packaging
inventory on hand which could not be utilized following the shutdown of the U.S.
manufacturing facilities (see next paragraph). Significant factors impacting
2001 results include lower of cost or market inventory valuation adjustments
totaling $4.3 million, the largest of which related to the exit of certain
licensed branded product lines by Woods in the first quarter of 2001. Woods had
entered into several proprietary licensed branding agreements with several
companies well known in the electronics and computer industries, but efforts to
market the products proved unsuccessful. Woods also incurred a litigation loss
reserve of $0.5 million. Woods also wrote off a related $0.1 million amount of
prepaid maintenance related to software licenses (see next paragraph). Selling,
general and administrative (SG&A) expenses were negatively impacted in 2002
versus 2001, as a result of the existence in 2001 of amortization of negative
goodwill (an income item) of $1.7 million.
Operating results in 2002 were negatively impacted by a number of
restructuring-related charges. The Electrical/Electronics group incurred
consulting fees of $2.8 million associated with product outsourcing strategies.
In December 2002, as mentioned above, Woods incurred charges related to the shut
down of all U.S. manufacturing operations of $2.4 million for severance and
other exit costs, and $0.4 million of impaired assets that will not be utilized
following the shut down of Woods' facilities. The group also incurred several
unusual charges in 2001. Woods incurred $1.5 million of severance and other exit
costs in early 2001 associated with the closure of several satellite
manufacturing facilities in southern Indiana. Asset impairments of $0.7 million
were recorded, related primarily to previously capitalized software licenses
that were not being used.
We believe that restructuring steps executed in 2002 related to the Woods
business will allow that business to remain competitive within its markets. The
fully outsourced product strategy has reduced headcount at the Woods division by
361 employees effective in mid-December 2002.
We are continually evaluating alternatives relating to divestitures of
certain of our businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
On March 6, 2003, we announced that we are exploring the sale of the Woods and
Woods Canada businesses. However, there can be no assurance that a sale of the
Woods and Woods Canada business can be completed.
Other
Sales from other operations decreased by $3.4 million, or 74%, as a result
of the SESCO waste-to-energy operation being turned over to a third party in
April 2002, compared to a full year's sales in 2001. Operating income from other
16
operations in 2002 was driven by an unusual charge of $6.0 million, relating to
an obligation created by Katy to the third party who took over operation of the
SESCO facility. Amounts will be paid in roughly equal installments through 2007.
See Note 8 to the Consolidated Financial Statements for Katy in Part II, Item 8,
for a discussion of the SESCO partnership transaction. Operating income in 2001
was impacted primarily by the $9.8 million impairment of all of the long-lived
assets of the SESCO operation. The assets were written down in anticipation of a
cash flow-negative transaction that would be necessary for Katy to exit the
SESCO business.
Discontinued Operations
Two business units are reported as discontinued operations for all periods
presented: Hamilton Precisions Metals, L.P. (Hamilton) and GC/Waldom
Electronics, Inc. (GC/Waldom). Hamilton generated $1.5 million of operating
income in 2002 (prior to its sale on October 31, 2002), versus operating income
of $3.5 million in 2001. Hamilton's business was affected by general economic
conditions and lower capital spending within the markets Hamilton serves.
GC/Waldom incurred a $6.3 million operating loss in 2002, versus a $2.5 million
operating loss in 2001. Nearly the entire operating loss of GC/Waldom in 2002 is
the result of asset valuation adjustments in anticipation of a sale of the
business unit in early 2003.
Corporate
During 2001, the Corporate group incurred $8.3 million of severance and
restructuring charges and $3.0 million of costs associated with completing the
recapitalization. The majority of the severance and restructuring charges relate
to payments made in connection with management transition. Included in this
amount is approximately $1.0 million of charges that relate to outside
consultants working with Katy to modify operating and financial strategies, and
$0.7 million of non-cancelable rent and other exit costs associated with the
premature termination of our leased office facility in Englewood, Colorado. The
largest portions of the $3.0 million of costs associated with the
recapitalization were non-capitalizable legal fees and investment banker fees,
board and committee fees and other internal incremental costs.
Identifiable assets at corporate decreased due to two primary items. Cash
was lower by $3.0 million due to more efficient management of borrowed funds at
the end of 2002 versus 2001 and net deferred tax assets were lower by $10.5
million as a result of additional valuation allowance adjustments in 2002.
Interest was lower by $3.6 million, or 25%, in 2002 compared to 2001,
primarily due to significant reductions in outstanding debt balances due to 1)
the infusion of equity capital with the recapitalization on June 28, 2001, and
2) reductions in debt as a result of working capital reductions in the last half
of 2001. Our effective tax rate in 2002 was (21%), indicating that $8.6 million
of tax provision was recorded on a $41.1 million pretax loss. A net tax
provision was recorded on the loss rather than a net tax benefit because we
determined that a greater valuation allowance was required on our net deferred
tax asset position. See "Deferred Income Taxes" in "Critical Accounting
Policies" and Note 15 to the Consolidated Financial Statements in Part II, Item
8., for further discussion of income tax accounting. The effective tax rate in
2001, while resulting in book benefit on a pretax book loss, was only 25%, due
to a significant increase in valuation allowances on net operating loss deferred
tax assets. We also recorded a $2.5 million, net of tax, transitional goodwill
impairment as a result of the adoption of SFAS No. 142, which is shown on the
Consolidated Statements of Operations as a cumulative effect of a change in
accounting principle. See Note 4 to the Consolidated Financial Statements in
Part II, Item 8. for a further discussion of goodwill impairments.
2001 Compared to 2000
Maintenance Products Group
Sales in the Maintenance Products group decreased from $362.9 million in
2000 to $324.6 million in 2001, a decrease of 11%. Sales decreased in 2001 at
Contico and Wilen, and to a lesser extent at Duckback, Gemtex and Disco. Sales
increased at Glit/Microtron and Loren. The group experienced weakness in both
the retail and institutional sectors to which it sells. Retailers' efforts to
reduce inventories, especially in early 2001, led to softer sales for Contico
and Duckback, and a slower economy contributed to softer sales in the
janitorial/sanitation markets.
The group's operating income decreased from $10.3 million in 2000 to
($39.7) million in 2001, a decrease of 485%. Operating income was reduced by
costs for severance, restructuring and related costs, and asset impairments,
which are discussed further below. Excluding the impact of these items,
operating income for the group declined from $11.5 million in 2000 to ($0.1)
million in 2001. SG&A expenses as a percentage of sales improved at Contico,
Glit/Microtron, Loren and Disco, offset by higher percentages of SG&A expenses
at Wilen, Duckback and Gemtex. The overall improvement in SG&A expenses
(excluding the unusual items) was offset by reduced gross margins at all
businesses, led by Contico. Decreased volumes and the inability to reduce
overhead accordingly was the main cause of the margin decreases. Offsetting
these factors were prices paid for various resins, a key raw material for
plastic products produced by Contico, which were lower in 2001 than in 2000,
especially for polypropylene. The lower prices for resins taken alone accounted
for approximately $4.7 million in lower cost of
17
goods sold during 2001 versus 2000. The Maintenance Products group recorded
valuation reserve adjustments for inventory and receivables of $3.5 million
during 2001, contributing to the lower operating results. 2000 results included
a $0.7 million increase (expense) to the LIFO inventory reserve at Contico and
an inventory write down at Wilen of $0.9 million
Operating results in 2001 were negatively impacted by unusual items of
$39.6 million. We recorded an impairment charge of $33.0 million at Wilen
because consistently poor operating performance led us to conclude that the
carrying values of certain long-lived assets were not recoverable through future
cash flows. In addition to the impairment at Wilen, an additional $3.1 million
of impairment charges were taken, related primarily to management decisions
regarding the discontinuance of certain property, plant and equipment.
Additional items that negatively impacted operating results during 2001 include
severance and restructuring charges of $3.5 million, primarily at Contico and
Wilen. Operating results in 2000 were negatively impacted by $1.2 million in
severance and restructuring charges
Identifiable assets for the group decreased by $68.2 million from $299.3
million in 2000 to $231.1 million in 2001, a decrease of 23%. The decrease was
due in part to the $33.0 million write-off of long-lived assets in the mop,
broom and brush business. An inventory reduction effort on a company-wide basis
resulted in lower working capital levels at each division in 2001. Depreciation
expense in excess of capital expenditures also contributed to the decline.
Electrical/Electronics Group
The Electrical/Electronics group's sales decreased from $157.0 million in
2000 to $130.9 million in 2001, a decrease of 17%. Sales volumes were lower in
2001 at both Woods and Woods Canada. We sold Thorsen Tools during the second
quarter of 2001, which accounted for $7.3 million of the sales decrease. The
sales decreases were primarily attributable to slower economic conditions during
2001, especially as those conditions caused retailers to reduce inventory levels
during the early portion of 2001.
The group's operating income decreased from $4.5 million in 2000 to ($0.2)
million in 2001, a decrease of 104%. Operating income was reduced by costs for
severance, restructuring and related costs, and asset impairments, which are
discussed further below. Operating results excluding these unusual items
decreased from $4.9 million in 2000 to $3.0 million in 2001, a decrease of 40%.
Positive factors included significant reductions in SG&A expenses at Woods and
Woods Canada in 2001 as compared to 2000. Negative factors in 2001 included $4.3
million of inventory lower of cost or market adjustments, the largest occurring
at Woods relating to exiting licensed branded product lines ($3.3 million).
Negative factors impacting operating income in 2000 included a charge of $0.8
million for costs associated with a product recall.
Operating results in 2001 were reduced by unusual items of $3.2 million,
including severance and restructuring charges of $1.6 million and related
impairments of long-lived assets of $1.6 million. Unusual items impacted
operating results in 2000 as well, including a $0.4 million severance charge at
Woods.
Identifiable assets for the group decreased from $67.3 million in 2000 to
$50.6 million in 2001, a decrease of 25%. Lower working capital levels at Woods
and Woods Canada drove this decrease. These reductions were the result of
aggressive efforts to reduce inventories, as well as lower levels of capital
expenditures. Also, assets of Thorsen Tools, which were sold during 2001,
accounted for approximately $6.9 million of the reduction.
Other
Sales from other operations increased modestly as a result of higher sales
at the SESCO waste-to-energy facility.
Operating income from other operations decreased $8.9 million, primarily
as a result of a $9.8 million impairment of our investment in SESCO's
waste-to-energy facility and related property, plant and equipment. Excluding
the effect of the write-off, operating income increased $0.9 million at the
SESCO waste-to-energy facility.
Identifiable assets for our other operations decreased $9.5 million in
connection with the write-off of Katy's investment in the SESCO waste-to-energy
facility.
Corporate
During 2001, the Corporate group incurred $8.3 million of severance and
restructuring charges and $4.1 million of other unusual items. The majority of
the severance and restructuring charges relate to payments made in connection
with management transition. Included in this amount is approximately $1.0
million of charges that relate to outside consultants working with Katy to
modify operating and financial strategies, and $0.7 million of non-cancelable
rent and other exit costs associated with the premature termination of our
leased office facility in Englewood, Colorado. The largest portion of the other
unusual items were approximately $3.0 million of costs associated with the
recapitalization, including non-capitalizable legal
18
fees and investment banker fees, board and committee fees and other internal
incremental costs. Other unusual items included increases to claims and
environmental reserves of $0.7 million and other items totaling $0.3 million.
Corporate expenses in 2000 were negatively impacted by $0.6 million in unusual
items, including $0.9 million of severance and restructuring charges and $0.2
million of costs associated with the recapitalization, partially offset by
proceeds of $0.5 million related to a previously written-off investment.
Interest was lower by $3.6 million, or 25%, in 2001 compared to 2000,
primarily due to the reduction in bank debt caused by the recapitalization in
June of 2001. Bank debt was reduced by $51.1 million when the recapitalization
occurred. We incurred an extraordinary loss on early extinguishment of debt of
$1.2 million, net of tax, at the time of the recapitalization. This loss
represented the write-off of previously capitalized debt costs. The effective
income tax rate for continuing operations reduced from 35% in 2000 to 25% in
2001, resulting in lowered tax benefit from book losses in 2001. The lower tax
rate and benefit were the result of valuation allowance adjustments placed on
certain deferred tax assets, particularly federal net operating loss
carry-forwards.
19
LIQUIDITY AND CAPITAL RESOURCES
Liquidity was our strongest performance measure in 2002, with overall debt
decreasing by $38.6 million from $84.1 million at the end of 2001 to $45.5
million at the end of 2002. Cash decreased by $3.0 million from $7.8 million at
the end of 2001 to $4.8 million at the end of 2002. During 2002, we accomplished
the following:
o Generated operating cash flow of $31.5 million.
o Incurred capital expenditures from continuing operations of $10.1
million.
o Sold the Hamilton business for gross proceeds of $13.9 million.
o The three items listed above, along with strong working capital
management in 2001, allowed us to repay by October 2002 the entire
remaining balance of the $30 million term loan with Deutsche Bank,
which was obtained in June 2001 at the time of the recapitalization.
The term loan was scheduled to be paid ratably through June of
2006. At December 31, 2002, scheduled remaining maturities of term
debt per the repayment amortization schedule in the loan document
would have been $21 million.
In addition, during 2003, the following events occurred:
o In February 2003, we funded a new credit agreement, agented by Fleet
Capital (Fleet Credit Agreement), which replaced the credit
agreement entered into at the time of the recapitalization in June
of 2001 (Deutsche Bank Credit Agreement). The new $110 million
facility, which provides for $20 million of term debt and $90
million of revolving debt, involves a syndicate of banks, all of
whom had participated in the Deutsche Bank Credit Agreement. The
Fleet Credit Agreement is an asset-based lending agreement, and is
generally on similar terms to those found in the Deutsche Bank
Credit Agreement. The term of the agreement is through January 30,
2008.
o Sold the GC/Waldom business for gross proceeds of $8.3 million,
which allowed us to further reduce our debt obligations.
While book losses in 2002 were significant, large portions of these losses
were due to non-cash events such as impairments of assets ($21.2 million),
depreciation and amortization ($19.4 million), and the creation of liabilities
to be paid in future years, such as the SESCO obligation (see discussion
regarding Contractual Obligations below) ($5.0 million, discounted) and the
recording of liabilities for non-cancelable leases at several operating
locations ($10.9 million, discounted). Strong collections of receivables late in
2002, as well as management of accounts payable, resulted in working capital
improvement in 2002.
With the early pay down of the term loan in October 2002, we set out to
take out a new term loan, which is collateralized by real and personal property,
in order to most efficiently leverage our entire asset base, and to create more
borrowing room under our revolving credit arrangements, which are based on the
liquidation values of accounts receivable and inventories. We believe we have
accomplished these goals by entering into the Fleet Credit Agreement in February
of 2003. Below is a summary of the sources and uses associated with the funding
of the Fleet Credit Agreement:
(Thousands of Dollars)
Sources:
Term loan borrowings under the Fleet Credit Agreement 20,000
Revolving loan borrowings under the Fleet Credit Agreement 43,743
-------
$63,743
=======
Uses:
Payment of interest and principal under the Deutsche
Bank Credit Agreement 52,895
Purchase of outstanding preferred interest of Contico at a
discount 9,840
Payment of accrued distributions on outstanding preferred
interest of Contico 122
Certain costs associated with the Fleet Credit Agreement 886
-------
$63,743
=======
The Fleet Credit Agreement, which provides for a total borrowing facility
of $110.0 million, has a $20.0 million term loan portion with a final maturity
date of February 3, 2008 and quarterly repayments of $0.7 million, the first of
which will be made on April 1, 2003. A final payment of $5.7 million is
scheduled to be made in 2008. The term loan is based on orderly liquidation
values of the Company's property, plant and equipment. The remaining portion of
the Fleet Credit Agreement is a
20
$90.0 million revolving credit facility that also has an expiration date of
February 3, 2008. The borrowing base of the revolving credit facility is
determined by eligible inventory and accounts receivable.
Unused borrowing availability on the revolving credit facility was $27.8
million at February 21, 2003.
All extensions of credit under the Fleet Credit Agreement are
collateralized by a first priority perfected security interest in and lien upon
the capital stock of each material domestic subsidiary (65% of the capital stock
of each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions apply under
the Fleet Credit Agreement. Until June 30, 2003, interest accrues on revolving
borrowings at 225 basis points over applicable LIBOR rates, and at 250 basis
points over LIBOR for term borrowings. Subsequent to June 30, 2003, margins are
determined on a pricing matrix which factors operating performance into the
pricing grid. Margins drop an additional 25 basis points in the most favorable
pricing grid from the pre-June 30 levels. Interest accrues at higher margins on
prime rates for swing loans.
Katy incurred $0.9 million in debt issuance costs associated with the
Fleet Credit Agreement. However, Katy expects to charge to expense during the
first quarter of 2003 approximately $1.2 million of previously capitalized debt
issuance costs from the Deutsche Bank Credit Agreement. While approximately $5.6
million of debt issuance costs were capitalized at the time of the inception of
the Fleet Credit Agreement, the $1.2 million represents an amount derived from
the pro rata reduction in borrowing capacity from the Duetsche Bank Credit
Agreement to the Fleet Credit Agreement. The remainder of the previously
capitalized costs, along with the newly capitalized costs from the Fleet Credit
Agreement will be amortized over the life of the Fleet Credit Agreement, through
January 2008.
With regard to the Deutsche Bank Credit Agreement, we were in compliance
with all covenants related to the agreement at December 31, 2002. Total debt was
28% of total capitalization at December 31, 2002. The revolving credit
facilities under the Deutsche Bank Credit Agreement required lockbox agreements
which provided for all receipts to be swept daily to reduce borrowings
outstanding. These agreements, combined with the existence of a Material Adverse
Effect (MAE) clause in the Deutsche Bank Credit Agreement, caused the Revolving
Credit Facility to be classified as a current liability, per guidance in the
Emerging Issues Task Force (EITF) Issue No. 95-22, Balance Sheet Classification
of Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement. However, the Company
did not expect to repay, or be required to repay, within one year, the balance
of the Revolving Credit Facility classified as a current liability. The MAE
clause, which is a fairly typical requirement in commercial credit agreements,
allows the lender to require the loan to become due if it determines there has
been a material adverse effect on our operations, business, properties, assets,
liabilities, condition or prospects. The classification of the Revolving Credit
Facility as a current liability is a result only of the combination of the two
aforementioned factors: the lockbox agreements and the MAE clause. However, the
Revolving Credit Facility under the Deutsche Bank Credit Agreement did not
expire or have a maturity date within one year, but rather had a final
expiration date of June 28, 2006. Also, we were in compliance with the
applicable financial covenants at December 31, 2002. The lender had not notified
us of any indication of a MAE at December 31, 2002, and to our knowledge, we
were not in default of any provision of the Deutsche Bank Credit Agreement at
December 31, 2002.
The Fleet Credit Agreement also calls for similar lockbox arrangements,
and has language regarding material adverse changes. We anticipate that our
obligations under the revolving credit facility will continue to be classified
as current liabilities.
The Fleet Credit Agreement, and the additional borrowing ability on
revolving credit obtained by incurring new term debt, results in three important
benefits related to the long-term strategy of Katy: 1) allowed us to redeem
early at a discount a preferred interest obligation of Contico, 2) provides
borrowing power to invest in capital expenditures key to our strategic
direction, and 3) provides working capital flexibility to build inventory when
necessary to accommodate lower cost outsourced finished goods inventory. We feel
that our operations and the Fleet Credit Agreement provide sufficient liquidity
for our operations going forward.
As a result of the refinance with the new Fleet Credit Agreement, we were
able to redeem at a 40% discount the remaining preferred interest that the
former owner of Contico had held. This balance sheet liability, which had a
carrying value of $16.4 million at December 31, 2002, was redeemed for $9.8
million in February 2003. The gain on this redemption will be an addition to
stockholders' equity, and will favorably impact earnings per share. This will
result in a reduction of preferred cash distributions by approximately $1.3
million annually, which had accrued at an annual rate of 8%. After giving effect
to the interest cost incurred by the Company to fund the redemption, the net
decrease in financing cost for the Company will be approximately $1.0 million
annually.
Funding for capital expenditures and working capital needs is expected to
be accomplished through the use of available borrowings under the Fleet Credit
Agreement. Anticipated capital expenditures are expected to be higher in 2003
than in 2002 and 2001, mainly due to investments planned for the restructuring
of the abrasives businesses and the various Contico facilities. These
restructuring and consolidation activities are important to reducing our cost
structure to a competitive level.
21
Our borrowing base under the Fleet Credit Agreement is reduced by the
outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom Katy does business may
require letters of credit in the future that either 1) do not exist today, or 2)
would be at higher amounts than those that exist today. Our largest letters of
credit relate to our casualty insurance programs.
We have a number of obligations and commitments, which are listed on the
schedule later in this section entitled "Contractual Obligations and Commercial
Commitments." We have considered all of these obligations and commitments in
structuring our capital resources to ensure that they can be met. See the notes
accompanying the table in that section for further discussions of those items.
Businesses classified as discontinued operations were both sold by early
2003. Therefore, we will not have the benefit of the cash flow generated by
those businesses in the past. However, the proceeds of the sales of those
businesses were used to pay down debt, more than offsetting the negative
liquidity impact of losing their cash flow from operations.
We are continually evaluating alternatives relating to divestitures of
certain of our businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
On March 6, 2003, we announced that we are exploring the sale of the Woods and
Woods Canada businesses. However, there can be no assurance that a sale of the
Woods and Woods Canada business will be completed. On April 2, 2003, we
announced the sale of GC/Waldom with gross proceeds of $8.3 million, which were
used to reduce our debt obligations.. On February 3, 2003, we announced that we
sold a Woods manufacturing facility in Moorseville, Indiana. Gross proceeds were
$1.9 million, of which $0.7 million was used to repay a mortgage loan payable on
the property. The remainder of the proceeds reduced our debt obligations.
Non-GAAP Financial Measure - Earnings before Income Taxes, Depreciation and
Amortization (EBITDA)
Cash flow generation is integral to the success of our business, and
EBITDA is used on a routine basis as a measure of operating performance at Katy.
While it is a non-GAAP measure, EBITDA is used extensively on an internal basis,
acting as a primary metric for performance measurement related to incentive
compensation for management. EBITDA is also the prime measure of operating
results used by the lenders in our bank group when evaluating our performance.
While appreciating the importance of depreciation charges and the information
operating income provides regarding returns on assets, we actively monitor the
payback and return on capital projects by thorough review of projects prior to
their approval, ensuring that returns on those projects are specified in
operating budgets, and subsequent follow up on the return provided by those
projects. The items added back in the table below to arrive at an EBITDA amount
shown below should not be ignored or considered irrelevant in the analysis of
our performance. However, management routinely views operating results with
unusual items such as those below excluded, so that a reasonable profitability
answer can be derived that can be used as a reliable indicator for future
performance. We think it is useful for investors to understand EBITDA because it
provides a link between profitability and operating cash flow, and also allows
the investor to view performance in a manner similar to the method used by our
management. Below are reconciliations of net income, computed in accordance with
generally accepted accounting principles and displayed on the Consolidated
Statements of Operations (Total Company), with EBITDA, a measure we use on a
routine basis:
22
Twelve months ended
Excluding
December 31, Unusual Unusual
2002 Items Items % of sales
------------ --------- -----------------------
Net sales $ 459,990 $ 459,990
Cost of goods sold 381,846 -- 381,846
--------- --------- ---------------------
Gross profit 78,144 -- 78,144 17.1%
Selling, general & administrative expenses 66,803 -- 66,803 14.5%
Impairments of long-lived assets 21,204 (21,204)(a) --
Severance, restructuring & other costs 19,155 (19,155)(b) --
SESCO joint venture transaction 6,010 (6,010)(c) --
--------- --------- ---------------------
Operating (loss) income (35,028) 46,369 11,341 2.6%
Equity in income of unconsolidated investment 295 -- 295
Interest (6,046) -- (6,046)
Other, net (407) -- (407)
--------- --------- ---------------------
(Loss) income before provision for income taxes (41,186) 46,369 5,183 1.3%
Income taxes (8,612) 6,642 (d) (1,970)
--------- --------- ---------------------
(Loss) income before distributions on preferred interest in subsidiary (49,798) 53,011 3,213 0.8%
Distributions on preferred interest of subsidiary, net of tax (1,593) -- (1,593)
--------- --------- ---------------------
(Loss) income from continuing operations $ (51,391) $ 53,011 $ 1,620 0.4%
========= ========= =====================
Earnings before interest, taxes, depreciation and amortization (EBITDA) Pretax income $ 5,183
(excluding unusual items) Interest 6,046
Depreciation and
amortization 19,403
---------
EBITDA $ 30,632 6.8%
=========
Twelve months ended
Excluding
December 31, Unusual Unusual
2001 Items Items % of sales
------------ --------- ----------------------
Net sales $ 460,176 $ -- $ 460,176
Cost of goods sold 395,789 -- 395,789
--------- --------- ----------------------
Gross profit 64,387 -- 64,387 14.0%
Selling, general & administrative expenses 74,424 (2,973)(e) 71,451 15.5%
Impairments of long-lived assets 47,469 (47,469)(a) --
Severance, restructuring & other costs 13,380 (13,380)(b) --
SESCO joint venture transaction -- -- --
--------- --------- ----------------------
Operating (loss) income (70,886) 63,822 (7,064) -1.5%
Equity in income of unconsolidated investment 72 -- 72
Interest (10,822) -- (10,822)
Other, net (604) -- (604)
--------- --------- ----------------------
(Loss) income before provision for income taxes (82,240) 63,822 (18,418) -4.0%
Income taxes 20,647 (16,024)(d) 4,623
--------- --------- ----------------------
(Loss) income before distributions on preferred interest in subsidiary (61,593) 47,798 (13,795) -3.0%
Distributions on preferred interest of subsidiary, net of tax (1,274) -- (1,274)
--------- --------- ----------------------
(Loss) income from continuing operations $ (62,867) $ 47,798 $ (15,069) -3.3%
========= ========= ======================
Earnings before interest, taxes, depreciation and amortization (EBITDA) Pretax income $ (18,418)
(excluding unusual items) Interest 10,822
Depreciation and
amortization 20,728
---------
EBITDA $ 13,132 2.9%
=========
Items to reconcile to EBITDA are discussed in further detail in the
Results of Operations section of MD&A. Summaries of the items are presented
below:
23
a) Impairments of long-lived assets include carrying value adjustments
relating to property, plant and equipment, intangible assets, and
goodwill (except for goodwill write-offs recorded with the adoption
of SFAS No. 142, Goodwill and Intangible Assets).
b) Severance and restructuring costs include costs related to 1)
accruals for non-cancelable lease payments for rented facilities
that have been, or will be, abandoned as part of facilities
consolidation or other restructuring projects, 2) severance charges
for terminated employees, 3) consultant fees for outsourcing and
other restructuring projects, 4) costs to move inventory and
equipment between facilities related to consolidation projects.
c) SESCO transaction costs include the charge for the contracted amount
payable to the third party who has taken prime responsibility within
the partnership for the operations of SESCO, and the cost of certain
spare parts that were contributed to the partnership.
d) Adjustment to reflect a more normalized effective tax rate excluding
unusual items. e) Recapitalization costs include costs associated
with completing the recapitalization that for various reasons were
not charged against the proceeds of convertible preferred stock or
capitalized with debt issuance costs.
e) Recapitalization costs include costs associated with completing the
recapitalization that for various reasons were not charged against
the proceeds of convertible preferred stock or capitalized with debt
issuance costs.
EBITDA, excluding unusual items as shown above, increased by $17.5 million
from $13.1 million in 2001 to $30.6 million in 2002, an improvement of 133%.
Higher EBITDA was generated in both the Maintenance Products group and the
Electrical/Electronics group in 2002 versus 2001. The reasons for the
improvements in EBITDA for both segments are largely the same as those discussed
for operating income in the Results of Operations discussion above regarding
2002 versus 2001. EBITDA in 2001 was negatively impacted by valuation
adjustments of $6.9 million for excess and obsolete inventory.
EBITDA enhances the understanding of our liquidity and helps provide a
link between earnings and cash provided by operating activities in the
Consolidated Statements of Cash Flows in Part II, Item 8.Depreciation,
amortization, impairments of long-lived assets and increases to valuation
allowances on deferred tax assests are non-cash charges. Also, certain
severance, restructuring and related charges did not result in cash outflows in
2002, but created liabilities that will be settled in future years; most
significantly, those for non-cancelable lease liabilities associated with
facilities that have been (or will be) abandoned as a result of restructuring
and consolidation efforts. Included in severance, restructuring and related
charges in 2002 are costs of $11.8 million for the establishment of these types
of liabilities. The balance sheet liabilities for these types of costs increased
by $10.5 million from December 31, 2001 to December 31, 2002. This change is
reflected in the Consolidated Statements of Cash Flows in the line item which
shows the change in "Accrued expenses and other liabilities" as a positive
adjustment from net income to cash provided by operating activities in 2002. As
the non-cancelable lease payments are made in future years, they will negatively
impact operating cash flow through opposite changes in this line item. See also
the section entitled "Restructuring and Severance Charges" for a discussion of
charges and payments against restructuring reserves, and estimates of future
settlement of related liabilities.
OFF-BALANCE SHEET ARRANGEMENTS
On April 29, 2002, Katy and SESCO, an indirect wholly owned subsidiary,
entered into a partnership agreement with Montenay Power Corporation and its
affiliates (Montenay) that turned over the operation of SESCO's waste-to-energy
facility to Montenay. The Company entered into this agreement as a result of
evaluations of SESCO's business. First, we determined that SESCO was not a core
component of our long-term business strategy. Moreover, we did not feel the
Company had the management expertise to deal with certain risks and
uncertainties presented by the operation of SESCO's business, given that SESCO
was the Company's only waste-to-energy facility. We had explored options for
divesting SESCO for a number of years, and management felt that this transaction
offered a reasonable strategy to exit this business.
The partnership, with Montenay's leadership, assumed SESCO's position in
various contracts relating to the facility's operation. Under the agreement,
SESCO contributed its assets and liabilities (except for its liability under the
loan agreement with the Resource Recovery Development Authority (the Authority)
of the City of Savannah and the related receivable under the service agreement)
to the partnership. While SESCO will maintain a 99% partnership interest as a
limited partner, Montenay will have most of the day to day responsibility of the
partnership, and accordingly, the partnership will not be consolidated. Katy
agreed to pay Montenay $6.6 million over the span of seven years under a note
payable as part of the partnership and related agreements. This note payable is
recorded as a liability on the Consolidated Balance Sheets included in Part II,
Item 8. Certain amounts may be due to SESCO upon expiration of the service
agreement in 2008; also, Montenay may purchase SESCO's interest in the
partnership at that time. Katy has not recorded any amounts receivable or other
assets relating to amounts that may be received at the time the service
agreement expires, given their uncertainty.
The Company recognized in the first quarter of 2002 a charge of $6.0
million, consisting of 1) the discounted value of the $6.6 million note, which
is payable over seven years, 2) the carrying value of certain assets contributed
to the partnership, consisting primarily of machinery spare parts, and 3) costs
to close the transaction. It should be noted that all of SESCO's long-lived
assets were reduced to a zero value at December 31, 2001, so no additional
impairment was required. Going forward, Katy does not expect any income
statement activity as a result of its involvement in the partnership, and Katy's
balance sheet will carry the liability mentioned above.
In 1984, the Authority issued $55.0 million of Industrial Revenue Bonds
and lent the proceeds to SESCO, under the loan agreement for the acquisition and
construction of the waste-to-energy facility that has now been transferred to
the partnership. The funds required to repay the loan agreement come from the
monthly disposal fee paid by the Authority to SESCO under the service agreement
for certain waste disposal services, a component of which is for debt service.
To induce the required parties to consent to the SESCO partnership transaction,
SESCO retained its liability under the loan agreement. In connection with that
liability, SESCO also retained its right to receive the debt service component
of the monthly disposal fee.
Based on an opinion from outside legal counsel, SESCO has a legally
enforceable right to offset amounts it owes to the Authority under the loan
agreement against amounts that are owed from the Authority under the service
agreement. At December 31, 2002, this amount was $35.8 million. Accordingly, the
amounts owed to and due from SESCO have been netted for financial reporting
purposes and are not shown on the consolidated balance sheets.
In addition to SESCO retaining its liabilities under the loan agreement,
to induce the required parties to consent to the partnership transaction, Katy
also continues to guarantee the obligations of the partnership under the service
agreement. The partnership is liable for liquidated damages under the service
agreement if it fails to accept the minimum amount of waste or to meet other
performance standards under the service agreement. The liquidated damages, an
off balance sheet risk for Katy, are equal to the amount of the bonds
outstanding, less $4.0 million maintained in a debt service reserve trust. We do
not expect
24
non-performance by the other parties. Additionally, Montenay has agreed to
indemnify Katy for any breach of the service agreement by the partnership.
Following are scheduled principal repayments on the loan agreement (and
the Industrial Revenue Bonds) (in thousands):
2003 5,385
2004 6,765
2005 8,370
2006 15,300
-------
Total $35,820
========
We also enter into operating lease agreements in the ordinary course of
business, and many of our facilities are leased. Contractual obligations
associated with these leases are listed in the table under the following section
entitled "Contractual Obligations and Commercial Obligations."
Contractual Obligations and Commercial Obligations
Katy's obligations are summarized below:
(In thousands of dollars)
Due in less Due in Due in Due after
Contractual Cash Obligations Total than 1 year 1-3 years 4-5 years 5 years
- ---------------------------- ----------- ----------- ----------- ----------- -----------
Revolving credit facility [d] $ 44,751 $ -- $ -- $ 44,751 $ --
Term loans -- -- -- -- --
Preferred interest in subsidiary [e] 16,400 16,400
Operating leases [c] 52,070 11,942 20,040 13,556 6,532
Severance and restructuring [c] 3,613 3,220 378 15
SESCO payable to Montenay [b] 5,800 1,000 2,050 2,200 550
Other 700 700 -- -- --
----------- ----------- ----------- ----------- -----------
Total Contractual Obligations $ 123,334 $ 16,862 $ 22,468 $ 76,922 $ 7,082
=========== =========== =========== =========== ===========
Due in less Due in Due in Due after
Other Commercial Commitments Total than 1 year 1-3 years 4-5 years 5 years
- ---------------------------- ----------- ----------- ----------- ----------- -----------
Commercial letters of credit $ 1,007 $ 1,007 $ -- $ -- $ --
Stand-by letters of credit 6,361 6,361 -- -- --
Guarantees [a] 35,820 5,385 15,135 15,300 --
----------- ----------- ----------- ----------- -----------
Total Commercial Commitments $ 43,188 $ 12,753 $ 15,135 $ 15,300 $ --
=========== =========== =========== =========== ===========
(a) As discussed in the Off-Balance Sheet Arrangements section above, SESCO,
an indirect wholly-owned subsidiary of Katy, is party to a partnership
that operates a waste-to-energy facility, and has certain contractual
obligations, for which Katy provides certain guarantees. If the
partnership is not able to perform its obligations under the contracts,
under certain circumstances SESCO and Katy could be subject to damages
equal to the amount of Industrial Revenue Bonds outstanding (which
financed construction of the facility) less amounts held by the
partnership in debt service reserve funds. Katy and SESCO do not
anticipate non-performance by parties to the contracts. See the
Off-Balance Sheet Arrangements section above and Note 8 to Consolidated
Financial Statements.
(b) Amount owed to Montenay as a result of the SESCO partnership, discussed
above and in Note 8 to the Consolidated Financial Statements. $1.0 million
of this obligation is classified in the Consolidated Balance Sheets as an
Accrued Expense in Current Liabilities, while the remainder is included in
Other Liabilities, recorded on a discounted basis.
(c) These "Severance and restructuring" obligations represent liabilities
associated with restructuring activities, other than liabilities for
non-cancelable lease rentals. Future non-cancelable lease rentals are
included in the line entitled "Operating leases." Our balance sheet at
December 31, 2002, includes $10.9 million in discounted liabilities
associated with non-cancelable operating lease rentals, net of estimated
sub-lease revenues, related to facilities that have been abandoned as a
result of restructuring and consolidation activities.
25
(d) As discussed in the Liquidity and Capital Resources section above, the
entire Deutsche Bank Revolving Credit Facility is classified as a current
liability on the Consolidated Statements of Financial Position as a result
of the combination in the Deutsche Bank Credit Agreement of 1) lockbox
agreements on Katy's depository bank accounts and 2) a subjective Material
Adverse Effect (MAE) clause. The Deutsche Bank Revolving Credit Facility
was paid off on February 3, 2003, with funds received under the Fleet
Credit Agreement. The Fleet Credit Agreement contains similar provisions,
and it is expected that borrowings under the Fleet revolving facility will
be classified as current as well.
(e) The preferred interest in subsidiary was redeemed early on February 3,
2003, coincident with the refinancing of Katy's debt obligations through
the Fleet Credit Agreement. The stated amount of $16.4 million was
redeemed at a 40% discount for $9.8 million. The resulting $6.6 million
(pre-tax) gain on the redemption will be recognized as an increase to
Paid-in Capital on the Consolidated Balance Sheets for period ended March
31, 2003.
OTHER ITEMS
Effect of Transactions with Related and Certain Other Parties
In connection with the Contico acquisition on January 8, 1999, we entered
into building lease agreements with Newcastle Industries, Inc. (Newcastle).
Newcastle was the holder of the $16.4 million preferred interest in Contico (see
Note 13 to the Consolidated Financial Statements in Part II, Item 8). Lester
Miller, the former owner of Contico, and a Katy director from 1999 to 2000, is
the majority owner of Newcastle. Also, several additional properties utilized by
Contico are leased directly from Lester Miller. Rental expense for these
properties approximates historical market rates. Related party rental expense
for the years ended December 31, 2002, 2001 and 2000 was approximately $0.8
million, $1.5 million and $1.5 million, respectively.
We paid Newcastle $1.3 million of preferred distributions for the year
ended December 31, 2002, compared to $2.0 and $2.6 million for each of the years
ended December 31, 2001 and 2000 respectively. The decreases in distributions
were due to the early redemption (at a discount) of half of the preferred
interest at the time of the recapitalization in June 2001. On February 3, 2003,
the remainder of the preferred interest was redeemed at a 40% discount. As a
result, we do not owe any further distributions.
Kohlberg & Co., L.L.C., an affiliate of Kohlberg Investors IV, L.P., whose
affiliate holds all 805,000 shares of our Convertible Preferred Stock, provides
ongoing management oversight and advisory services to Katy. We paid $500,000 for
such services in 2002, and expect to pay $500,000 annually in future years.
RESTRUCTURING EFFORTS AND SEVERANCE CHARGES
During the fourth quarter of 2002, we recorded $2.4 million of severance
and other exit costs associated with the shut down of the Woods manufacturing
facilities in Indiana. Manufacturing operations were ceased in order to
implement a more cost-effective procurement of finished goods inventory through
sourcing with third party suppliers. 361 operational employees were terminated
as a result of this shut down. Woods incurred $1.5 million in severance,
pension, and other employee-related costs associated with the employee
terminations. Woods also incurred a charge for the creation of a liability for
non-cancelable lease costs at abandoned production facilities of $0.8 million.
An additional $0.1 million of other exit costs were incurred related to facility
repairs and other minor costs. Woods also incurred $0.9 million of inventory
write-offs related to raw and packaging materials that will not be utilized
efficiently with the change-over to a fully sourced inventory strategy. Contico
incurred restructuring costs of $0.6 million associated with costs of revaluing
their non-cancelable lease liability at the Warson Road and Earth City
facilities, and $0.3 million of costs in moving inventory and equipment from the
Warson facility to the Bridgeton facility.
During the third quarter of 2002, we recorded $9.5 million of severance,
restructuring and other charges. During the third quarter, we committed to a
plan to abandon Contico's Earth City, Missouri distribution facility, and to
consolidate its operations into the Bridgeton, Missouri facility (both
facilities are in the St. Louis, Missouri area). As a result, a $7.1 million
charge was recorded to accrue a liability for non-cancelable lease payments
associated with the Earth City facility. Also during the third quarter, the
Contico business recorded a $1.4 million charge related to rent and other
facility costs associated with its Warson Road facility (also in the St. Louis,
Missouri area), whose operations are also being consolidated into Bridgeton,
Missouri. A charge of $1.8 million was recorded in the second quarter of 2002
for the Warson Road facility, and the additional amount of $1.4 million was
recorded after consideration of the market for sub-leasing and to accrue costs
to refurbish the facility. The Contico business recorded related charges of $0.2
million incurred in moving inventory and equipment from the Warson Road facility
to Bridgeton, Missouri, and $0.2 million in severance costs. The Corporate group
recorded a $0.1 million charge for non-cancelable lease payments related to the
former corporate headquarters. Also in the third quarter of 2002, a
26
charge of $0.5 million was recorded for payments to consultants working with us
on sourcing and other manufacturing and production efficiency initiatives.
Certain assumptions have been made regarding potential future sub-lease
revenue at rented facilities that have been, or will be, abandoned as a result
of restructuring and consolidation activities. If we are unable to achieve our
estimated sub-lease revenue estimates, charges could be recognized in future
periods to update the estimated liability and cost to Katy for these facilities.
During the second quarter of 2002, we recorded $3.8 million of severance,
restructuring, and other charges. Approximately $1.6 million of the charges
related to accruals for payments to consultants working with us on sourcing and
other manufacturing and production efficiency initiatives. Additionally, net
non-cancelable rental payments of $1.8 million associated with the shut down of
Contico's Warson Road facility in St. Louis, Missouri were accrued at June 30,
2002, as well as involuntary termination benefits of $0.1 million. The Warson
Road facility shutdown involves a reduction in workforce of nineteen employees.
The remaining $0.3 million was for involuntary termination benefits related to
SESCO and for various integration costs in the consolidation of administrative
functions into St. Louis, Missouri, from various operating divisions in the
Maintenance Products group.
During the first quarter of 2002, we recorded $2.3 million of severance,
restructuring and other charges. Approximately $1.9 million of the charges
related to accruals for payments to consultants working with us on sourcing and
other manufacturing and production efficiency initiatives. Approximately $0.3
million related to involuntary termination benefits for two management employees
whose positions were eliminated, and $0.1 million were costs associated with the
consolidation of administrative and operational functions.
During the fourth quarter of 2001, we recorded $3.2 million of severance
and restructuring charges. Approximately $1.0 million was related to severance
payments. These payments related to the closing of the former corporate
headquarters in Englewood, Colorado and an adjunct corporate office in Chicago,
Illinois and the related terminations of employees, as well as severance paid to
employees at operating divisions in headcount reduction efforts. Approximately
$1.4 million of the charges related to a consultant working with us on sourcing
and other manufacturing and production efficiency initiatives. Approximately
$0.2 million of the charges related to transition activities within the Company.
Other costs related to manufacturing restructuring initiatives at Contico.
During the third quarter of 2001, we recorded $6.5 million of severance
and restructuring charges, of which $5.1 million related to the payment or
accrual of severance and other expenses associated with the management
transition as a result of the recapitalization. Additionally, $1.0 million of
costs were incurred related primarily to outside consultants working with us on
strategic operational and financial strategies. Included in this amount is a
charge of $0.5 million for the fair value of stock options awarded to this
non-employee firm.
During the second quarter of 2001, Contico undertook restructuring efforts
that resulted in severance payments to various individuals. Forty-three
employees, including two members of Contico and Katy executive management,
received severance benefits. Total involuntary termination benefits were $1.6
million.
During the first quarter of 2001, Woods undertook a restructuring effort
that involved reductions in senior management headcount as well as facility
closings. We closed facilities in Loogootee and Bloomington, Indiana, as well as
the Hong Kong office of Katy International, a subsidiary which coordinates
sourcing of products from Asia. Sixteen management and administrative employees
received severance packages. Total involuntary severance benefits were $0.5
million and other exit costs were $0.3 million.
During the third and fourth quarters 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 group.
The workforce reduction included severance and related costs for certain
employees. Total severance and related costs was $2.4 million.
The table below details activity in restructuring reserves since December
31, 2000.
27
Restructuring liabilities at December 31, 2000 $ 1,121
Additions to restructuring liabilities 13,380
Payments on restructuring liabilities (11,488)
--------
Restructuring liabilities at December 31, 2001 3,013
Additions to restructuring liabilities 19,155
Payments on restructuring liabilities (7,669)
--------
Restructuring liabilities at December 31, 2002 $ 14,499
========
The table below summarizes the future obligations for severance and
restructuring charges detailed above:
2003 $ 7,459
2004 1,592
2005 1,601
2006 1,368
2007 1,300
Thereafter 1,179
----------
Total Payments $ 14,499
==========
OUTLOOK FOR 2003
We anticipate a continuation of the difficult economic conditions and
business environment in 2003, which will present challenges in maintaining net
sales. In particular, we expect to see softness continue in the restaurant,
travel and hotel markets to which we sell cleaning products. However, we began
to see some improvement in this channel as 2002 progressed. We have also seen
strong sales performance from the Woods and Woods Canada retail electrical
corded products business, but we do not expect to see the same level of top line
growth from those businesses in 2003. We have a significant concentration of
customers in the mass-market retail, discount and do-it-yourself market
channels. Our ability to maintain and increase our sales levels depends in part
on our ability to retain and improve relationships with these customers. We face
the continuing challenge of recovering or offsetting cost increases for raw
materials.
Gross margins are expected to improve during 2003 as we realize the
benefits of various profit-enhancing strategies begun in 2001 and 2002. These
strategies include sourcing previously manufactured products, as well as
locating new sources for products already sourced outside the Company. We have
significantly reduced headcount, and continue to examine issues related to
excess facilities. Cost of goods sold is subject to variability in the prices
for certain raw materials, most significantly thermoplastic resins used by
Contico in the manufacture of plastic products. Prices of plastic resins, such
as polyethylene and polypropylene, have increased during the early months of
2003. Management has observed that the prices of plastic resins are driven to an
extent by prices for crude oil and natural gas, in addition to other factors
specific to the supply and demand of the resins themselves. We cannot predict
the longevity of the current price increase, or if resin prices may increase
further or be reduced through the rest of 2003. We are also exposed to price
changes for copper (a primary material in many of the products sold by Woods and
Woods Canada), corrugated packaging material and other raw materials. Copper
prices have also increased in recent months. We have not employed an active
hedging program related to our commodity price risk, but are employing other
strategies for managing this risk. In a climate of rising raw material costs, we
experience difficulty in raising prices to shift these higher costs to our
customers.
Depreciation expense is expected to be higher during 2003 as a result of
the reduction in depreciable lives for certain assets used in Contico's
manufacturing process. However, many of these assets will become fully
depreciated during 2003 since the Contico acquisition occurred in early 1999.
Therefore, depreciation expense is expected to reduce again in 2004 and
subsequent years.
Selling, general and administrative expenses are expected to remain stable
as a percentage of sales from 2002 levels. Cost reduction efforts are ongoing
throughout the Company. Our corporate office has relocated, and we expect to
maintain modest headcount and rental costs for that office. We have completed
the process of transferring most back-office functions of our Wilen subsidiary
from Atlanta, Georgia to St. Louis, Missouri, the headquarters of Contico. We
are nearly complete with the process of transferring most back office functions
of the Glit/Microtron subsidiary in Wrens, Georgia to St. Louis, Missouri. We
will evaluate the possibility of further consolidation of administrative
processes at our subsidiaries.
28
We have announced or committed to several restructuring plans involving
our operations. During the second and third quarters of 2002, respectively, we
announced plans to consolidate the Warson and Earth City facilities of Contico
into the Bridgeton facility. All of these facilities are located in the St.
Louis, Missouri area. The move from our Warson Road facility is complete. The
move from our Earth City facility will require approximately $1.9 million of
incremental cash, $1.6 million in the form of capital expenditures, mainly for
material handling equipment, and $0.3 million to move inventory and equipment.
This cash will be spent in 2003. The large expense charges recorded during the
second and third quarters of 2002 related to these facilities were mainly to
accrue non-cancelable lease payments for these facilities (i.e., non-incremental
cash). We expect the Contico business unit to benefit from significantly lower
overhead costs in 2003 and beyond as a result of these consolidations. Further
facility consolidations with respect to the Contico operations are under review.
During October 2002, we also announced the planned closure of four Woods
manufacturing facilities in Indiana, necessitated by our decision to fully
outsource our supply of electrical consumer corded products to lower cost
sources. Prior to the plant closures, Woods already sourced approximately half
of its finished goods from vendors. The plant closures took place in December
2002. While outsourcing of the Woods' products is a cost-saving measure, Woods
expects to maintain higher inventory levels, especially during mid-2003, as a
result of this move.
We have committed to other restructuring alternatives as well, most of
which center around consolidation of operations into fewer facilities. Certain
of these projects under consideration could require more significant levels of
incremental cash for both capital expenditures and moving and relocation costs.
Expected capital needs for these projects may reach $6.0 million, which would be
spent mainly in early- to mid-2003.
We continue to pursue a strategy of developing the Katy Maintenance Group
(KMG). By the latter portion of 2003, we expect to have operational centralized
customer service functions for Continental, Glit, Wilen and Disco, allowing
customers to order products from any division on one purchase order. We believe
that operating these businesses as a cohesive unit will improve customer service
in that our customers' purchasing processes will be simplified, as will follow
up on order status, billing, collection and other related functions. We hope
that these steps will increase customer loyalty and help in attracting new
customers and increasing top line sales in future years.
Interest expense in 2003 is expected to be stable to lower than the amount
reported in 2002, due primarily to similar or lower expected debt balances. We
cannot predict the future levels of interest rates.
Regarding income tax expense, we did not record the net benefit of any
deferred tax benefits as of December 31, 2002. Given our history of operating
losses, along with guidance provided by the accounting literature covering
accounting for income taxes, we were unable to conclude it is more likely than
not that we will be able to generate future taxable income sufficient to realize
the benefits of deferred tax assets carried on our books. Therefore, a full
valuation allowance on the net deferred tax asset position was recorded at
December 31, 2002. Therefore, we do not expect to record the benefit of any
losses or deferred tax assets that may be generated in 2003.
We are continually evaluating alternatives relating to divestitures of
certain of our businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
On March 6, 2003, we announced that we are exploring the sale of the Woods and
Woods Canada businesses. However, there can be no assurance that a sale of the
Woods and Woods Canada business will be completed. On April 2, 2003, we
announced the sale of GC/Waldom with gross proceeds of $8.3 million. Katy does
not expect to record a significant gain or loss during 2003 as a result of this
transaction.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
This report and the information incorporated by reference in this report
contain various "forward-looking statements" as defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, as amended.
The forward-looking statements are based on the beliefs of our management, as
well as assumptions made by, and information currently available to, our
management. We have based these forward-looking statements on current
expectations and projections about future events and trends affecting the
financial condition of our business. These forward-looking statements are
subject to risks and uncertainties that may lead to results that differ
materially from those expressed in any forward-looking statement made by us or
on our behalf, including, among other things:
- Increases in the cost of, or in some cases continuation of the
current price levels of, plastic resins, copper, paper board
packaging, and other raw materials.
- Our inability to reduce product costs, including manufacturing,
sourcing, freight, and other product costs.
29
- The greater reliance on third parties for our finished goods as we
increase the portion of our manufacturing that is outsourced.
- Our inability to reduce administrative costs through consolidation
of functions and systems improvements.
- Our inability to successfully integrate our operations as a result
of the facility consolidations.
- Our inability to sub-lease rented facilities which have been
abandoned as a result of consolidation and restructuring
initiatives.
- Our inability 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 us and our existing channels.
- The potential impact of rising interest rates on our
Eurodollar-based Credit Agreement.
- Our inability to meet covenants associated with the Credit
Agreement.
- The potential impact of rising costs for insurance for properties
and various forms of liabilities.
- Labor issues, including union activities that require an increase in
production costs or lead to a strike, thus impairing production and
decreasing sales. We are also subject to labor relations issues at
entities involved in our supply chain, including both suppliers and
those involved in transportation and shipping.
- Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
- Our inability to sell certain assets to raise cash and de-leverage
its financial condition.
Words and phrases such as "expects," "estimates," "will," "intends,"
"plans," "believes," "anticipates" and the like are intended to identify
forward-looking statements. The results referred to in forward-looking
statements may differ materially from actual results because they involve
estimates, assumptions and uncertainties. Forward-looking statements
included herein are as of the date hereof and we undertake no obligation
to revise or update such statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated
events. All forward looking statements should be viewed with caution.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 2 to
the Consolidated Financial Statements of Katy included in Part II, Item 8.
Certain of our accounting policies as discussed below require the application of
significant judgment by management in selecting the appropriate assumptions for
calculating amounts to record in our financial statements. By their nature,
these judgments are subject to an inherent degree of uncertainty.
Accounts Receivable - We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customer's
current credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payment from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provision established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past. Since our accounts
receivable are concentrated in a relatively few number of large sized customers,
especially our consumer/retail customers, a significant change in the liquidity
or financial position of any one of these customers could have a material
adverse impact on the collectibility of our accounts receivable and our future
operating results.
30
Inventories - We value our inventory at the lower of the actual cost to
purchase and/or manufacture the inventory or the current estimated market value
of the inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements for the next twelve
months. Our accounting policies state that operating divisions are to identify,
at a minimum, those inventory items that are in excess of either one year's
historical or one year's forecasted usage, and to use business judgment in
determining which is the more appropriate metric. Those inventory items must
then be evaluated on a lower of cost or market basis for realizability. A
significant increase in the demand for our products could result in a short-term
increase in the cost of inventory purchases while a significant decrease in
demand could result in an increase in the amount of excess inventory quantities
on hand. Additionally, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision
required for excess and obsolete inventory. In the future, if our inventory is
determined to be overvalued, we would be required to recognize such costs in our
cost of goods sold at the time of such determination. Likewise, if our inventory
is determined to be undervalued, we may have over-reported our costs of goods
sold in previous periods and would be required to recognize such additional
operating income at the time of sale. Therefore, although we make every effort
to ensure the accuracy of our forecasts of future product demand, any
significant unanticipated changes in demand or product developments could have a
significant impact on the value of our inventory and our reported operating
results. Our reserves for excess and obsolete inventory were $5.8 million and
$5.9 million, respectively, as of December 31, 2002 and December 31, 2001.
Impairments of Long-Lived Assets - We regularly review our long-lived
assets for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. For assets that are to be held and
used, this is done by comparing undiscounted future cash flows associated with
the asset (or asset group) and determining if the carrying value of the asset
(asset group) will be recovered by those cash flows over the remaining useful
life of the asset (or of the primary asset of an asset group). If the future
undiscounted cash flows indicate that the carrying value of the asset (asset
group) will not be recovered, then the asset is marked to fair value. We monitor
our operations to look for triggering events that may cause us to perform an
impairment analysis. These events include, among others, loss of product lines,
poor operating performance and abandonment of facilities. We determine the
lowest level at which cash flows are separately identifiable to perform the
future cash flows tests, and apply the results to the assets related to those
separately identifiable cash flows. In some cases, this may be at the individual
asset level, but in other cases, it is more appropriate to perform this testing
at a business unit level (especially when poor operating performance was the
triggering event). For assets that are to disposed of by sale or by a means
other than by sale, the identified asset (or disposal group if a group of assets
or entire business unit) is marked to fair value less costs to sell. In the case
of the planned sale of a business unit, SFAS No. 144 indicates that disposal
groups should be reported as discontinued operations on the consolidated
financial statements if cash flows of the disposal group are separately
identifiable. SFAS No. 144 has had an impact on the application of accounting
for discontinued operations, making it in general much easier to classify a
business unit (disposal group) held for sale as a discontinued operation. The
rules covering discontinued operations prior to SFAS No. 144 generally required
that an entire segment of a business be planned for disposal in order to
classify it as a discontinued operation. We recorded significant impairments of
long-lived assets during 2002 in accordance with SFAS No. 144, which are
discussed in Note 5 to the Consolidated Financial Statements in Part II., Item
8. We also recorded amounts as discontinued operations in 2002 (and for all
periods presented), which are detailed further in Note 7 to the Consolidated
Financial Statements.
Deferred income taxes - We recognize deferred income tax assets and
liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. Deferred income tax assets
also include federal, state and foreign net operating loss carry forwards,
primarily due to the significant operating losses incurred during recent years,
as well as various tax credits. We regularly review our deferred income tax
assets for recoverability taking into consideration historical net income
(losses), projected future income (losses) and the expected timing of the
reversals of existing temporary differences. We establish a valuation allowance
when it is more likely than not that these assets will not be recovered. As of
December 31, 2002, we had a valuation allowance of $42.8 million. During the
year ended December 31, 2002, we increased the valuation allowance by $29
million primarily to provide a full reserve against our net deferred tax asset
position. Given the negative evidence provided by our history of operating
losses, and considering guidance provided by SFAS No. 109, Accounting for Income
Taxes, we were unable to conclude that our deferred tax assets would be
recoverable through the generation of future taxable income. We will continue to
evaluate our valuation allowance requirements based on future operating results
and business acquisitions and dispositions, and we may adjust our deferred tax
asset valuation allowance. Such changes in our deferred tax asset valuation
allowance will be reflected in current operations through our income tax
provision.
Workers' compensation and product liabilities - We make payments for
workers' compensation and product liability claims generally through the use of
a third party claims administrator. We have purchased insurance coverage for
large claims over our self-insured retention levels. Our workers' compensation
and health benefit liabilities are developed using actuarial methods based upon
historical data for payment patterns, cost trends, and other relevant factors.
In order to consider a range of possible outcomes, we have estimated our
liabilities in this area on several different sources of loss development
factors, including those from the insurance industry, the manufacturing
industry, and factors developed in-house. Our general approach
31
is to identify a reasonable, logical conclusion, typically in the middle range
of the possible outcomes. While we believe that our liabilities for workers'
compensation and product liability claims as of December 31, 2002, are adequate
and that the judgment applied is appropriate, such estimated liabilities could
differ materially from what will actually transpire in the future.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is
no longer amortized on a straight line basis over its estimated useful life, but
will be tested for impairment on an annual basis and whenever indicators of
impairment arise. The goodwill impairment test, which is based on fair value, is
to be performed on a reporting unit level. A reporting unit is defined as an
operating segment determined in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, or one level lower. Goodwill
will no longer be allocated to other long-lived assets for impairment testing
under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Additionally, goodwill on equity method
investments will no longer be amortized; however, it will continue to be tested
for impairment in accordance with Accounting Principles Board (APB) Opinion No.
18, The Equity Method of Accounting for Investments in Common Stock. Under SFAS
No. 142 intangible assets with indefinite lives will not be amortized. Instead
they will be carried at the lower of cost or fair value and tested for
impairment at least annually or when indications of impairment arise. All other
recognized intangible assets will continue to be amortized over their estimated
useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 although goodwill on business combinations consummated after July 1, 2001
will not be amortized. The Company has adopted the non-amortization provisions
of SFAS No. 142 with regards to goodwill that has been reported on the balance
sheets historically. The amount of goodwill amortization not recorded during the
twelve months ended December 31, 2002 as a result of the adoption of the
non-amortization provisions was $1.9 million, before tax. Negative goodwill,
which was created with the acquisition of Woods Industries in December 1996 and
was amortized over five years, was fully amortized by December 31, 2001;
therefore, the adoption of the non-amortization provisions of SFAS No. 142 had
no impact on negative goodwill.
See Note 4 to the Consolidated Financial Statements of Katy included in
Part II, Item 8. for further discussion of the final transition to SFAS No. 142.
In August 2001, the FASB released SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Previously, two accounting models
existed for long-lived assets to be disposed of, as SFAS No. 121 did not address
the accounting for a segment of a business accounted for as a discontinued
operation under APB Opinion 30, Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. This statement establishes a
single model based on the framework of SFAS No. 121. This statement also
broadens the presentation of discontinued operations to include more disposal
transactions. Katy anticipates that the implementation of SFAS No. 144 could
have a future impact on its financial reporting as 1) Katy is considering
divestitures of certain businesses and exiting certain facilities and
operational activities, 2) the statement broadens the presentation of
discontinued operations, and 3) the Company anticipates that impairments of
long-lived assets may be necessitated as a result of the above contemplated
actions. If certain divestitures occur, they may qualify as discontinued
operations under SFAS No. 144, whereas they would not have met the requirements
of discontinued operations treatment under APB Opinion 30. However, the Company
is not able to conclude that it is probable that these divestitures will occur
within one year, and recognizes that significant changes to plans or intentions
may occur. Therefore, these operations have not been classified as discontinued
operations. See Notes 5 and 7 to the Consolidated Financial Statements of Katy
included in Part II, Item 8. for further discussion of impairments and
discontinued operations.
In April 2002, the FASB released SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds and makes technical corrections regarding
various topics, including early extinguishments of debt and sale-leaseback
transactions. The statement is effective for fiscal years beginning after May
15, 2002. We intend to adopt SFAS No. 145 on January 1, 2003. SFAS No. 145 will
require that certain costs and losses associated with early extinguishments of
debt be reported as interest expense as a component of income from continuing
operations, whereas the prior accounting guidance provided for classification so
these costs and losses as extraordinary items, reported separate on a
tax-effected basis after income from continuing operations. The adoption of SFAS
No. 145 will require that we reclassify a $1.2 million after-tax ($1.8 million
pre-tax) write-off of previously capitalized debt costs that occurred during
2001 to interest expense in income from continuing operations during 2001, as
opposed to its previous classification as an extraordinary item. Future
write-offs of capitalized debt costs would be classified in interest expense in
a similar manner. We anticipate writing off approximately $1.2 million of debt
costs, pre-tax, during the first quarter of 2003, associated with the
refinancing of our debt obligations through the Fleet Credit Agreement. These
costs will be reported as interest expense as a component of income from
continuing operations.
32
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146
replaces EITF Issue No. 94-3. The new standard is effective for exit or
restructuring activities initiated after December 31, 2002. We are considering a
number of restructuring and exit activities at the current time, including plant
closings and consolidation of facilities. Since these activities will be
initiated after December 31, 2002, this statement could have a significant
impact on the timing of the recognition of these costs in our statements of
operations, tending to spread the costs out as opposed to recognition of a large
portion of the costs at the time we commit to and communicate such restructuring
and exit plans. Katy is required to adopt the provisions of SFAS No. 146 in
2003. Our operating plans call for additional restructuring and facility
consolidation activity during 2003 and 2004, concerned mainly with further
consolidation of St. Louis, Missouri plastics manufacturing facilities, and
restructuring and consolidation of certain abrasives manufacturing facilities.
Current estimates indicate $7.0 million to $7.5 million will be expensed in 2003
and 2004 associated with these activities. The largest share of these costs
would have been expensed as incurred under either the old or new rules, as they
pertain to moving of inventory and equipment, and cleaning and refurbishing
facilities. The new rules could potentially push the recognition of a portion of
the costs, related to an estimated $2.0 million non-cancelable lease liability,
from 2003 to 2004, since the facility would probably not be abandoned until
2004.
In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. We are currently evaluating the interpretation and determining the
impact that this interpretation could have on certain disclosures made regarding
Katy's guarantees, especially those involving SESCO.
In January 2003, the FASB released Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.
The Interpretation clarifies issues regarding the consolidation of entities
which may have features that make it unclear whether consolidation or equity
method accounting is appropriate. FIN 46 is generally effective in 2003. Katy is
evaluating FIN 46 to determine any potential impact on its financial reporting.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This standard provides alternative
methods of transition for a voluntary change to the fair value based methods of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, to require prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The new
standard is effective for fiscal years ending after December 15 2002. Katy will
continue to comply with the provisions under APB Opinion No. 25, Accounting for
Stock Issued to Employees, for accounting for stock-based employee compensation.
The disclosure provisions of SFAS No. 148 have been reflected in Note 2 to the
Consolidated Financial Statements in Part II, Item 8.
Environmental and Other Contingencies
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions are involved in remedial
activities at certain present and former locations and have been identified by
the EPA, 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 Act) 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 amounts that it deems reasonable and believes that any liability
with respect to these matters in excess of the accrual will not be material. The
ultimate costs 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.
The most significant environmental matter in which the Company is
currently involved relates to the W.J. Smith site. In 1993, the EPA initiated a
Unilateral Administrative Order Proceeding under Section 7003 of the RCRA
against W.J. Smith and Katy. The proceeding requires certain actions at the W.J.
Smith site and certain off-site areas, as well as development and
33
implementation of additional cleanup activities to mitigate off-site releases.
In December 1995, W.J. Smith, Katy and USEPA agreed to resolve the proceeding
through an Administrative Order on Consent under Section 7003 of RCRA. Pursuant
to the Order, W.J. Smith is currently implementing a cleanup to mitigate
off-site releases.
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of Katy, 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 (RICO) 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 Katy's purchase of Woods. The plaintiff also alleged that it
made loans to an entity controlled by certain past officers and directors of
Woods based upon fraudulent representations. The plaintiff seeks to hold Woods
liable for its alleged damages directly, and 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 RICO. Because certain
threshold procedural and jurisdictional issues have not yet been fully
adjudicated in this litigation, it is not possible at this time for the Company
to reasonably determine an outcome or accurately estimate the range of potential
exposure. Katy 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 Katy 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 or other issues relating to the litigation. The extent or limit of
any such adjustment cannot be predicted at this time. An adverse judgment in
this matter could have a material impact on Katy's liquidity and financial
position if the Company were not able to exercise recourse against the former
owner of Woods.
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. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final outcome on certain 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 to the Company or its insurance providers, 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.
Although we believe that these actions individually and in the aggregate
are not likely to have a material adverse effect on the Company, further costs
could be significant and will be recorded as a charge to operations when such
costs become probable and reasonably estimable.
34
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk associated with changes in interest rates
relates primarily to our debt obligations and a preferred interest in one of our
subsidiaries (which was redeemed as of February 3, 2003). We currently do not
use derivative financial instruments relating to this exposure. Our interest
obligations on outstanding debt at December 31, 2002, were indexed from
short-term Eurodollar rates.
The following table presents as of December 31, 2002, our financial
instruments, rates of interest and indications of fair value:
Expected Maturity Dates
(Thousands of Dollars)
ASSETS
- ------ 2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Temporary cash investments
Fixed rate $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Average interest rate -- -- -- -- -- -- -- --
INDEBTEDNESS
- ------------
Fixed rate debt $ 700 $ -- $ -- $ -- $ -- $ -- $ 700 $ 700
Average interest rate 7.14% -- -- -- -- -- 7.14% --
Variable interest rate $ -- $ -- $ -- $ 44,751 $ -- $ -- $ 44,751 $ 44,751
Average interest rate 3.86% 3.86% 3.86% 3.86% -- -- 3.86% --
PREFERRED INTEREST OF SUBSIDIARY
- --------------------------------
Fixed rate obligation $ -- $ -- $ -- $ 16,400 $ -- $ -- $ 16,400 $ 9,840
Average interest rate 8.00% 8.00% 8.00% 8.00% -- -- 8.00% --
On February 3, 2003, the Company refinanced its variable interest rate
indebtedness and entered into the Fleet Credit Agreement. The Fleet Credit
Agreement provides for a $20 million term loan, with 20 quarterly payments of
$0.7 million, and a $5.7 million final payment in 2008. The remainder of the
borrowings are covered under a revolving credit facility. Rates of interest are
variable and are based on short-term LIBOR rates. Therefore, we expect that the
fair value of this indebtedness in future periods will approximate its carrying
value. Coincident with this transaction, the Company redeemed early, at a 40%
discount, the remaining preferred interest in Contico, which, as disclosed
above, had a stated value of $16.4 million. Katy utilized approximately $9.8
million (plus $0.2 million for payment of accrued distributions) of the proceeds
from the Fleet Credit Agreement funding for this purpose. Therefore, it was
determined that the fair value of this instrument at December 31, 2002, was $9.8
million.
35
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILTY FOR FINANCIAL STATEMENTS
The management of Katy Industries, Inc. is responsible for the accuracy and
internal consistency of all information contained in this annual report,
including the Consolidated Financial Statements. Management has followed those
generally accepted accounting principles that it believes to be most appropriate
to the circumstances of the Company, and has made what it believes to be
reasonable and prudent judgments and estimates where necessary.
Katy Industries, Inc. operates under a system of internal accounting controls
designed to provide reasonable assurance that its financial records are
accurate, that the assets of the Company are protected and that the financial
statements fairly present the financial position and results of operations of
the Company. The internal accounting controls system is tested, monitored and
revised as necessary.
Three directors of the Company, not members of management, serve as the Audit
Committee of the Board of Directors and are the principal means through which
the Board oversees performance of the financial reporting duties of management.
The Audit Committee meets with management and the Company's independent auditors
several times a year to review the results of the external audit of the Company
and to discuss plans for future audits. At these meetings, the Audit Committee
also meets privately with the independent auditors to assure its unrestricted
access to them.
The Company's independent auditors, PricewaterhouseCoopers LLP, audited the
financial statements prepared by the management of Katy Industries, Inc. Their
opinion on these financial statements is presented below.
/S/ C. Michael Jacobi /S/ Amir Rosenthal
- --------------------- ------------------
C. Michael Jacobi Amir Rosenthal
President and Chief Executive Officer Vice President, Chief Financial Officer,
General Counsel and Secretary
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Katy Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows,
present fairly, in all material respects, the financial position of Katy
Industries, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill to conform to Statement of
Financial Accounting Standards No. 142. Also as discussed in Note 2 to the
consolidated financial statements, in 2002 the Company changed its method of
accounting for discontinued operations to conform to Statement of Financial
Accounting Standards No. 144.
/S/PricewaterhouseCoopers LLP
St. Louis, Missouri
April 11, 2003
36
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 and 2001
(Thousands of Dollars)
ASSETS
2002 2001
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 4,842 $ 7,836
Trade accounts receivable, net of allowances of $2,806 and $2,762 58,913 67,602
Inventories 57,967 53,330
Deferred income taxes -- 8,243
Other current assets 1,942 2,619
Current assets of discontinued operations 5,970 18,306
--------- ---------
Total current assets 129,634 157,936
--------- ---------
OTHER ASSETS:
Goodwill 11,211 13,571
Intangibles 25,491 32,630
Deferred income taxes -- 2,278
Equity method investment in unconsolidated affiliate 7,306 7,011
Other 12,342 12,825
Non-current assets of discontinued operations 3,100 11,942
--------- ---------
Total other assets 59,450 80,257
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 3,180 3,053
Buildings and improvements 14,707 16,206
Machinery and equipment 143,089 152,150
--------- ---------
160,976 171,409
Less - Accumulated depreciation (74,083) (61,647)
--------- ---------
Net property and equipment 86,893 109,762
--------- ---------
Total assets $ 275,977 $ 347,955
========= =========
See Notes to Consolidated Financial Statements
37
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 and 2001
(Thousands of Dollars, except Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
---- ----
CURRENT LIABILITIES:
Accounts payable $ 37,058 $ 32,923
Accrued compensation 7,214 6,442
Accrued expenses 47,712 41,440
Current maturities, long-term debt 700 14,619
Revolving credit agreement 44,751 57,000
Current liabilities of discontinued operations 2,444 3,155
--------- ---------
Total current liabilities 139,879 155,579
LONG-TERM DEBT, less current maturities -- 12,474
OTHER LIABILITIES 17,526 4,933
--------- ---------
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS -- 705
Total liabilities 157,405 173,691
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 19 and 22)
PREFERRED INTEREST OF SUBSIDIARY 16,400 16,400
STOCKHOLDERS' EQUITY
15% Convertible Preferred Stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 805,000 shares, liquidation
value $70,000 80,696 69,560
Common stock, $1 par values; authorized 35,000,000;
issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 46,701 58,314
Accumulated other comprehensive loss (3,046) (4,625)
Unearned compensation -- (106)
(Accumulated deficit) retained earnings (11,773) 44,976
Treasury stock, at cost, 1,460,027
and 1,430,621 shares, respectively (20,228) (20,077)
--------- ---------
Total stockholders' equity 102,172 157,864
--------- ---------
Total liabilities and stockholders equity $ 275,977 $ 347,955
========= =========
See Notes to Consolidated Financial Statements.
38
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
(Thousands of Dollars, Except Per Share Amounts)
2002 2001 2000
---- ---- ----
Net sales $ 459,990 $ 460,176 $ 523,639
Cost of goods sold 381,846 395,789 433,541
--------- --------- ---------
Gross profit 78,144 64,387 90,098
Selling, general and administrative expenses (66,803) (74,424) (82,785)
Impairments of long-lived assets (21,204) (47,469) --
Severance, restructuring and related charges (19,155) (13,380) (2,651)
Loss on SESCO joint venture transaction (6,010) -- --
--------- --------- ---------
Operating (loss) income (35,028) (70,886) 4,662
Equity in income (loss) of unconsolidated affiliate 295 72 (61)
Interest (6,046) (10,822) (14,399)
Other, net (407) (604) 453
--------- --------- ---------
Loss before income taxes (41,186) (82,240) (9,345)
(Provision) benefit for income taxes from continuing operations (8,612) 20,647 3,275
--------- --------- ---------
Loss from continuing operations before distributions on preferred (49,798) (61,593) (6,070)
interest of subsidiary
Distributions on preferred interest of subsidiary (net of tax) (1,593) (1,274) (1,711)
--------- --------- ---------
Loss from continuing operations (51,391) (62,867) (7,781)
(Loss) income from operations of discontinued businesses (net of tax) (6,150) 787 2,323
Gain on sale of discontinued businesses (net of tax) 3,306 -- --
--------- --------- ---------
Loss before extraordinary item and cumulative effect of
a change in accounting principle (54,235) (62,080) (5,458)
Extraordinary loss on early extinguishment of debt (net of tax) -- (1,182) --
Cumulative effect of a change in accounting principle (net of tax) (2,514) -- --
--------- --------- ---------
Net loss (56,749) (63,262) (5,458)
Gain on early redemption of preferred interest of subsidiary -- 6,600 --
Payment in kind of dividends on convertible preferred stock (11,136) (4,459) --
--------- --------- ---------
Net loss attributable to common stockholders $ (67,885) $ (61,121) (5,458)
========= ========= =========
Loss per share of common stock - Basic and diluted
Loss from continuing operations attributable to common stockholders $ (7.47) $ (7.23) $ (0.93)
Discontinued operations (0.34) 0.09 0.28
Extraordinary loss on early extinguishment of debt -- (0.14) --
Cumulative effect of a change in accounting principle (0.30) -- --
--------- --------- ---------
Net loss attributable to common stockholders $ (8.11) $ (7.28) $ (0.65)
========= ========= =========
See Notes to Consolidated Financial Statements
39
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
(Thousands of dollars)
Accumulated
Convertible Common Other
Preferred Stock Stock Additional Compre-
Number of Par Number of Par Paid in hensive
Shares Value Shares Value Capital Loss
---------------------------------------------------------------------------------
Balance, January 1, 2000 $ -- 9,822,204 $ 9,822 $ 51,127 ($434)
Net income -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- (2,323)
Comprehensive loss -- -- -- -- -- --
Common stock dividends -- -- -- -- -- --
Issuance of shares under Stock Plan -- -- -- -- -- --
Other issuance of shares -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- -- --
Other -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 9,822,204 9,822 51,127 (2,757)
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- (1,511)
Pension minimum liability adjustment -- -- -- -- -- (357)
Comprehensive loss -- -- -- -- -- --
Issuance of convertible preferred stock 700,000 70,000 -- -- -- --
Direct costs related to
issuance of convertible preferred stock -- (4,899) -- -- -- --
Redemption of preferred
interest in subsidiary, net of tax -- -- -- -- 6,710 --
Payment in kind dividends accrued -- 4,459 -- -- -- --
Stock option grant -- -- -- -- 477 --
Other -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, December 31, 2001 700,000 69,560 9,822,204 9,822 58,314 (4,625)
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- 1,913
Pension minimum liability adjustment -- -- -- -- -- (334)
Comprehensive loss -- -- -- -- -- --
Issuance of convertible preferred stock
related to PIK dividends accrued 105,000 -- -- -- -- --
Payment in kind dividends accrued -- 11,136 -- -- (11,136) --
Stock option grant -- -- -- -- (477) --
Other -- -- -- -- -- --
---------------------------------------------------------------------------------
Balance, December 31, 2002 805,000 $ 80,696 9,822,204 $ 9,822 $ 46,701 $ (3,046)
---------------------------------------------------------------------------------
Retained
Earnings Compre- Total
Unearned (Accumulated Treasury hensive Stockholders'
Compensation Deficit) Stock Loss Equity
--------------------------------------------------------------------------
Balance, January 1, 2000 ($1,010) $ 120,689 ($19,883) $ 160,311
Net income -- (5,458) -- $ (5,458) (5,458)
Foreign currency translation adjustment -- -- -- (2,323) (2,323)
-----------
Comprehensive loss -- -- -- $ (7,781) --
===========
Common stock dividends -- (2,520) -- (2,520)
Issuance of shares under Stock Plan -- -- 63 63
Other issuance of shares 0 (14) 44 30
Purchase of treasury shares -- -- (262) (262)
Other 492 -- -- 492
--------------------------------------------------------------------------
Balance, December 31, 2000 (518) 112,697 (20,038) 150,333
Net loss -- (63,262) -- $ (63,262) (63,262)
Foreign currency translation adjustment -- -- -- (1,511) (1,511)
Pension minimum liability adjustment -- -- -- (357) (357)
-----------
Comprehensive loss -- -- -- $ (65,130) --
===========
Issuance of convertible preferred stock -- -- -- 70,000
Direct costs related to
issuance of convertible preferred stock -- -- -- (4,899)
Redemption of preferred
interest in subsidiary, net of tax -- -- -- 6,710
Payment in kind dividends accrued -- (4,459) -- --
Stock option grant -- -- -- 477
Other 412 -- (39) 373
--------------------------------------------------------------------------
Balance, December 31, 2001 (106) 44,976 (20,077) 157,864
Net loss -- (56,749) -- $ (56,749) (56,749)
Foreign currency translation adjustment -- -- -- 1,913 1,913
Pension minimum liability adjustment -- -- -- (334) (334)
-----------
Comprehensive loss -- -- -- $ (55,170) --
===========
Issuance of convertible preferred stock
related to PIK dividends accrued -- -- -- --
Payment in kind dividends accrued -- -- -- --
Stock option grant -- -- -- (477)
Other 106 -- (151) (45)
--------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ (11,773) $ (20,228) $ 102,172
--------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
40
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
(Thousands of Dollars)
2002 2001 2000
---------------------------------
Cash flows from operating activities:
Net loss $(56,749) $ (63,262) $ (5,458)
Cumulative effect of a change in accounting principle 2,514 -- --
Extraordinary loss on early extinguishment of debt -- 1,182 --
Loss (income) from operations of discontinued businesses 6,150 (787) (2,323)
Gain on sale of discontinued businesses (3,306) -- --
-------- --------- --------
Loss from continuing operations (51,391) (62,867) (7,781)
Adjustments to reconcile loss from continuing operations
to net cash provided by continuing operations:
Depreciation and amortization 19,403 20,728 21,608
Amortization of debt issue costs 1,605 728 764
Impairment of long-lived assets 21,204 47,469 --
Loss on SESCO transaction 6,010 -- --
Equity in (income) loss of unconsolidated affiliates (295) (72) 61
Deferred income taxes 10,521 (22,836) 885
Other 290 670 (1,192)
Changes in operating assets and liabilities, net of acquisition/disposition
of subsidiaries:
Accounts receivable 8,689 10,753 3,833
Inventories (4,637) 30,757 10,203
Other assets, including current (976) 287 (3,311)
Accounts payable 4,135 (13,959) (2,241)
Accrued expenses and other liabilities 13,752 (603) (10,149)
-------- --------- --------
Net cash provided by continuing operations 28,310 11,055 12,680
Net cash provided by discontinued operations 3,178 7,226 11,521
-------- --------- --------
Net cash provided by operating activities 31,488 18,281 24,201
-------- --------- --------
Cash flows from investing activities:
Capital expenditures of continuing operations (10,065) (11,064) (13,215)
Capital expenditures of discontinued operations (53) (1,502) (981)
Proceeds from sale of subsidiaries 13,947 1,576 --
Collections of notes receivable from sales of subsidiaries 820 137 581
Proceeds from sale of assets 249 691 904
-------- --------- --------
Net cash provided by (used in) investing activities 4,898 (10,162) (12,711)
-------- --------- --------
Cash flows from financing activities:
Net borrowings (repayments) on revolving loans, prior to Recapitalization -- 11,300 (17,064)
Repayment of borrowings under revolving loans at Recapitalization -- (144,300) --
Proceeds on initial borrowings at Recapitalization -- term loans -- 30,000 --
Proceeds on initial borrowings at Recapitalization -- revolving loans -- 63,211 --
Net repayments of revovling loans following Recapitalization (12,249) (3,675) --
Repayments of term loans following Recapitalization (26,393) (6,282) --
Direct costs associated with debt facilities (720) (7,471) --
Proceeds from issuance of Convertible Preferred Stock -- 70,000 --
Direct costs related to issuance of Convertible Preferred Stock -- (4,899) --
Redemption of preferred interest of subsidiary -- (9,900) --
Payment of dividends -- (629) (2,520)
Purchase of treasury shares -- -- (262)
Other 42 122 75
-------- --------- --------
Net cash used in financing activities (39,320) (2,523) (19,771)
-------- --------- --------
Effect of exchange rate changes on cash and cash equivalents (60) 9 54
-------- --------- --------
Net (decrease) increase in cash and cash equivalents (2,994) 5,605 (8,227)
Cash and cash equivalents, beginning of period 7,836 2,231 10,458
-------- --------- --------
Cash and cash equivalents, end of period $ 4,842 $ 7,836 $ 2,231
======== ========= ========
See Notes to Consolidated Financial Statements
41
KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002 and 2001
(Thousands of dollars, except per share data)
Note 1. ORGANIZATION OF THE BUSINESS
The Company is a manufacturer and distributor of a variety of
commercial and consumer products, including sanitary maintenance supplies,
coated abrasives, stains and electrical and electronic components. Principal
markets are in the United States, Canada, and Europe and include the sanitary
maintenance, restaurant supply, retail, electronics, automotive, and computer
markets. These activities are grouped into two primary reportable segments:
Electrical/Electronics and Maintenance Products.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include
the accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% voting 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 exercises significant influence are reported using the equity
method.
As part of the continuous evaluation of its operations, Katy has
acquired and disposed of certain of its operating units in recent years. Those
which affected the Consolidated Financial Statements for the years ended
December 31, 2002, 2001, and 2000 are discussed in Notes 6 and 7.
At December 31, 2002, the Company owns 30,000 shares of common
stock, a 43% interest, in Sahlman Holding Company, Inc., (Sahlman) that is
accounted for under the equity method. Sahlman is engaged in the business of
harvesting shrimp off the coast of South and Central America and shrimp farming
in Nicaragua. As of December 31, 2002 and 2001 the investment balances were
$7,306 and $7,011, respectively.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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.
Revenue Recognition - Revenue is recognized for all sales, including
sales to agents and distributors, at the time the products are shipped and title
has transferred to the customer, provided that a purchase order has been
received or a contract has been executed, there are no uncertainties regarding
customer acceptances, the sales price is fixed and determinable and
collectibility is deemed probable. The Company's standard shipping terms are FOB
shipping point. Sales discounts, returns and allowances, and cooperative
advertising are included in net sales, and the provision for doubtful accounts
is included in selling, general and administrative expenses. Additionally, it is
the Company's practice to include revenues generated from freight billed to
customers in net sales with corresponding freight expense included in cost of
sales in the consolidated statement of operations.
Cash and Cash Equivalents - Cash equivalents consist of highly
liquid investments with original maturities of three months or less.
Advertising Costs - Advertising costs are expensed as incurred.
Advertising costs expensed in 2002, 2001 and 2000 were $4.0 million, $8.5
million and $9.7 million, respectively.
Accounts Receivable - Accounts receivable are stated at net
realizable value. Customer collections, receivables aging, and information on
customer creditworthiness are continuously monitored, and provisions are
42
maintained for estimated credit losses based upon historical experience and
specific customer collection issues that are identified.
Inventories - Inventories are stated at the lower of cost or market
value, and reserves are established for excess and obsolete inventory (shown
below in the table as "Inventory Reserves") in order to ensure proper valuation
of inventories. Cost includes materials, labor and overhead costs. At December
31, 2002 and 2001, approximately 35% and 49%, respectively, of Katy's
inventories (excluding discontinued operations) were accounted for using the
last-in, first-out (LIFO) method, 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 $1.3 million and $1.5 million at
December 31, 2002 and 2001, respectively. The components of inventories are:
December 31,
------------------------
2002 2001
---- ----
(Thousands of dollars)
Raw materials $ 19,472 $ 22,081
Work in process 1,539 2,016
Finished goods 42,736 35,097
Inventory reserves (5,780) (5,864)
-------- --------
$ 57,967 $ 53,330
======== ========
Goodwill - In connection with certain acquisitions, the Company
recorded goodwill representing the cost of the acquisition in excess of the fair
value of the net assets acquired. Beginning in 2002, goodwill is not amortized
in accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Intangible Assets. The carrying value of goodwill is reviewed
annually in accordance with SFAS No. 142. The fair value of each reporting which
carries goodwill is determined annually, and the fair value is compared to the
carrying value of the reporting unit. If the fair value exceeds the carrying
value, then no adjustment is necessary. If the carrying value of the reporting
unit exceeds the fair value, appraisals are performed of long-lived assets and
other adjustments are made to arrive at a revised fair value balance sheet. This
revised fair value balance sheet (without goodwill) is compared to the fair
value of the business previously determined, and a revised goodwill amount is
reached. If the indicated goodwill amount meets or exceeds the current carrying
value of goodwill, then no adjustment is required. However, if the result
indicates a reduced level of goodwill, an impairment is recorded to state the
goodwill at the revised level. See Note 4 for a discussion of goodwill
impairments recognized with the adoption of SFAS No. 142, which were recorded on
the Consolidated Statements of Operations as a cumulative effect of a change in
accounting principle. Any future impairments of goodwill determined in
accordance with SFAS No. 142 would be recorded as a component of operating
income.
Property and Equipment - Property and equipment are stated at cost
and depreciated over their estimated useful lives: buildings (10-40 years)
generally using the straight-line method; machinery and equipment (3-20 years)
using straight-line or composite methods; and leasehold improvements using the
straight-line method over the remaining lease period or useful life, if shorter.
Costs for repair and maintenance of machinery and equipment are expensed as
incurred, unless the result significantly increases the useful life or
functionality of the asset, in which case capitalization is considered.
Depreciation expense from continuing operations for 2002, 2001 and 2000 was
$19.4 million, $20.7 million, and $21.6 million, respectively.
Impairment of Assets - Long-lived assets are reviewed for impairment
if events or circumstances indicate the carrying amount of these assets may not
be recoverable through future undiscounted cash flows. If this review indicates
that the carrying value of these assets will not be recoverable, based on future
undiscounted net cash flows from the use or disposition of the asset, the
carrying value is reduced to fair value (see Note 5). Katy adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets on January 1,
2002.
Income Taxes - Income taxes are accounted for using a balance sheet
approach known as the liability method. The liability method accounts for
deferred income taxes by applying the statutory tax rates in effect at the date
of the balance sheet to the differences between the book basis and tax basis of
the assets and liabilities. The Company records a valuation allowance when it is
more likely than not that some portion or all of the deferred income tax asset
will not be realizable.
43
Foreign Currency Translation - The results of the Company's foreign
subsidiaries are translated to U.S. dollars using the current-rate method.
Assets and liabilities are translated at the year end spot exchange rate,
revenue and expenses at average exchange rates and equity transactions at
historical exchange rates. Exchange differences arising on translation are
recorded as a component of accumulated other comprehensive income (loss).
Fair Value of Financial Instruments - Where the fair values of
Katy's financial instrument assets and liabilities differ from their carrying
value or Katy is unable to establish the fair value without incurring excessive
costs, appropriate disclosures have been given in the Notes to the Consolidated
Financial Statements. All other financial instrument assets and liabilities not
specifically addressed are believed to be carried at their fair value in the
accompanying Consolidated Balance Sheets.
Stock Options and Other Stock Awards - The Company follows the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, regarding accounting for stock options and other
stock awards. APB Opinion No. 25 dictates a measurement date concept in the
determination of compensation expense related to stock awards including stock
options, restricted stock, and stock appreciation rights. Katy's outstanding
stock options all have established measurement dates and therefore, fixed plan
accounting is applied, generally resulting in no compensation expense for stock
option awards. However, the Company has issued stock appreciation rights and
restricted stock awards and compensation expense has been recorded for these
awards in accordance with relative accounting literature. Compensation expense
recorded in 2002, 2001, and 2000 related to stock awards was $0.1 million, $0.4
million and $0.5 million, respectively.
The Company applies APB Opinion No. 25 and related interpretations
in accounting for stock options. SFAS No. 123, "Accounting for Stock-Based
Compensation" was issued and, if fully adopted by the Company, would change the
method for recognition of expense related to option grants to employees. Under
SFAS No. 123, cost is based upon the fair value of each option at the date of
grant using an option-pricing model that takes into account as of the grant date
the exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the expected term of the option. Had
compensation cost been determined based on the fair value method of SFAS No.
123, the Company's net income (loss) and earnings (loss) per share would have
been reduced to the pro forma amounts indicated below. The weighted average fair
values of options granted in 2002, 2001 and 2000 were $1.89, $2.70 and $5.02
respectively.
The fair value of each option grant is estimated on the date of
grant using a Black-Scholes option-pricing model with the following assumptions:
dividend yield from 0% to 3.16%; expected volatility ranging from 37.7% to 53.6%
for all grants, risk-free interest rates ranging from 3.09% to 6.50% for all
grants; and expected lives of five to ten years for all grants.
For the years ended December 31,
2002 2001 2000
---- ---- ----
Net loss attributable to common stockholders, as reported $ (67,885) $ (61,121) $ (5,458)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 276 695 512
---------- ---------- ----------
Pro forma net loss $ (68,161) $ (61,816) $ (5,970)
========== ========== ==========
Earnings per share
Basic and diluted-as reported $ (8.11) $ (7.28) $ (0.65)
========== ========== ==========
Basic and diluted-pro forma $ (8.14) $ (7.37) $ (0.71)
========== ========== ==========
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
44
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No, 142, goodwill
is no longer amortized on a straight line basis over its estimated useful life,
but will be tested for impairment on an annual basis and whenever indicators of
impairment arise. The goodwill impairment test, which is based on fair value, is
to be performed on a reporting unit level. A reporting unit is defined as an
operating segment determined in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, or one level lower. Goodwill
will no longer be allocated to other long-lived assets for impairment testing
under SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Additionally, goodwill on equity method
investments will no longer be amortized; however, it will continue to be tested
for impairment in accordance with APB Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. Under SFAS No. 142 intangible assets
with indefinite lives will not be amortized. Instead they will be carried at the
lower of cost or fair value and tested for impairment at least annually or when
indications of impairment arise. All other recognized intangible assets will
continue to be amortized over their estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December
15, 2001 although goodwill on business combinations consummated after July 1,
2001 will not be amortized. The Company has adopted the non-amortization
provisions of SFAS No. 142 with regards to goodwill that has been reported on
the consolidated balance sheets historically. The amount of goodwill
amortization not recorded during the twelve months ended December 31, 2002 as a
result of the adoption of the non-amortization provisions was $1.9 million,
before tax. Negative goodwill, which was created with the acquisition of Woods
Industries in December 1996 and was amortized over five years, was fully
amortized by December 31, 2001; therefore, the adoption of the non-amortization
provisions of SFAS No. 142 had no impact on negative goodwill.
See Note 4 for further discussion of the final transition to SFAS
No. 142.
In August 2001, the FASB released SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Previously, two accounting models
existed for long-lived assets to be disposed of, as SFAS No. 121 did not address
the accounting for a segment of a business accounted for as a discontinued
operation under APB Opinion 30, Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. This statement establishes a
single model based on the framework of SFAS No. 121. This statement, which was
adopted by the Company on January 1, 2002, also broadens the presentation of
discontinued operations to include more disposal transactions. See Notes 5 and 7
for further discussion of impairments and discontinued operations.
In April 2002, the FASB released SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds and makes technical corrections regarding
various topics, including early extinguishments of debt and sale-leaseback
transactions. The statement is effective for fiscal years beginning after May
15, 2002. The Company intends to adopt SFAS No. 145 on January 1, 2003. SFAS No.
145 will require that certain costs and losses associated with early
extinguishments of debt be reported as interest expense as a component of income
from continuing operations, whereas the prior accounting guidance provided for
classification so these costs and losses as extraordinary items, reported
separate on a tax-effected basis after income from continuing operations. The
adoption of SFAS No. 145 will require that the Company reclassify a write-off of
previously capitalized debt costs that occurred during 2001 to interest expense
in income from continuing operations during 2001, as opposed to its previous
classification as an extraordinary item. Future write-offs of capitalized debt
costs would be classified in interest expense in a similar manner.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 replaces EITF Issue No. 94-3. The new standard is
effective for exit or restructuring activities
45
initiated after December 31, 2002. We are considering a number of restructuring
and exit activities at the current time, including plant closings and
consolidation of facilities. Since these activities will be initiated after
December 31, 2002, this statement could have a significant impact on the timing
of the recognition of these costs in our statements of operations by extending
the period over which these costs are recognized, as opposed to recognition of a
large portion of the costs at the time we commit to such restructuring and exit
plans. Katy is required to adopt the provisions of SFAS No. 146 in 2003. Katy's
operating plans call for additional restructuring and facility consolidation
activity during 2003 and 2004, concerned mainly with further consolidation of
St. Louis, Missouri plastics manufacturing facilities, and restructuring and
consolidation of certain abrasives manufacturing facilities. The largest share
of these costs would have been expensed as incurred under either the old or new
rules, as they pertain to moving of inventory and equipment, and cleaning and
refurbishing facilities. The new rules could potentially shift the recognition
of a non-cancelable lease liability from 2003 to 2004, since the facility will
probably not be abandoned until 2004.
In November 2002, the FASB issued Interpretation (FIN) No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on
the disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. Katy has determined that its disclosures in regards to guarantees are
in accordance with FIN No. 45.
In January 2003, the FASB released Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.
The Interpretation clarifies issues regarding the consolidation of entities
which may have features that make it unclear whether consolidation or equity
method accounting is appropriate. FIN 46 is generally effective in 2003. Katy is
evaluating FIN 46 to determine any potential impact on its financial reporting.
During December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
methods of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
new standard is effective for fiscal years ending after December 15, 2002. Katy
will continue to comply with the provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees, for accounting for stock-based employee
compensation. The disclosure provisions of SFAS No. 148 have been reflected in
this Note 2.
Reclassifications - Certain amounts from prior years have been
reclassified to conform to the 2002 financial statement presentation. See
unaudited Note 21 for a further discussion of these reclassifications.
46
Note 3. RECAPITALIZATION
On June 28, 2001, Katy announced that it completed a
recapitalization of the Company (the "Recapitalization"). Katy had reached a
definitive agreement on June 2, 2001 with KKTY Holding Company, LLC (KKTY), an
affiliate of Kohlberg Investors IV, L.P. (Kohlberg) regarding the
Recapitalization. On June 28, 2001, 1) Katy stockholders approved proposals to
effectuate the Recapitalization at their annual meeting, including
classification of the board of directors into two classes with staggered terms,
and 2) Katy, KKTY and a syndicate of banks agreed to a new credit facility
(Deutsche Bank Credit Agreement) to finance the future operations of Katy. Under
the terms of the Recapitalization, directors designated by KKTY represent a
majority of Katy's Board of Directors. Pursuant to the shareholder vote at the
annual meeting, four of the elected directors are considered Class I directors,
and were elected for one year terms. These directors include C. Michael Jacobi,
the President and CEO, and three directors who were not designated by KKTY. Five
of the elected directors are considered Class II directors, and will serve a two
year term. All of the Class II directors are designees of KKTY.
Under the terms of the Recapitalization, KKTY purchased 700,000 shares of
newly issued preferred stock, $100 par value per share (Convertible Preferred
Stock), which is convertible into 11,666,666 common shares, for an aggregate
purchase price of $70.0 million. See Note 10. The Recapitalization allowed Katy
to retire obligations it had under its former revolving credit agreement, which
was agented by Bank of America (Bank of America Credit Agreement). In connection
with the Recapitalization, Katy entered into the Deutsche Bank Credit Agreement,
agented by Bankers Trust Company, a subsidiary of Deutsche Bank. See Note 9.
Also in connection with the Recapitalization, the Company entered into an
agreement with the holder of the preferred interest in Contico International,
L.L.C. (Contico), a subsidiary of Katy, to redeem at a 40% discount
approximately half of such interest, plus $0.3 million of accrued distributions
thereon. The stated value prior to the recapitalization was $32.9 million. See
Note 13. Katy utilized approximately $10.2 million of the proceeds from the
issuance of the Convertible Preferred Stock for this purpose. The difference
between the amount paid on redemption and the stated value of preferred interest
redeemed ($6.7 million, net of tax) was recognized as an increase to Additional
Paid-in Capital on the Consolidated Statement of Stockholders' Equity. This gain
is also shown on the Consolidated Statements of Operations as an amount included
in net income attributable to common shareholders. The holder of the remaining
preferred interest retained approximately 50% of the original preferred
interest, or a stated value of $16.4 million. See Note 24. Following is a
summary of the sources and uses of funds from, and in connection with, the
Recapitalization:
(Thousands of Dollars)
Sources:
Sale of Convertible Preferred Stock $ 70,000
Borrowings under the Deutsche Bank Credit Agreement 93,211
--------
$163,211
========
Uses:
Paydown of principal obligations under the Bank of
America Credit Agreement $144,300
Payment of accrued interest under the Bank of America
Credit Agreement 624
Purchase of one-half of preferred interest of Contico
at a discount 9,900
Payment of accrued distributions on one-half of preferred
interest of Contico 322
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
47
Note 4. GOODWILL AND INTANGIBLE ASSETS
During 2002, Katy completed the transition to SFAS No. 142 with regard
to accounting and reporting of goodwill and other intangible assets.
The first phase in the determination of a potential transitional
goodwill impairment was completed in the second quarter of 2002. Valuations of
six Katy reporting units' carrying values were completed. Those reporting units
were Contico, Glit/Disco, Inc. (Disco), Duckback Products, Inc., Gemtex, Ltd,
Loren Products (Loren) and GC/Waldom Electronics, Inc. (GC/Waldom). The analyses
indicated that the fair values were less than the carrying values for three of
the six reporting units: Contico, Loren and GC/Waldom. The second phase in the
determination of the transitional goodwill impairment was completed by September
30, 2002. Independent appraisals were obtained on the relevant reporting units'
property, plant and equipment and intangible assets. The fair value balance
sheets as of December 31, 2001 which resulted from this work indicated that
transitional goodwill impairment charges of $4.2 million (pre-tax) were required
at the Loren and GC/Waldom reporting units. The goodwill of the Contico business
unit, which was also evaluated in the second phase of the project, was
determined to have a carrying value that was not in excess of fair value as of
December 31, 2001. The transitional goodwill impairment of $4.2 million
(pre-tax) is shown in the Consolidated Statements of Operations as a cumulative
effect of a change in accounting principle, in accordance with SFAS No. 142.
Loren Products is part of the Maintenance Products group and GC/Waldom is a
discontinued operation (formerly part of the Electrical/Electronics group). In
accordance with SFAS No. 142, Katy evaluated the carrying value of goodwill
balances at the reporting units as of December 31, 2002, and determined that no
further impairments were required.
As part of the project to implement SFAS No. 142, certain changes to
the carrying value of goodwill at the Loren Products and Disco reporting units
were made, relating to 1) reclassification of formerly recognized work force
intangibles to goodwill, and 2) reclassification of formerly recognized goodwill
to a non-compete intangible. Below is a summary of activity in the goodwill
accounts during the twelve-month period ending December 31, 2002 (in thousands):
Total from
Maintenance Continuing Discontinued
Products Operations Operations Total
-------- ---------- ---------- -----
Goodwill, net, at December 31, 2001 $ 13,571 $ 13,571 1,554 $ 15,125
Net changes to carrying value 276 276 -- 276
-------- -------- -------- --------
Adjusted carrying value 13,847 13,847 1,554 15,401
Transitional impairment charge (2,636) (2,636) (1,554) (4,190)
-------- -------- -------- --------
Goodwill, net, at December 31, 2002 $ 11,211 $ 11,211 $ -- $ 11,211
======== ======== ======== ========
The Company adopted the non-amortization provisions of SFAS No. 142 during
the first quarter of 2002. Below is a calculation of earnings, removing the
impact of amortization recorded on goodwill and negative goodwill (shown net of
tax):
48
2002 2001 2000
---- ---- ----
Reported net loss from continuing operations $ (51,391) $ (62,867) $ (7,781)
Add back: Goodwill amortization, net of tax -- 1,348 1,602
Deduct: Negative goodwill amortization -- (1,704) (1,704)
---------- ---------- ----------
Adjusted net loss from continuing operations (51,391) (63,223) (7,883)
========== ========== ==========
Reported net (loss) income from discontinued businesses (6,150) 787 2,323
Add back: Goodwill amortization -- 88 117
---------- ---------- ----------
Adjusted net (loss) income from discontinued businesses (6,150) 875 2,440
Gain on sale of discontinued businesses 3,306 -- --
Extraordinary loss on early extinguishment of debt -- (1,182) --
Cumulative effect of a change in accounting principle (2,514) -- --
Adjusted net loss from continuing operations (51,391) (63,223) (7,883)
---------- ---------- ----------
Adjusted net loss (56,749) (63,530) (5,443)
Gain on early redemption of preferred interest in subsidiary -- 6,600 --
Paid-in-kind dividends (11,136) (4,459) --
---------- ---------- ----------
Adjusted net loss available to common shareholders $ (67,885) $ (61,389) $ (5,443)
========== ========== ==========
Below is a presentation of pro forma earnings per share, removing the
impact of amortization on goodwill and negative goodwill (net of tax):
2002 2001 2000
---- ---- ----
Reported net loss from continuing operations $ (6.14) $ (7.49) $ (0.93)
Add back: Goodwill amortization, net of tax -- 0.16 0.19
Deduct: Negative goodwill amortization -- (0.20) (0.20)
---------- ---------- ----------
Adjusted net loss from continuing operations (6.14) (7.53) (0.94)
========== ========== ==========
Reported net (loss) income from discontinued businesses (0.73) 0.09 0.28
Add back: Goodwill amortization -- 0.01 0.01
---------- ---------- ----------
Adjusted net (loss) income from discontinued businesses (0.73) 0.10 0.29
Gain on sale of discontinued businesses 0.39 -- --
Extraordinary loss on early extinguishment of debt -- (0.14) --
Cumulative effect of a change in accounting principle (0.30) -- --
Adjusted net loss from continuing operations (6.14) (7.53) (0.94)
---------- ---------- ----------
Adjusted net loss (6.78) (7.57) (0.65)
Gain on early redemption of preferred interest in subsidiary -- 0.79 --
Paid-in-kind dividends (1.33) (0.53) --
---------- ---------- ----------
Adjusted net loss available to common shareholders $ (8.11) $ (7.31) $ (0.65)
========== ========== ==========
During 2002, Katy reviewed its intangible assets for impairment purposes,
and determined in accordance with SFAS No. 144 that the carrying value of a
customer list intangible asset at the Contico business unit would not be
recovered by projected future undiscounted cash flows. Specifically, Katy
determined that the portion of the customer list intangible associated with the
Consumer/Retail side of the Contico business required impairment. As a result,
an impairment charge of $3.6 million was recorded during 2002, reducing the
carrying value of the customer list intangible to $14.8 million. Fair value was
determined on a discounted cash flow basis, assuming an estimated cash flow
stream resulting from the customer list. This charge is recorded in the line
entitled "Impairments of Long-Lived Assets" in the Consolidated Statements of
Operations. Contico is part of the Maintenance Products group.
49
Also during 2002, Katy recorded $0.7 million impairment on the trademark
intangible asset at the Wilen Products, Inc. (Wilen) business unit. Poor
performance at Wilen in recent years has driven Wilen's profitability to very
low levels (including some years with operating losses). This performance
continued in 2002, and it was determined that these performance levels negated
the relative value of the trademark intangible.
During 2001, the Company recorded an impairment of certain
long-lived assets, including goodwill and certain intangible assets, of its mop,
broom and brush division. The division had experienced consistently poor
operating results for a number of periods, causing the Company to evaluate the
division for impairment. While the Company had plans to improve the division's
performance, the then current sales levels and operating results did not support
the pre-impairment carrying value of certain long-lived assets that would not be
recoverable through forecasted future undiscounted cash flows. A determination
of the division's fair value was made using the income approach, specifically, a
discounted cash flow analysis using the same cash flow stream used to initially
determine that an impairment existed. The adjustment to record the impaired
long-lived assets at fair value amounted to a reduction of goodwill of $21.6
million and a reduction to other intangible assets of $11.4 million, for a total
reduction of the division's carrying value of $33.0 million.
Following is detailed information regarding Katy's intangible assets
(in thousands):
December 31, December 31,
2002 2001
------------ ------------
Trade Names $ 8,916 $ 9,668
Customer lists 21,447 25,035
Patents 4,283 4,232
Non-compete agreements 1,000 --
Work force -- 1,480
Other -- 27
-------- --------
Subtotal 35,646 40,442
Accumulated amortization (10,155) (7,812)
-------- --------
Intangible assets, net $ 25,491 $ 32,630
======== ========
All of Katy's intangible asses are definite-lived intangibles. Katy
recorded amortization expense on intangible assets of $2.6 million, $2.7 million
and $3.1 million in 2002, 2001 and 2000, respectively.
Estimated aggregate amortization expense related to intangible
assets is (in thousands):
2003 $1,920
2004 1,696
2005 1,696
2006 1,696
2007 1,696
Note 5. IMPAIRMENTS OF PROPERTY, PLANT AND EQUIPMENT
During 2002, certain manufacturing equipment assets at the Contico
business unit were impaired, resulting in charges of $15.2 million. These
impairments were the result of management's analysis of the projected
undiscounted future cash flows associated with the assets, and the related
conclusion that the carrying values of the assets would not be recovered by
future cash flows. Approximately 83% of Contico's impaired assets were molds and
tooling equipment (which are used to shape specific products in the molding
process), the majority of which were associated with consumer/retail products of
Contico. Restructuring initiatives, and their impact on the future use of
certain assets, triggered approximately $2.6 million of the impairments, making
up most of the other 17% of impaired assets. Of this $2.6 million, $2.4 million
of assets that had been used at the closed Warson Road plant, and
50
$0.2 million of assets of the Earth City, Missouri plant (both of which are in
the St. Louis, Missouri area), were impaired as a result of the consolidation of
those plants to the Bridgeton, Missouri plant.
Also during 2002, the Wilen business unit recorded an impairment charge of
$1.2 million related to certain of its property, plant and equipment, as a
result of the decision to reduce costs by sourcing product from outside vendors.
The Company is continuing its evaluation of its various operating units and
therefore additional impairments of long-lived assets may be recorded in future
periods.
The Woods business unit recorded asset impairments during 2002 of $0.4
million associated with the shutdown of all U.S. manufacturing operations, which
occurred in December 2002, impacting the future use and cash flow to be
generated by certain assets located in Indiana.
During 2001, the Company recorded an impairment of all of the
long-lived assets of the waste-to-energy facility previously operated by
Savannah Energy Systems Company (SESCO) (See Note 8). SESCO's long-lived assets
consisted of equity contributions that SESCO was required to make as a result of
contractual obligations through 1993, which had a carrying value of $8.5
million, and certain property, plant and equipment, which had a carrying value
of approximately $1.3 million. Upon determining that future undiscounted cash
flows would not be adequate to cover the carrying amount of long-lived assets,
the Company determined that the long-lived assets had a fair value of zero. The
fair value estimate is based on attempts to dispose of SESCO.
Also during 2001, the Company recorded other impairments of
long-lived assets totaling $4.7 million. These impairments were primarily the
result of management decisions regarding the retirement of certain capitalized
assets.
Note 6. DISPOSITIONS
See Note 7 for dispositions accounted for as discontinued
operations.
On May 3, 2001, Katy sold the Thorsen Tools business for $2.5
million, including a note receivable for $1.0 million, due over five years. The
company recognized losses on impairments of goodwill of $0.8 million and a
write-down on the value of inventory through cost of goods sold of $0.2 million
in connection with the sale.
Note 7. DISCONTINUED OPERATIONS
Two of Katy's operations have been classified as discontinued
operations as of December 31, 2002, and for all periods shown, in accordance
with SFAS No. 144.
Hamilton Precision Metals, L.P. (Hamilton) was sold on October 31,
2002, with Katy collecting gross proceeds of $13.9 million. These proceeds were
used primarily to pay off the remaining balance of the Company's term debt. The
Company may receive additional payments in the future dependent upon the
occurrence of certain events associated with Hamilton's financial performance.
These contingent amounts have not been recorded as receivables on the
Consolidated Balance Sheets. A gain on the sale of Hamilton of $3.3 million was
recognized as a result of the sale.
GC/Waldom was held for sale at December 31, 2002 and was sold on
April 2, 2003.
Both Hamilton and GC/Waldom had been presented as part of the
Electrical/Electronics group for segment reporting purposes. Management and the
board of Katy determined that these businesses are not core to the Company's
long-range strategic goals.
The historical operating results have been segregated as
discontinued operations on the Consolidated Statements of Operations and the
related assets and liabilities have been separately identified on the
Consolidated Balance Sheets. Following is a summary of the major asset and
liability categories for the discontinued operations:
51
December 31, December 31,
2002 2001
------------ ------------
Current assets
Trade accounts receivable, net $ 1,738 $ 5,207
Inventories 4,164 12,611
Other 68 488
------- -------
$ 5,970 18,306
======= =======
Non-current assets
Goodwill $ -- $ 1,554
Net properties 3,100 10,388
------- -------
$ 3,100 $11,942
======= =======
Current liabilities
Accounts payable $ 1,415 $ 1,381
Other 1,029 1,774
------- -------
$ 2,444 $ 3,155
======= =======
Non-current liabilities
Post-retirement benefit obligations $ -- $ 705
======= =======
Selected financial data for discontinued operations is summarized as
follows (in thousands):
2002 2001 2000
-------- ------- -------
Net sales $ 32,891 $42,466 $52,451
Pre-tax profit (loss) $ (4,810) $ 1,051 $ 3,576
Pretax gain on sale of discontinued operations $ 5,462 -- --
At December 31, 2002, Katy anticipated the sale of GC/Waldom in
early 2003, and indications were that a book loss was probable. Therefore, the
carrying value of the net assets of GC/Waldom were reduced by $6.2 million via a
charge in discontinued operations as of December 31, 2002.
Katy anticipates that the implementation of SFAS No. 144 could have
a future impact on its financial reporting as 1) Katy is considering
divestitures of certain businesses and exiting of certain facilities and
operational activities, 2) the statement broadens the presentation of
discontinued operations, and 3) the Company anticipates that impairments of
long-lived assets may be necessitated as a result of the above contemplated
actions. If certain divestitures occur, they may qualify as discontinued
operations under SFAS No. 144, whereas they would not have met the requirements
of discontinued operations treatment under APB Opinion 30. However, the Company
is not able to conclude that it is probable that these divestitures will occur
within one year, and recognizes that significant changes to plans or intentions
may occur. Therefore, these operations have not been classified as discontinued
operations.
Note 8. SESCO PARTNERSHIP
On April 29, 2002, Katy and Savannah Energy Systems Company (SESCO),
an indirect wholly owned subsidiary, entered into a partnership agreement with
Montenay Power Corporation and its affiliates (Montenay) that turned over the
operation of SESCO's waste-to-energy facility to Montenay. The Company entered
into this agreement as a result of evaluations of SESCO's business. First, Katy
determined that SESCO was not a core component of the Company's long-term
business strategy. Moreover, Katy did not feel it had the management expertise
to deal with certain risks and uncertainties presented by the operation of
SESCO's business, given that
52
SESCO was the Company's only waste-to-energy facility. Katy had explored options
for divesting SESCO for a number of years, and management felt that this
transaction offered a reasonable strategy to exit this business.
The partnership, with Montenay's leadership, assumed SESCO's
position in various contracts relating to the facility's operation. Under the
agreement, SESCO contributed its assets and liabilities (except for its
liability under the loan agreement with the Resource Recovery Development
Authority (the Authority) of the City of Savannah and the related receivable
under the service agreement with the Authority) to the partnership. While SESCO
will maintain a 99% interest as a limited partner, Montenay will have most of
the day to day responsibility for operations of the partnership, and
accordingly, the partnership will not be consolidated. Katy agreed to pay
Montenay $6.6 million over the span of seven years under a note payable as part
of the partnership and related agreements. Certain amounts may be due to SESCO
upon expiration of the service agreement in 2008; also, Montenay may purchase
SESCO's interest in the partnership at that time. Katy has not recorded any
amounts receivable or other assets relating to amounts that may be received at
the time the Service Agreement expires, given their uncertainty.
The Company made a payment of $0.8 million in July 2002 on the $6.6
million note. The table below schedules the remaining payments:
2003 1,000
2004 1,000
2005 1,050
2006 1,100
2007 1,100
2008 550
-------
$ 5,800
=======
The Company recognized in the first quarter of 2002 a charge of $6.0
million, consisting of 1) the discounted value of the $6.6 million note, 2) the
carrying value of certain assets contributed to the partnership, consisting
primarily of machinery spare parts, and 3) costs to close the transaction. It
should be noted that all of SESCO's long-lived assets were reduced to a zero
value at December 31, 2001, so no additional impairment was required. On a going
forward basis, Katy would expect little if any income statement activity as a
result of its involvement in the partnership, and Katy's consolidated balance
sheet will carry the liability mentioned above.
In 1984, the Authority issued $55.0 million of Industrial Revenue
Bonds and lent the proceeds to SESCO, under the loan agreement for the
acquisition and construction of the waste-to-energy facility that has now been
transferred to the partnership. The funds required to repay the loan agreement
come from the monthly disposal fee, paid by the Authority under the service
agreement for certain waste disposal services, a component of which is for debt
service. To induce the required parties to consent to the SESCO partnership
transaction, SESCO retained its liability under the loan agreement. In
connection with that liability, SESCO also retained its right to receive the
debt service component of the monthly disposal fee.
Based on an opinion from outside legal counsel, SESCO has a legally
enforceable right to offset amounts it owes to the Authority under the loan
agreement against amounts that are owed from the Authority under the service
agreement. At December 31, 2002, this amount was $35.8 million. Accordingly, the
amounts owed to and due from SESCO have been netted for financial reporting
purposes and are not shown on the consolidated balance sheet.
In addition to SESCO retaining its liabilities under the loan
agreement, to induce the required parties to consent to the partnership
transaction, Katy also continues to guarantee the obligations of the partnership
under the service agreement. The joint venture is liable for liquidated damages
under the service agreement if it fails to accept the minimum amount of waste or
to meet other performance standards under the service agreement. The liquidated
damages, an off balance sheet risk for Katy, are equal to the amount of the
bonds outstanding, less $4.0 million maintained in a debt service reserve trust.
We do not expect non-performance by the other parties. Additionally, Montenay
has agreed to indemnify Katy for any breach of the service agreement by the
partnership.
53
Following are scheduled principal repayments on the loan agreement
(and the Industrial Revenue Bonds) (in thousands):
2003 5,385
2004 6,765
2005 8,370
2006 15,300
-------
Total $35,820
=======
Note 9. INDEBTEDNESS
Katy's indebtedness at December 31, 2002, was outstanding under a credit
agreement that became effective in June 2001 at the time of the
Recapitalization. The credit agreement was a collateralized, asset-based lending
arrangement agented by Deutsche Bank (the Deutsche Bank Credit Agreement), with
seven other banks completing the syndicate. The Deutsche Bank Credit Agreement,
which provided for a total borrowing facility of $140.0 million, had a $30.0
million term loan portion (Term Loan) with a final maturity date of June 28,
2006 that required quarterly repayments of $1.5 million. As a result of the sale
of Hamilton, and operating cash flow in 2002 and 2001, the term loan was repaid
in full in October 2002. The Term Loan was collateralized by the Company's
property, plant and equipment. The remaining portion of the Deutsche Bank Credit
Agreement was a $110.0 million revolving credit facility (Revolving Credit
Facility) that also had an expiration date of June 28, 2006. The borrowing base
of the Revolving Credit Facility was determined by eligible inventory and
accounts receivable of the Company. Unused borrowing availability on the
Revolving Credit Facility was $24.3 million at December 31, 2002. All extensions
of credit to the Company were collateralized by a first priority perfected
security interest in and lien upon the capital stock of each material domestic
subsidiary (65% of the capital stock of each material foreign subsidiary), and
all present and future assets and properties of the Company. Customary financial
covenants and restrictions on the payment of dividends applied to the Deutsche
Bank Credit Agreement. Interest accrued on borrowings at approximately 225 basis
points over the Eurodollar rate for Eurodollar loans, and 125 basis points over
the prime rate for base rate loans, margins which were determined by the
Company's leverage ratio. The Company paid a commitment fee of 0.5% of the
unused portion of the Revolving Credit Facility.
December 31, December 31,
2002 2001
---------------------------
(Thousands of Dollars)
Term loan payable under New Credit Agreement, interest based on
Eurodollar Rate (3.75%), due through 2006 $ -- $ 26,325
Revolving loans payable under New Credit Agreement, interest based on
Eurodollar and Prime Rates (3.75 - 5.50%) 44,751 57,000
Real estate and chattel mortgages, with interest at fixed rates (7.14%),
due through 2003 700 768
-------- --------
Total debt 45,451 84,093
Less revolving loans, classified as current (see below) (44,751) (57,000)
Less current maturities (700) (14,619)
-------- --------
Long-term debt $ -- $ 12,474
======== ========
In connection with the Revolving Credit Facility, the Deutsche Bank
Credit Agreement required lockbox agreements which provide for all receipts to
be swept daily to reduce borrowings outstanding. These agreements, combined with
the existence of a Material Adverse Effect (MAE) clause in the Deutsche Bank
Credit Agreement, caused the Revolving Credit Facility to be classified as a
current liability, per guidance in the FASB's Emerging Issues Task Force (EITF)
Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement.
54
However, the Company did not expect to repay, or be required to repay, within
one year, the balance of the Revolving Credit Facility classified as a current
liability. The MAE clause, which is a typical requirement in commercial credit
agreements, allows the lender to require the loan to become due if it determines
there has been a material adverse effect on the operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the Revolving Credit Facility as a current liability is a result only of the
combination of the two aforementioned factors: the lockbox agreements and the
MAE clause. However, the Revolving Credit Facility did not expire or have a
maturity date within one year, but rather had a final expiration date of June
28, 2006. Also, the Company was in compliance with the applicable financial
covenants at December 31, 2002, the lender had not notified the Company of any
indication of a MAE at December 31, 2002, and to our knowledge, the Company was
not in default of any provision of the Deutsche Bank Credit Agreement at
December 31, 2002.
Letters of credit totaling $7.4 million were outstanding at December
31, 2002, which reduced the unused borrowing availability under the Revolving
Credit Facility.
All of the debt under the Deutsche Bank Credit Agreement is
re-priced to current rates at frequent intervals. Therefore, its fair value
approximates its carrying value at December 31, 2002.
At December 31, 2002, the Company had an unamortized balance of
capitalized debt issuance costs of $5.7 million, included in the Other line
under Other Assets on the Consolidated Balance Sheets. These costs were largely
incurred in 2001 with the initiation of the Deutsche Bank Credit Agreement. Part
of the direct costs incurred in 2001 were $1.4 million paid to Kohlberg (who
worked on behalf of KKTY) for consulting fees and out-of-pocket expenses
relating to negotiation of terms and covenants associated with the Deutsche Bank
Credit Agreement. These costs have been capitalized and were being amortized
over the five year length of the agreement (through June 2006).
The extraordinary loss on early extinguishment of debt of $1.2
million (net of tax of $0.6 million) recorded in 2001 was due to the write-off
of deferred financing costs associated with the early extinguishment of the
credit agreement that had existed prior to the Deutsche Bank Credit Agreement.
In February 2003, we funded a new credit agreement, agented by Fleet
Capital (Fleet Credit Agreement), which replaced the Deutsche Bank Credit
Agreement. See Note 24 for further information.
Note 10. CONVERTIBLE PREFERRED STOCK
As discussed in Note 3 above, KKTY purchased from Katy 700,000
shares of newly issued Convertible Preferred Stock, $100 par value per share,
which is convertible into 11,666,666 common shares, for an aggregate purchase
price of $70.0 million. The Convertible Preferred shares are entitled to a 15%
payment in kind (PIK) dividend (that is, dividends in the form of additional
shares of Convertible Preferred Stock), compounded annually, which started
accruing on August 1, 2001, and was paid on August 1, 2002 (105,000 convertible
preferred shares, equivalent to 1,745,240 common shares), and will be payable on
August 1 of 2003 and 2004, and on December 31, 2004. No dividends will accrue or
be payable after December 31, 2004. If converted, the 11,666,666 common shares,
along with the 2,594,367 equivalent common shares paid (1,745,240) and accrued
(849,127) PIK dividends through December 31, 2002, would represent 63% of the
outstanding shares of common stock as of December 31, 2002, excluding
outstanding options. If the holder continues to hold the Convertible Preferred
Stock through December 2004, it will receive an additional 259,613 shares of
Convertible Preferred Stock, which would be convertible into an additional
4,588,950 shares of common stock. The shares of common stock issuable on the
conversion of the Convertible Preferred Stock issued at closing, together with
the shares of common stock issuable on the conversion of the Convertible
Preferred Stock issued through the PIK dividend, would represent 69% of the
outstanding common shares of common stock, excluding outstanding options. The
accruals of the PIK dividends were recorded as a charge to Retained Earnings
and/or Paid-in Capital and an increase to Convertible Preferred Stock. The
dividends were recorded at fair value, reduced earnings available to common
shareholders in the calculation of basic earnings per share, and are presented
on the Consolidated Statements of Operations as an adjustment to arrive at net
loss available to common shareholders.
55
The Convertible Preferred Stock is convertible at the option of the
holder at any time after the earlier of 1) June 28, 2006, 2) board approval of a
merger, consolidation or other business combination involving a change in
control of the Company, or a sale of all or substantially all of the assets or
liquidation of the Company, or 3) a contested election for directors of the
Company nominated by KKTY. The preferred shares 1) are non-voting (with limited
exceptions), 2) are non-redeemable, except in whole, but not in part, at the
Company's option (as approved only by the Class I directors) at any time after
June 30, 2021, 3) are entitled to receive cumulative PIK dividends through
December 31, 2004, as mentioned above, at a rate of 15% percent, 4) have no
preemptive rights with respect to any other securities or instruments issued by
the Company, and 5) have registration rights with respect to any common shares
issued upon conversion of the Convertible Preferred Stock. Upon a liquidation of
Katy, the holders of the Convertible Preferred Stock would receive the greater
of (i) an amount equal to the par value ($100 per share) of their Convertible
Preferred Stock, or (ii) an amount that the holders the Convertible Preferred
Stock would have received if their shares of Convertible Preferred Stock were
converted into common stock immediately prior to the distribution upon
liquidation.
The Company incurred approximately $4.9 million in 2001 of direct
costs related to the issuance of the Convertible Preferred Stock, including $1.7
million paid to Kohlberg (who worked on behalf of KKTY) for consulting fees and
out-of-pocket expenses relating to due diligence and structuring of the
recapitalization. These costs have been netted against the stated amount of the
Convertible Preferred Stock on the Consolidated Balance Sheets.
Note 11. EARNINGS PER SHARE
The Company's diluted earnings per share were calculated using the
treasury stock method in accordance with the SFAS No. 128, "Earnings Per Share."
The basic and diluted earnings per share calculations are as follows:
For the Year Ended December31, 2002 2001 2000
- ------------------------------ ---- ---- ----
Basic and Diluted EPS:
Loss from continuing operations $(51,391) $(62,867) $ (7,781)
Gain on early redemption of preferred interest of subsidiary -- 6,600 --
Payment-in-kind dividends on convertible preferred stock (11,136) (4,459) --
-------- -------- --------
Loss from continuing operations available to common stockholders (62,527) (60,726) (7,781)
Discontinued operations, net of tax (2,844) 787 2,323
Extraordinary loss on early extinguishment of debt, net of tax -- (1,182) --
Cumulative effect of a change in accounting principle, net of tax (2,514) -- --
-------- -------- --------
Net loss attributable to common stockholders $(67,885) $(61,121) $ (5,458)
======== ======== ========
Weighted average shares - Basic and Diluted 8,371 8,393 8,404
Per share amount:
Loss from continuing operations attributable to common stockholders $ (7.47) $ (7.23) $ (0.93)
Discontinued operations, net of tax (0.34) 0.09 0.28
Extraordinary loss on early extinguishment of debt, net of tax -- (0.14) --
Cumulative effect of a change in accounting principle, net of tax (0.30) -- --
-------- -------- --------
Net loss attribute to common stockholders $ (8.11) $ (7.28) $ (0.65)
======== ======== ========
As of December 31, 2002 and December 31, 2001, 150,000 options were
in-the-money. 1,800,750 and 1,728,650 options were out-of-the-money at December
31, 2002 and December 31, 2001, respectively. No options were in the money at
December 31, 2000. At December 31, 2002, 805,000 convertible preferred shares
were outstanding, along with 50,947 convertible preferred shares accrued through
paid in kind dividends, which were in total convertible into 14,265,812 shares
of Katy common stock. At December 31, 2001, 700,000 convertible preferred shares
were outstanding, along with 44,301 convertible preferred shares accrued through
paid in kind
56
dividends, which were in total convertible into 12,405,041 shares of Katy common
stock. No convertible preferred stock was outstanding at December 31, 2000.
In-the-money options and convertible preferred shares were not included in the
calculation of diluted earnings per share in any period presented because of
their anti-dilutive impact as a result of the Company's net loss position.
Note 12. RETIREMENT BENEFIT PLANS
Pension and Other Postretirement Plans
Several subsidiaries have pension plans covering substantially all
of their employees. These plans are noncontributory, defined benefit pension
plans. The benefits to be paid under these plans are generally based on
employees' retirement age and years of service. The companies' funding policies,
subject to the minimum funding requirements of employee benefit and tax laws,
are to contribute such amounts as determined on an actuarial basis to provide
the plans with assets sufficient to meet the benefit obligations. Plan assets
consist primarily of fixed income investments, corporate equities and government
securities. The Company also provides certain health care and life insurance
benefits for some of its retired employees. The post-retirement health plans are
unfunded.
57
Pension Benefits Other Benefits
---------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Thousands of dollars)
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,085 $ 1,988 $ 3,025 $ 3,187
Service cost 111 169 37 15
Interest cost 149 150 224 155
Plan amendments 254 -- -- --
Actuarial (gain)/loss 192 48 175 --
Settlement -- (194) -- --
Benefits paid (198) (76) (362) (332)
------- ------- ------- -------
Benefit obligation at end of year $ 2,593 $ 2,085 $ 3,099 $ 3,025
======= ======= ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,713 $ 2,118 $ -- $ --
Actuarial return on plan assets (11) (305) -- --
Employer contribution 356 237 362 332
Settlement -- (261) -- --
Benefits paid (198) (76) (362) (332)
------- ------- ------- -------
Fair value of plan assets at end of year $ 1,860 $ 1,713 $ -- $ --
======= ======= ======= =======
Reconciliation of prepaid (accrued) benefit cost:
Funded status $ (734) $ (372) $(3,099) $(3,025)
Unrecognized net actuarial (gain)/loss 896 963 (680) (325)
Unrecognized prior service cost -- -- 785 845
Unrecognized net transition asset 27 35 -- --
Additional minimum liability adjustment (691) (391) -- --
------- ------- ------- -------
Prepaid/(accrued) benefit cost $ (502) $ 235 $(2,994) $(2,505)
======= ======= ======= =======
Components of net periodic benefit cost:
Service cost $ 111 $ 169 $ 37 $ 15
Interest cost 149 150 224 155
Expected return on plan assets (144) (170) -- --
Amortization of net transition asset 9 9 -- --
Amortization of prior service cost -- -- 60 81
Amortization of net gain/(loss) 67 37 (7) 97
Curtailment/settlement recognition 605 156 535 --
------- ------- ------- -------
Net periodic benefit cost $ 797 $ 351 $ 849 $ 348
======= ======= ======= =======
Assumptions as of December 31:
Discount rates 6.75% 7.50% 7.50% 7.50%
Expected return on plan assets 8.00% 8.00% 0% 0%
Assumed rates of compensation increases 0-5% 0-5% 0-5% 0-5%
Impact of one-percent increase in health care trend rate:
Increase in accumulated postretirement benefit obligation $ 189 $ 123
Increase in service cost and interest cost $ 11
Impact of one-percent decrease in health care trend rate:
Decrease in accumulated postretirement benefit obligation $ 151 $ 99
Decrease in service cost and interest cost $ 9 $ --
58
The assumed health care cost trend rate used in measuring the
accumulated post-retirement benefit obligation as of December 31, 2002 was 7.5%
in 2002 grading to 5% by 2009. Prepaid/accrued benefit costs were included in
accrued expenses or other liabilities at December 31, 2002 and 2001.
In addition to the plans described above, in 1993 the Company's
Board of Directors approved a retirement compensation program for certain
officers and employees of the Company and a retirement compensation arrangement
for the Company's then Chairman and Chief Executive Officer. The Board approved
a total of $3.5 million to fund such plans. This amount represented the best
estimate of the obligation that vested immediately upon Board approval and is to
be paid for services rendered to date. The Company had $2.7 million and $2.9
million recorded in accrued compensation and other liabilities at December 31,
2002 and December 31, 2001, respectively, for this obligation.
401(k) Plans
The Company offers its employees the opportunity to voluntarily
participate in one of two 401(k) plans administered by the Company or one of its
subsidiaries. On January 1, 2002, Katy consolidated certain of its 401(k) plans
and reduced the number of plans within the Company from five to two. The Company
makes matching and other contributions in accordance with the provisions of the
plans and, under certain provisions, at the discretion of the Company. The
Company made annual matching and other contributions of $0.5 million, $0.5
million and $0.7 million in 2002, 2001 and 2000, respectively.
Note 13. PREFERRED INTEREST OF SUBSIDIARY
Upon the Company's purchase of the common interest of Contico on
January 8, 1999, Newcastle Industries, Inc. (Newcastle) retained a preferred
interest in Contico, represented by 329 preferred units, each with a stated
value of $100,000, for an aggregate stated value of $32.9 million. The preferred
interest yielded an 8% cumulative annual return on its stated value while
outstanding, payable quarterly in cash. In connection with the Recapitalization,
the Company entered into an agreement with Newcastle to redeem at a 40% discount
165 preferred units, plus accrued distributions thereon, which, as disclosed
above, at a stated value prior to the Recapitalization of $32.9 million. Katy
utilized approximately $10.2 million of the proceeds from the Recapitalization
for the purpose of redeeming the 165 preferred units. The holder of the
preferred interest retained 164 preferred units, or a stated value of $16.4
million. The difference between the amount paid on redemption and the stated
value of preferred interest redeemed ($6.6 million, plus $0.1 million of tax
benefit) was recognized as an increase to Additional Paid-in Capital on the
Consolidated Statements of Stockholders' Equity, and was an addition to earnings
available to common stockholders in the calculation of basic earnings per share
in 2001.
As discussed in Note 24, Katy refinanced its debt obligations on
February 3, 2003, and entered into the Fleet Credit Agreement. As a result of
the transaction that occurred on February 3, 2003 referenced above, it was
determined that the fair value of the preferred interest at December 31, 2002,
was $9.9 million.
Note 14. STOCKHOLDERS' EQUITY
Share Repurchase
On February 26, 2000, the Company's Board of Directors authorized
management to spend up to $5.0 million over a twelve month period for the
repurchase of Katy common stock in the open market. During 2000, the Company
repurchased 24,800 shares of Katy common stock at a total cost of $262,000 and
an average stock price of $10.49. The Company did not repurchase any of its
shares during calendar 2002 or 2001.
Stockholder Rights Plan
In January 1995, the Board of Directors adopted a Stockholder Rights
Agreement and distributed one right for each outstanding share of the Company's
common stock (not otherwise exempted under the terms of the agreement). The
rights entitle the stockholders to purchase, upon certain triggering events,
shares of either the
59
Company's common stock or any acquiring company's stock, at a reduced price. The
rights are not and will not become exercisable unless certain change of control
events or increases in certain parties' percentage ownership occur. Consistent
with the intent of the Stockholder Rights Agreement, a shareholder who caused a
triggering event would not be able to exercise their rights. If stockholders
were to exercise rights, the effect would be to increase the percentage
ownership stakes of those not causing the triggering event, while decreasing the
percentage ownership stake of the party causing the triggering event. The
Stockholder Rights Agreement was amended on June 2, 2001 to clarify that the
Recapitalization was not a triggering event under the Rights Agreement. As of
December 31, 2002, there are 8,362,177 rights outstanding, of which none are
currently exercisable.
Restricted Stock Grant
During 2000 and 1999, the Company issued restricted stock grants in
the amount of 3,000 and 45,100 shares, respectively, to certain key employees of
the Company. These stock grants vest over a three-year period, of which 25%
vested immediately upon distribution. As a result of restricted stock grants,
the Company has recognized compensation expense for 2002, 2001 and 2000 in the
amount of $0.1 million, $0.3 million, and $0.4 million, respectively. As of
December 31, 2002, all compensation expense associated with restricted stock
grants has been earned and expensed.
Director Stock Grant
During 2002, 2001 and, 2000, the Company granted all independent,
non-employee Directors 500 shares of Company common stock as part of their
compensation. For 2002 and 2001, this grant was limited to the three
non-employee Class I directors. The total grant to the Directors for the years
ended December 31, 2002, 2001 and 2000 was 1,500, 1,500 and 4,000 shares,
respectively.
Stock Options and Stock Appreciation Rights
On November 21, 2002, the Board of Directors approved the 2002 Stock
Appreciation Rights Plan (the "2002 SAR Plan"), authorizing the issuance of up
to 1,000,000 stock appreciation rights (SARs). Vesting of the SARs occurs
ratably over three years. The 2002 SAR Plan provides limitations on redemption
by holders, specifying that no more than the greater of (a) 50% of vested SARs
held by an employee and (b) 10% of the total SAR award (vested or not) could be
exercised in any one calendar year. The SARs expire ten years from the date of
issue. The Board approved grants on November 22, 2002, of 917,175 SARs to 60
individuals with an exercise price of $3.15, which equaled the market price of
Katy's stock on the grant date. An insignificant amount of compensation expense
was recorded as of December 31, 2002, associated with these grants. The 2002 SAR
Plan also provides that in the event of a Change in Control of the Company, all
outstanding SARs become fully vested. In accordance with the 2002 SAR Plan, a
"Change in Control" is deemed to have occurred upon any of the following events:
1) a sale of 100 percent of the Company's outstanding capital stock, as may be
outstanding from time to time; 2) a sale of all or substantially all of the
Company's operating subsidiaries or assets; or 3) a transaction or series of
transactions in which any third party acquires an equity ownership in the
Company greater than that held by KKTY Holding Company, L.L.C. and in which
Kohlberg & Co., L.L.C. relinquishes its right to nominate a majority of the
candidates for election to the Board of Directors.
At the 1998 Annual Meeting, the Company's stockholders approved the
1997 Long-Term Incentive Plan (the "1997 Incentive Plan"), authorizing the
issuance of up to 875,000 shares of Company common stock pursuant to the grant
or exercise of stock options, including incentive stock options, nonqualified
stock options, SARs, restricted stock, performance units or shares and other
incentive awards. The Compensation Committee of the Board of Directors
administers the 1997 Incentive Plan and determines to whom awards may be
granted, the type of award as well as the number of shares of Company common
stock to be covered by each award, and the terms and conditions of such awards.
The exercise price of stock options granted under the 1997 Incentive Plan cannot
be less than 100 percent of the fair market value of such stock on the date of
grant. The restricted stock grants in 1999 and 1998 referred to above were made
under the 1997 Incentive Plan. Related to the 1997 Incentive Plan, the Company
granted SARs as described below.
Under the 1997 Incentive Plan, 204,473 SARs have been granted and
will become exercisable at any time up to and including January 22, 2005, the
Company's average closing stock price over a 45 calendar day period has
60
equaled or exceeded $53.80 per share. During 2001, 146,965 of these SARs were
cancelled due to employee terminations; 57,508 remain outstanding. An additional
163,579 SARs have been granted and will become exercisable at such time, up to
and including January 22, 2005, the Company's average closing stock price over a
45-calendar day period has equaled or exceeded $53.80 per share. During 2001,
117,572 of these SARS were cancelled due to employee terminations; 46,007 remain
outstanding. All SARs which have met the performance goals above, as the case
may be, will expire December 9, 2007. As a result of the underlying stock price,
no compensation expense was recorded in 2002, 2001 or 2000. The exercise price
of each SAR is $19.56. Katy would record compensation expense for each SAR to
the extent its stock price were to exceed $19.56.
The 1997 Incentive Plan also provides that in the event of a Change
in Control of the Company, as defined below, 1) any SARs and stock options
outstanding as of the date of the Change in Control which are neither
exercisable or vested will become fully exercisable and vested (the payment
received upon the exercise of the SARs shall be equal to the excess of the fair
market value of a share of the Company's Common Stock on the date of exercise
over the grant date price multiplied by the number of SARs exercised); 2) the
restrictions applicable to restricted stock will lapse and such restricted stock
will become free of all restrictions and fully vested; and 3) all performance
units or shares will be considered to be fully earned and any other restrictions
will lapse, and such performance units or shares will be settled in cash or
stock, as applicable, within 30 days following the effective date of the Change
in Control. For purposes of subsection 3), the payout of awards subject to
performance goals will be a pro rata portion of all targeted award opportunities
associated with such awards based on the number of complete and partial calendar
months within the performance period which had elapsed as of the effective date
of the Change in Control. The Compensation Committee will also have the
authority, subject to the limitations set forth in the 1997 Incentive Plan, to
make any modifications to awards as determined by the Compensation Committee to
be appropriate before the effective date of the Change in Control.
For purposes of the 1997 Incentive Plan, "Change in Control" of the
Company means, and shall be deemed to have occurred upon, any of the following
events: 1) any person (other than those persons in control of the Company as of
the effective date of the 1997 Incentive Plan, a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company)
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities; or 2) during any period of two
consecutive years (not including any period prior to the effective date), the
individuals who at the beginning of such period constitute the Board of
Directors (and any new director, whose election by the Company's stockholders
was approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was so approved), cease for any reason to
constitute a majority thereof, or 3) the stockholders of the Company approve:
(a) a plan of complete liquidation of the Company; or (b) an agreement for the
sale or disposition of all or substantially all the Company's assets; or (c) a
merger, consolidation, or reorganization of the Company with or involving any
other corporation, other than a merger, consolidation, or reorganization that
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent at least 50 percent of the combined voting
power of the voting securities of the Company (or such surviving entity)
outstanding immediately after such merger, consolidation, or reorganization. The
Company has determined that the Recapitalization did not result in such a Change
in Control.
At the 1995 Annual Meeting, the Company's stockholders approved the
Long-Term Incentive Plan (the "1995 Incentive Plan") authorizing the issuance of
up to 500,000 shares of Company common stock pursuant to the grant or exercise
of stock options, including incentive stock options, nonqualified stock options,
SARs, restricted stock, performance units or shares and other incentive awards
to executives and certain key employees. The Compensation Committee of the Board
of Directors administers the 1995 Incentive Plan and determines to whom awards
may be granted, the type of award as well as the number of shares of Company
common stock to be covered by each award and the terms and conditions of such
awards. The exercise price of stock options granted under the 1995 Incentive
Plan cannot be less than 100 percent of the fair market value of such stock on
the date of grant. Stock options granted pursuant to the 1995 Incentive Plan
generally vest in four equal annual installments from the date of grant and
generally expire 10 years after the date of grant. In the event of a Change in
Control of the Company, awards granted under the 1995 Incentive Plan are subject
to substantially similar provisions to those described under the 1997 Incentive
Plan. The definition of Change in Control of the Company under the 1995
Incentive Plan is substantially similar to the definition described under the
1997 Incentive Plan.
61
At the 1995 Annual Meeting, the Company's stockholders approved the
Non-Employee Directors Stock Option Plan (the "Directors Plan") authorizing the
issuance of up to 200,000 shares of Company common stock pursuant to the grant
or exercise of nonqualified stock options to outside directors. The Board of
Directors administers the Directors Plan. The exercise price of stock options
granted under the Directors Plan is equal to the fair market value of the
Company's common stock on the date of grant. Stock options granted pursuant to
the Directors Plan are immediately vested in full on the date of grant and
generally expire 10 years after the date of grant.
Employment Agreements and Stock Option Grants
On June 28, 2001, the Company entered into an employment agreement
with C. Michael Jacobi, President and Chief Executive Officer. To induce Mr.
Jacobi to enter into the employment agreement, on June 28, 2001, the
Compensation Committee of the Board of Directors approved the Katy Industries,
Inc. 2001 Chief Executive Officer's Plan. Under this plan, Mr. Jacobi was
granted 978,572 stock options. Mr. Jacobi was also granted 71,428 stock options
under the Company's 1997 Incentive Plan. All stock options granted to Mr. Jacobi
will vest over a three year period provided that certain performance measures
are met. The performance measures were not met in 2002 or 2001. The options vest
unconditionally (assuming continued employment) in nine years.
On September 4, 2001, the Company entered into an employment
agreement with Amir Rosenthal, Vice President, Chief Financial Officer, General
Counsel and Secretary. To induce Mr. Rosenthal to enter into the employment
agreement, on September 4, 2001, the Compensation Committee of the Board of
Directors approved the Katy Industries, Inc. 2001 Chief Financial Officer's
Plan. Under this plan, Mr. Rosenthal was granted 123,077 stock options. Mr.
Rosenthal was also granted 126,923 stock options under the Company's 1995
Incentive Plan. All stock options granted to Mr. Rosenthal will vest over a
three year period provided that certain performance measures are met in each
year. The performance measures were not met in 2002 or 2001. The options vest
unconditionally (assuming continued employment) in nine years.
The following table summarizes option activity under each of the
1997 Incentive Plan, 1995 Incentive Plan, the Chief Executive Officer's Plan,
the Chief Financial Officer's Plan and the Directors Plan:
62
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Options Exercise Price Life Price
------- -------------- ---- -----
Outstanding at January 1, 2000 655,850 $ 8.50 - 19.56 7.6 years $ 12.64
Granted 166,000 $ 9.63 - 10.50 $ 10.33
Exercised (4,500) $ 8.50 - 9.25 $ 9.00
Canceled (53,550) $ 8.50 - 19.56 $ 13.86
----------
Outstanding at December 31, 2000 763,800 $ 8.50 - 19.56 7.2 years $ 12.07
Granted 1,429,000 $ 3.02 4.74 $ 4.04
Exercised -- -- --
Canceled (314,150) $ 8.50 - 18.13 $ 11.72
----------
Outstanding at December 31, 2001 1,878,650 $ 3.02 - 19.56 8.83 years $ 6.03
Granted 295,000 $ 3.11 - 5.15 $ 3.65
Exercised -- -- --
Canceled (222,900) $ 8.50 - 19.56 $ 12.38
----------
Outstanding at December 31, 2002 1,950,750 8.27 years $ 4.94
==========
Vested and Exercisable at December 31, 2002 292,450
==========
Available to grant as of December 31, 2002 159,588
==========
The following table summarizes information about stock options
outstanding at December 31, 2002:
Options Outstanding Options Excercisable
--------------------------------------------------------------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Exercise Outstanding at Remaining Average Exercise Exerciseable at Average Exercise
Prices 12/31/2002 Contractual Life Price 12/31/2002 Price
- ---------------------------------------------------------------------------------------------------------------------
$3.02 - 5.15 1,724,000 8.73 $ 3.97 24,000 $ 3.89
$8.50 - 10.50 103,400 4.94 9.38 118,450 9.55
$13.19 - 13.50 77,650 3.97 13.22 77,650 13.22
$16.13 - 19.50 45,700 6.37 17.25 72,350 17.47
---------------------------------------------------------------------------------------
1,950,750 8.27 $ 4.94 292,450 $ 12.02
=======================================================================================
During 2001, the Company promised to grant a non-employee consultant
200,000 options to purchase common stock. As of December 31, 2001, this grant
had not occurred. However, the Company recorded compensation expense, with a
corresponding increase to Additional Paid in Capital, of $0.5 million during
2001 representing the fair value of options promised, determined using a
binomial option-pricing model. During 2002, the non-employee consultant was
awarded 200,000 SARs under the 2002 SAR Plan, in lieu of a grant of stock
options. As of December 31, 2002, these SARs were out-of-the-money. Therefore,
the $0.5 million of compensation expense was reversed during 2002.
63
Please refer to Note 2 for a discussion of accounting for stock
awards, and related fair value and pro forma incomes disclosures.
Note 15. INCOME TAXES
The components of the net (benefit) provision for income taxes are:
2002 2001 2000
---- ---- ----
(Thousands of Dollars)
Continuing operations:
Current:
Federal $ (2,080) $ (34) $ (3,978)
State 337 208 168
Foreign 1,466 957 624
--------------------------------------
Total (277) 1,131 (3,186)
--------------------------------------
Deferred:
Federal 7,761 (18,955) (927)
State 1,326 (2,872) 368
Foreign (198) 49 470
--------------------------------------
Total 8,889 (21,778) (89)
--------------------------------------
Total continuing operations, excluding preferred interest of subsidiary 8,612 (20,647) (3,275)
Preferred interest of subsidiary 281 (686) (921)
Discontinued operations 3,496 264 1,253
Extraordinary loss on early extinguishment of debt -- (636) --
Cumulative effect of a change in accounting principle (1,676) -- --
--------------------------------------
Net provision for (benefit from) income taxes $ 10,713 $(21,705) $ (2,943)
======================================
The total income tax provision from continuing operations differed
from the amount computed by applying the statutory federal income tax rate to
pre-tax income from continuing operations. The computed amount and the
differences for the years ended December 31, 2002, 2001 and 2000 were as
follows:
64
2002 2001 2000
---- ---- ----
(Thousands of Dollars)
(Benefit) provision for income taxes at statutory rate $(14,415) $(28,784) $ (3,271)
State income taxes, net of federal benefit 219 (717) 477
Amortization of negative goodwill -- (596) (596)
Preferred interest of subsidiary (281) 686 921
Discontinued businesses (3,496) (264) (1,253)
Early extinguishment of debt -- 636 --
Cumulative effect of a change in accounting principle 1,676 -- --
Valuation allowance adjustments 28,974 9,748 544
Valuation allowance adjustments related to discontinued business (4,235) -- --
Other, net 170 (1,356) (97)
--------------------------------------
Provision (benefit) for income taxes from continuing operations
before distrubtions on preferred interest of subsidiary 8,612 (20,647) (3,275)
Distributions on preferred interest of subsidiary 281 (686) (921)
(Loss) income from discontinued operations 1,340 264 1,253
Gain on sale of discontinued businesses 2,156 -- --
Cumulative effect of a change in accounting principle (1,676) -- --
Extraordinary loss on early extinguishment of debt -- (636) --
--------------------------------------
Net (benefit) provision for income taxes from continuing operations $ 10,713 $(21,705) $ (2,943)
======================================
The tax effects of significant items comprising the Company's net
deferred tax asset (liability) as of December 31, 2002 and 2001 are as follows:
2002 2001
---- ----
(Thousands of Dollars)
Deferred tax liabilities
Difference between book and tax basis of property $ -- $ (1,926)
Waste-to-energy facility (9,172) (12,426)
Inventory costs (2,263) (867)
Undistributed earnings of equity investees (1,699) (1,645)
-----------------------
$(13,134) $(16,864)
=======================
Deferred tax assets
Allowance for doubtful receivables $ 1,943 $ 1,395
Accrued expenses and other items 20,566 10,926
Difference between book and tax basis of property & goodwill 7,445 --
Operating loss carry-forwards - domestic 22,747 25,580
Operating loss carry-forwards - foreign 543 661
Tax credit carry forwards 2,718 2,677
-----------------------
55,962 41,239
Less valuation allowance (42,828) (13,854)
-----------------------
13,134 27,385
-----------------------
Net deferred income tax asset (liability) $ -- $ 10,521
=======================
The Company has approximately $53.3 million of United States federal
net operating loss carry-forwards ("federal NOLs") which will expire in years
2020 through 2022 if not utilized prior to that time. Due to tax laws governing
change in control events and their relation to the Recapitalization,
approximately $30.4 million of the federal NOLs are subject to certain
limitations as to the amount that can be used to offset taxable income in any
single year. The remainder of the Company's domestic and foreign net operating
loss carry-forwards relate to certain U.S. operating subsidiaries, primarily
SESCO, and the Company's Canadian operations, respectively, and
65
can only be used to offset income from these operations. The Company's Canadian
subsidiaries have Canadian net operating loss carry-forwards of approximately
$1.6 million at December 31, 2002 that expire in the years 2003 through 2009.
SESCO has state net operating loss carry-forwards of $46.9 million at December
31, 2002 that expire in the years 2003 through 2019. The tax credit
carry-forwards relate to United States federal minimum tax credits of $1.2
million that have no expiration date, general business credits of $0.1 million
that expire in years 2011 through 2021, and foreign tax credit carryovers of
$1.3 million that expire in the years 2003 through 2007.
During 2002, the Company realized a tax benefit of $2.1 million as a
result of a change in federal tax law that governs the utilization of federal
NOLs. The Company utilized this tax benefit to increase its valuation allowance.
The valuation allowance relates to federal, state and foreign net
operating loss carry-forwards, foreign and domestic tax credits, and other
deferred tax assets to the extent they exceed deferred tax liabilities. Katy's
history of operating losses provides significant negative evidence with respect
to the Company's ability to generate future taxable income, a requirement in
order to recognize deferred tax assets on the Consolidated Balance Sheets. For
this reason, the Company was unable to conclude that NOLs and other deferred tax
assets would be utilized in the future.
Note 16. LEASE OBLIGATIONS
The Company, a lessee, has entered into non-cancelable leases for
manufacturing and data processing equipment and real property with lease terms
of up to ten years. Future minimum lease payments as of December 31, 2002 are as
follows:
2003 $ 11,942
2004 11,007
2005 9,033
2006 7,087
2007 6,469
Later years 6,532
--------
Total minimum payments $ 52,070
========
Liabilities totaling $10.9 million were recorded on the Consolidated
Balance Sheets at December 31, 2002, related to leased real facilities that have
been abandoned. These facilities were abandoned as cost saving measures as a
result of efforts to restructure the Company's operations. These liabilities are
stated at fair value (i.e., discounted), and include estimates of sub-lease
revenue. See Note 22 for further detail on accrued amounts in both current and
long-term liabilities related to non-cancelable, abandoned, leased facilities.
Rental expense for 2002, 2001 and 2000 for operating leases was
$12.9 million, $14.0 million, $13.6 million, respectively. Also, $1.0 million of
rent was paid and charged against liabilities in 2002 for non-cancelable leases
at facilities abandoned as a result of restructuring initiatives.
Note 17. RELATED PARTY TRANSACTIONS
In connection with the Contico acquisition on January 8, 1999, the
Company entered into building lease agreements with Newcastle. Newcastle was the
holder of the $16.4 million preferred interest in Contico (see Note 13). Lester
Miller, the former owner of Contico, and a Katy director from 1999 to 2000, is
the majority owner of Newcastle. Also, several additional properties utilized by
Contico are leased directly from Lester Miller. Rental expense for these
properties approximates historical market rates. Related party rental expense
for the year ending December 31, 2002, 2001 and 2000 was approximately $0.8
million, $1.5 million and $1.5 million, respectively.
The Company paid Newcastle $1.3 million of preferred dividends for
the year ended December 31, 2002, compared to $2.0 and $2.6 million for the
years ended December 31, 2001 and 2000, respectively. The decreases in
66
dividends were due to the early redemption of half of the preferred interest at
the time of the recapitalization in June 2001. On February 3, 2003, the
remainder of the preferred interest was redeemed at a 40% discount. See Note 24.
Kohlberg, whose affiliate holds all 805,000 shares of our
Convertible Preferred Stock, provides ongoing management oversight and advisory
services to Katy. We paid $500,000 for such services in 2002, and expect to pay
$500,000 annually in future years. Such amounts are recorded in selling, general
and administrative expenses in the statement of operations.
Note 18. INDUSTRY SEGMENTS AND GEOGRAPHIC 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. 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. During 2002, one of Katy's
customers accounted for 17% of consolidated net sales. Sales to this particular
customer are made by three separate operating divisions (Contico, Woods and
Glit/Microtron). However, a significant loss of business at this retail outlet
could have an adverse impact on the Company's results. The table below, and the
narrative that follows, summarize the key factors in the year-to-year changes in
operating results.
67
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(Thousands of dollars)
Electrical/Electronics Group
Net external sales $ 144,242 $ 130,949 $ 157,027
Operating income (loss) 2,874 (166) 4,511
Operating margin (deficit) 2.0% -0.1% 2.9%
Severance, restructuring and related charges 5,239 1,552 385
Impairments of long-lived assets 392 1,565 --
Depreciation and amortization 1,484 220 810
Capital expenditures 601 301 723
Total assets 48,228 51,591 75,062
Maintenance Products Group
Net external sales $ 314,571 $ 324,642 $ 362,922
Operating income (loss) (19,915) (39,699) 10,298
Operating margin (deficit) 6% -12% 2.8%
Severance, restructuring and related charges 13,629 3,489 1,177
Impairments of long-lived assets 20,812 36,087 --
Depreciation and amortization 17,769 19,926 20,238
Capital expenditures 9,306 10,060 11,737
Total assets 197,865 231,179 299,292
Total
Net external sales - Operating segments $ 458,813 $ 455,591 $ 519,949
- Other [a] 1,177 4,585 3,690
--------- --------- ---------
Total $ 459,990 $ 460,176 $ 523,639
========= ========= =========
Operating income (loss) - Operating segments $ (17,041) $ (39,865) 14,809
- Other [a] (6,989) (9,782) (889)
- unallocated corporate (10,998) (21,239) (9,258)
--------- --------- ---------
Total $ (35,028) $ (70,886) $ 4,662
========= ========= =========
Severance, restructuring & related charges - Operating segments $ 18,868 $ 5,041 $ 1,562
- Other [a] 207 -- --
- Unallocated corporate 80 8,339 1,089
--------- --------- ---------
Total $ 19,155 $ 13,380 $ 2,651
========= ========= =========
Impairments of long-lived assets - Operating segments $ 21,204 $ 37,652 $ --
.. - Other [a] -- 9,817 --
--------- --------- ---------
Total $ 21,204 $ 47,469 $ --
========= ========= =========
Depreciation and amortization - Operating segments $ 19,253 $ 20,146 $ 21,048
- Other [a] -- 225 116
- Unallocated corporate 150 357 444
--------- --------- ---------
Total $ 19,403 $ 20,728 $ 21,608
========= ========= =========
Capital expenditures - Operating segments $ 9,907 $ 10,361 $ 12,460
- Other [a] -- 524 755
- Unallocated corporate 158 179 --
--------- --------- ---------
Total $ 10,065 $ 11,064 $ 13,215
========= ========= =========
Total assets - Operating segments $ 246,093 $ 282,770 $ 374,354
- Other [a] 7,626 8,995 18,468
- Unallocated corporate 13,188 25,942 17,487
- Discontinued operations 9,070 30,248 36,414
--------- --------- ---------
Total $ 275,977 $ 347,955 $ 446,723
========= ========= =========
68
[a] Amounts shown as "other" represent items associated with Katy's
waste-to-energy facility and the equity investment in the shrimp
harvesting and farming operation.
The Company operates businesses in the United States and foreign
countries. The operations for 2002, 2001 and 2000 of businesses within major
geographic areas are summarized as follows:
United Europe
(Thousands of Dollars) States Canada U.K. (Excluding U.K.) Other Consolidated
2002:
Sales to unaffiliated customers $381,325 $ 40,795 $ 28,121 $ 5,376 $ 4,373 $459,990
Total assets $235,802 $ 16,616 $ 23,559 $ -- $ -- $275,977
2001:
Sales to unaffiliated customers $392,336 $ 36,567 $ 26,499 $ 655 $ 4,119 $460,176
Total assets $302,383 $ 21,455 $ 22,313 $ 880 $ 924 $347,955
2000
Sales to unaffiliated customers $440,132 $ 50,114 $ 24,406 $ 4,608 $ 4,379 $523,639
Total assets $397,059 $ 24,908 $ 23,354 $ 1,324 $ 78 $446,723
Net sales for each geographic area include sales of products
produced in that area and sold to unaffiliated customers, as reported in the
Consolidated Statements of Operations.
Note 19. COMMITMENTS AND CONTINGENCIES
The Company and certain of its current and former direct and
indirect corporate predecessors, subsidiaries and divisions are involved in
remedial activities at certain present and former locations and 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 environmental liabilities at amounts that it deems
reasonable and believes that any liability with respect to these matters in
excess of the accruals will not be material. The ultimate costs will depend on a
number of factors and the amount currently accrued represents management's best
current estimate of the total costs to be incurred. The Company expects this
amount to be substantially paid over the next one to four years. The most
significant environmental matter in which the Company is currently involved
relates to the W.J. Smith site. In 1993, the United States Environmental
Protection Agency (EPA) initiated a Unilateral Administrative Order Proceeding
under Section 7003 of the Resource Conservation and Recovery Act (RCRA) against
W.J. Smith and Katy. The proceeding requires certain actions at the W.J. Smith
site and certain off-site areas, as well as development and implementation of
additional cleanup activities to mitigate off-site releases. In December 1995,
W.J. Smith, Katy and EPA agreed to resolve the proceeding through an
Administrative Order on Consent under Section 7003 of RCRA. Pursuant to the
Order, W.J. Smith is currently implementing a cleanup to mitigate off-site
releases.
In December 1996, Banco del Atlantico, a bank located in Mexico,
filed a lawsuit against Woods, a subsidiary of Katy, 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 (RICO) Act involving allegedly fraudulently obtained loans
from Mexican banks, including the plaintiff, and
69
"money laundering" of the proceeds of the illegal enterprise. All of the
foregoing is alleged to have occurred prior to Katy's purchase of Woods. The
plaintiff also alleged that it made loans to an entity controlled by certain
past officers and directors of Woods based upon fraudulent representations. The
plaintiff seeks to hold Woods liable for its alleged damages directly, and 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 RICO. Because certain threshold procedural and jurisdictional issues have
not yet been fully adjudicated in this litigation, it is not possible at this
time for the Company to reasonably determine an outcome or accurately estimate
the range of potential exposure. Katy 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 Katy
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 or other issues relating to the
litigation. The extent or limit of any such adjustment cannot be predicted at
this time. An adverse judgment in this matter could have a material impact on
Katy's liquidity and financial position if the Company were not able to exercise
recourse against the former owner of Woods.
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. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final outcome on certain 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 to the Company or its insurance providers, 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.
Although management believes that these actions individually and in
the aggregate are not likely to have a material adverse effect on the Company,
further costs could be significant and will be recorded as a charge to
operations when, and if, current information dictates a change in management's
estimates.
Note 20. RESTRUCTURING CHARGES
During the fourth quarter of 2002, we recorded $2.4 million of
severance and other exit costs associated with the shut down of the Woods
manufacturing facilities in Indiana. Manufacturing operations were ceased in
order to implement a more cost-effective procurement of finished goods inventory
through sourcing with third party suppliers. 361 employees were terminated as a
result of this shut down. Woods incurred $1.5 million in severance, pension, and
other employee-related costs associated with the employee terminations. Woods
also incurred a charge for the creation of a liability for non-cancelable lease
costs at abandoned production facilities of $0.8 million. An additional $0.1
million of other exit costs were incurred related to facility repairs and other
minor costs. Woods also incurred $0.9 million of inventory write-offs related to
raw and packaging materials that will not be able to be utilized efficiently
with the change-over to a fully sourced inventory strategy. Contico incurred
restructuring costs of $0.6 million in the fourth quarter of 2002 associated
with costs of revaluing their non-cancelable lease liability at the Warson Road
and Earth City facilities, and $0.3 million of costs in moving inventory and
equipment from the Warson facility to the Bridgeton facility, as discussed
below.
During the third quarter of 2002, we recorded $9.5 million of
severance, restructuring and other charges. During the third quarter, we
committed to a plan to abandon Contico's Earth City distribution facility, and
to consolidate its operations into the Bridgeton facility (both facilities are
in the St. Louis, Missouri area). As a result, a $7.1 million charge was
recorded to accrue a liability for non-cancelable lease payments associated with
the Earth City facility. Also during the third quarter, the Contico business
recorded a $1.4 million charge related to rent and other facility costs
associated with its Warson Road facility (also in the St. Louis area), whose
operations are also being consolidated into Bridgeton. A charge of $1.8 million
was recorded in the second quarter of 2002 for the Warson Road facility, and the
additional amount of $1.4 million was recorded after consideration of the market
for sub-leasing and to accrue costs to refurbish the facility. The Contico
business recorded related charges of $0.2 million incurred in moving inventory
and equipment from Warson to Bridgeton, and $0.2 million in severance costs.
70
The Corporate group recorded a $0.1 million charge for non-cancelable lease
payments related to the former corporate headquarters. Also in the third quarter
of 2002, a charge of $0.5 million was recorded for payments to consultants
working with us on sourcing and other manufacturing and production efficiency
initiatives.
Certain assumptions have been made regarding potential future
sub-lease revenue at rented facilities that have been, or will be, abandoned as
a result of restructuring and consolidation activities. If the Company is unable
to achieve its estimated sub-lease revenue estimates, charges could be
recognized in future periods to update the estimated liability and cost to Katy
for these facilities.
During the second quarter of 2002, we recorded $3.8 million of
severance, restructuring, and other charges. Approximately $1.6 million of the
charges related to accruals for payments to consultants working with us on
sourcing and other manufacturing and production efficiency initiatives.
Additionally, net non-cancelable rental payments of $1.8 million associated with
the shut down of Contico's Warson Road facility in St. Louis, Missouri were
accrued at June 30, 2002, as well as involuntary termination benefits of $0.1
million. The Warson Road facility shutdown involves a reduction in workforce of
nineteen employees. The remaining $0.3 million was for involuntary termination
benefits related to SESCO and for various integration costs in the consolidation
of administrative functions into St. Louis, Missouri, from various operating
divisions in the Maintenance Products group.
During the first quarter of 2002, we recorded $2.3 million of
severance, restructuring and other charges. Approximately $1.9 million of the
charges related to accruals for payments to consultants working us on sourcing
and other manufacturing and production efficiency initiatives. Approximately
$0.3 million related to involuntary termination benefits for two management
employees whose positions were eliminated, and $0.1 million were costs
associated with the consolidation of administrative and operational functions.
During the fourth quarter of 2001, we recorded $3.2 million of
severance and restructuring charges. Approximately $1.0 million was related to
severance payments. These payments related to the closing of the former
corporate headquarters in Englewood, Colorado and an adjunct corporate office in
Chicago and the related terminations of employees, as well as severance paid to
employees at operating divisions in headcount reduction efforts. Approximately
$1.4 million of the charges related to a consultant working with us on sourcing
and other manufacturing and production efficiency initiatives. Approximately
$0.2 million of the charges related to transition activities within the Company.
Other costs related to manufacturing restructuring initiatives at Contico.
During the third quarter of 2001, we recorded $6.5 million of
severance and restructuring charges, of which $5.1 million related to the
payment or accrual of severance and other payments associated with the
management transition as a result of the recapitalization. Additionally, $1.0
million of costs were incurred related primarily to outside consultants working
with us on strategic operational and financial strategies. Included in this
amount is a charge of $0.5 million for the fair value of stock options awarded
to this non-employee firm.
During the second quarter of 2001, Contico undertook restructuring
efforts that resulted in severance payments to various individuals. Forty-three
employees, including two members of Contico and Katy executive management,
received severance benefits. Total involuntary termination benefits were $1.6
million.
During the first quarter of 2001, Woods undertook a restructuring
effort that involved reductions in senior management headcount as well as
facility closings. We closed facilities in Loogootee and Bloomington, Indiana,
as well as the Hong Kong office of Katy International, a subsidiary which
coordinates sourcing of products from Asia. Sixteen management and
administrative employees received severance packages. Total involuntary
severance benefits were $0.5 million and other exit costs were $0.3 million.
During the third and fourth quarters 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
group. The workforce reduction included severance and related costs for certain
employees. Total severance and related costs were $2.4 million.
71
The table below details activity in restructuring reserves since
December 31, 2000.
Restructuring liabilities at December 31, 2000 $ 1,121
Additions to restructuring liabilities 13,380
Payments on restructuring liabilities (11,488)
--------
Restructuring liabilities at December 31, 2001 3,013
Additions to restructuring liabilities 19,155
Payments on restructuring liabilities (7,669)
--------
Restructuring liabilities at December 31, 2002 $ 14,499
========
The table below summarizes the future obligations for severance and
restructuring charges detailed above:
2003 $ 7,459
2004 1,592
2005 1,601
2006 1,368
2007 1,300
Thereafter 1,179
---------
Total Payments $ 14,499
==========
72
Note 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
2002 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- --------- --------- --------- ---------
Net sales as reported previously $ 111,020 $ 118,425 $ 143,602 $ --
Customer allowances (750) (798) -- --
Discontinued operations (8,745) (9,166) (5,577) --
--------- --------- --------- ---------
Net sales as adjusted $ 101,525 $ 108,461 $ 138,025 $ 111,979
========= ========= ========= =========
Gross profit as reported previously $ 20,416 $ 20,870 $ 24,318 $ --
Customer allowances (750) (798) -- --
Discontinued operations (2,193) (2,338) (1,136) --
--------- --------- --------- ---------
Gross profit as adjusted $ 17,473 $ 17,734 $ 23,182 $ 19,755
========= ========= ========= =========
Loss from continuing operations reported previously $ (7,590) $ (6,570) $ (16,800) $ --
Discontinued operations (net of tax) (495) (700) (13) --
--------- --------- --------- ---------
Loss from continuing operations adjusted $ (8,085) $ (7,270) $ (16,813) $ (19,223)
========= ========= ========= =========
Income (loss) from discontinued operations reported previously $ -- $ -- $ 241 $ --
Discontinued operations (net of tax) 495 700 13 --
--------- --------- --------- ---------
Income (loss) from discontinued operations adjusted $ 495 $ 700 $ 254 $ (7,599)
========= ========= ========= =========
Gain on sale of discontinued operations (net of tax) $ -- $ -- $ -- $ 3,306
Loss before cumulative effect of a change in accounting
principle $ (7,590) $ (6,570) $ (16,559) $ (23,516)
Cumulative effect of a change in accounting principle (net of tax) -- -- (4,190) 1,676
--------- --------- --------- ---------
Net loss $ (7,590) $ (6,570) $ (20,749) $ (21,840)
Payment in kind of dividends on convertible preferred stock $ (2,622) $ (2,615) $ (2,615) $ (3,284)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (10,212) $ (9,185) $ (23,364) $ (25,124)
========= ========= ========= ==========
Loss per share of common stock - Basic and diluted
Loss from continuing operations attributable to common stockholders $ (1.28) $ (1.18) $ (2.32) $ (2.69)
Discontinued operations (net of tax) 0.06 0.08 (0.03) (0.51)
Cumulative effect of a change in accounting principle (net of tax) -- -- (0.50) 0.20
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (1.22) $ (1.10) $ (2.79) $ (3.00)
========= ========= ========= =========
Effective with the reporting of interim results for the period ended
September 30, 2002, Katy classified the results and financial position of
Hamilton in discontinued operations for all periods presented. Hamilton was sold
on October 31, 2002. Effective with the reporting of year-end results in these
consolidated financial statements, Katy classified the results and financial
position of GC/Waldom in discontinued operations for all periods presented.
GC/Waldom was held for sale at December 31, 2002 and was sold on April 2, 2003.
See Notes 7 and 24.
During the fourth quarter of 2002, the Company recorded pretax
charges of $3.6 million for severance and restructuring and $7.8 million for
impairments of long-lived assets. During the third quarter of 2002, the Company
recorded pretax charges of $9.5 million for severance and restructuring and
$11.0 million for impairments of long-lived assets (primarily at Contico).
During the second quarter of 2002, the Company recorded pretax charges of $3.8
million for severance and restructuring and $2.4 million for impairments of
long-lived assets. During the first quarter of 2002, the Company recorded pretax
charges of $2.3 million for severance and restructuring charges.
73
2001 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- --------- --------- --------- ---------
Net sales as reported previously $ 119,913 $ 120,142 $ 135,801 $ --
Customer allowances (845) (897) -- --
Discontinued operations (12,724) (10,774) (6,003) --
--------- --------- --------- ---------
Net sales as adjusted $ 106,344 $ 108,471 $ 129,798 $ 115,563
========= ========= ========= =========
Gross profit as reported previously $ 16,806 $ 16,955 $ 18,750 $ --
Customer allowances (845) (897) -- --
Discontinued operations (4,116) (1,591) 419 --
--------- --------- --------- ---------
Gross profit as adjusted $ 11,845 $ 14,467 $ 19,169 $ 18,906
========= ========= ========= =========
Loss from continuing operations reported previously $ (8,372) $ (30,434) $ (6,015) $ --
Discontinued operations (net of tax) (1,000) 70 1,185 --
--------- --------- --------- ---------
Loss from continuing operations adjusted $ (9,372) $ (30,364) $ (4,830) $ (18,301)
========= ========= ========= =========
Income (loss) from discontinued operations reported previously $ -- $ -- $ 450 $ --
Discontinued operations (net of tax) 1,000 (70) (1,185) --
--------- --------- --------- ---------
Income (loss) from discontinued operations adjusted $ 1,000 $ (70) $ (735) $ 592
========= ========= ========= =========
Loss before extraordinary item $ (8,372) $ (30,434) $ (5,565) $ (17,709)
Extraordinary loss on early extinguishment of debt (net of tax) -- (1,182) -- --
--------- --------- --------- ---------
Net loss (8,372) (31,616) (5,565) (17,709)
Gain on early redemption of preferred interest of subsidiary -- 6,600 -- --
Payment in kind dividends on convertible preferred stock -- -- (1,755) (2,704)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (8,372) $ (25,016) $ (7,320) $ (20,413)
========= ========= ========= =========
Loss per share of common stock - Basic and diluted
Loss from continuing operations attribute to common stockholders $ (1.12) $ (2.83) $ (0.78) $ (2.50)
Discontinued operations (net of tax) 0.12 (0.01) (0.09) 0.07
Extraordinary loss on early extinguishment of debt (net of tax) -- (0.14) -- --
--------- --------- --------- ---------
Net loss attribute to common stockholders $ (1.00) $ (2.98) $ (0.87) $ (2.43)
========= ========= ========= =========
During the fourth quarter of 2001, the Company recorded pretax
charges of $3.0 million for severance and restructuring and $11.3 million for
impairments of long-lived assets. During the third quarter of 2001, the Company
recorded pretax charges of $6.5 million for severance and restructuring. During
the second quarter of 2001, the Company recorded pretax charges of $2.6 million
for severance and restructuring and $35.1 million for impairments of long-lived
assets (primarily at Wilen). During the first quarter of 2001, the Company
recorded pretax charges of $1.3 million for severance and restructuring and $0.8
million for impairments of long-lived assets.
74
NOTE 22. SUPPLEMENTAL BALANCE SHEET INFORMATION
The following table provides detail regarding other assets shown on
the Consolidated Balance Sheets:
2002 2001
---- ----
Capitalized debt costs $ 5,684 $ 6,669
Notes and other receivables - sales of subsidiaries 3,416 4,236
Other 3,242 1,920
------- -------
Total $12,342 $12,825
======= =======
The following table provides detail regarding accrued expenses shown
on the Consolidated Balance Sheets:
2002 2001
---- ----
Advertising and rebates $12,946 $11,931
Contingent liabilities 15,055 16,428
Non-cancellable lease liabilities - restructuring 4,239 252
Other restructuring 3,220 2,308
Professional services 2,645 590
SESCO note payable to Montenay 1,000 --
Other 8,607 $ 9,931
------- -------
Total $47,712 $41,440
======= =======
Contingent liabilities consist of accruals for estimated losses
associated with environmental issues, the uninsured portion of general and
product liability and workers' compensation claims, and a purchase price
adjustment associated with the purchase of a subsidiary.
The following table provides detail regarding other liabilities
shown on the Consolidated Balance Sheets:
2002 2001
---- ----
Non-cancellable lease liabilities - restructuring $ 6,648 $ 160
Other restructuring 393 293
SESCO note payable to Montenay 3,974 --
Deferred compensation 4,857 3,153
Other 1,654 1,327
------- -------
Total $17,526 $ 4,933
======= =======
NOTE 23. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid and (received) during the year for interest and income
taxes is as follows:
2002 2001 2000
---- ---- ----
(Thousands of dollars)
Interest $ 4,733 $ 11,333 $ 14,016
======= ======== ========
Income taxes $(1,893) $ (2,549) $ (3,850)
======= ======== ========
Significant non-cash transactions include the accrual of payment in
kind (PIK) dividends on the Convertible Preferred Stock of $11.1 million in 2002
and $4.5 million in 2001. The PIK dividends are recorded at fair value. In this
case, each convertible preferred share is translated to its common equivalent
(16.6667 common shares per each convertible preferred share) and multiplied by
$6.00, which is the value of each common share equivalent given the proceeds
from the issuance of the convertible preferred stock. Also during 2001, a gain
of $6.6
75
million was realized on the early redemption of the preferred interest in
Contico (Notes 13 and 24), and a note receivable of $1.0 million was created
related to the sale of the Thorsen Tools business.
Note 24. SUBSEQUENT EVENTS
On February 3, 2003, the Company refinanced its indebtedness and
entered into the Fleet Credit Agreement. See Note 9. The new $110 million
facility, which provides for $20 million of term debt and $90 million of
revolving debt, involves a syndicate of banks, all of whom had participated in
the Deutsche Bank Credit Agreement. The Fleet Credit Agreement is an asset-based
lending agreement, and is generally on similar terms to those found in the
Deutsche Bank Credit Agreement
Below is a summary of the sources and uses associated with the funding of the
Fleet Credit Agreement:
(Thousands of Dollars)
Sources:
Term borrowings under the Fleet Credit Agreement $20,000
Revolving borrowings under the Fleet Credit Agreement 43,743
-------
$63,743
=======
Uses:
Payment of interest and principal under the Deutsche Bank Credit $52,895
Agreement
Purchase of one-half of preferred interest of subsidiary at a 9,840
discount
Payment of accrued distributions on one-half of preferred 122
interest of subsidiary
Certain costs associated with the Fleet Credit Agreement 886
-------
$63,743
=======
The Fleet Credit Agreement, which provides for a total borrowing
facility of $110.0 million, has a $20.0 million term loan portion (Term Loan)
with a final maturity date of February 3, 2008 and quarterly repayments of $0.7
million, the first of which will be made on April 1, 2003. A final payment of
$5.7 million will be made in 2008. The Term Loan is collateralized by the
Company's property, plant and equipment. The remaining portion of the Fleet
Credit Agreement is a $90.0 million revolving credit facility (Revolving Credit
Facility) that also has an expiration date of February 3, 2008. The borrowing
base of the Revolving Credit Facility is determined by eligible inventory and
accounts receivable. Unused borrowing availability on the Revolving Credit
Facility was $27.8 million at February 21, 2003. All extensions of credit under
the Fleet Credit Agreement are collateralized by a first priority perfected
security interest in and lien upon the capital stock of each material domestic
subsidiary (65% of the capital stock of each material foreign subsidiary), and
all present and future assets and properties of Katy. Customary financial
covenants and restrictions apply under the Fleet Credit Agreement. Until June
30, 2003, interest accrues on Revolving Credit Facility borrowings at 225 basis
points over applicable LIBOR rates, and at 250 basis points over LIBOR for Term
Loan borrowings. Following June 30, 2003, margins are determined on a pricing
matrix which factors operating performance into the pricing grid. Margins drop
an additional 25 basis points in the most favorable pricing grid from the
pre-June 30, 2003 levels for both revolving and term loans. Interest accrues at
higher margins on prime rates for swing loans.
Coincident with this transaction, the Company redeemed early, at a
discount, the remaining half of the preferred interest in Contico, plus accrued
distributions thereon, which, as disclosed above, had a stated value of $16.4
million. Katy utilized approximately $10.0 million of the proceeds from the
Fleet Credit Agreement for this purpose. The difference between the amount paid
on redemption and the stated value of preferred interest redeemed ($6.6 million,
pre-tax) will be recognized as an increase to Additional Paid in Capital on the
Consolidated Statements of Stockholders' Equity, and will be an addition to
earnings available to common shareholders in the calculation of basic earnings
per share during 2003.
See Note 13 for a discussion of the preferred interest of subsidiary
redeemed early as a result of the Fleet Credit Agreement refinancing
transaction.
76
On March 6, 2003, Katy announced that it was exploring the sale of
Woods and Woods Canada. The Company can give no assurances that a sale of these
businesses will be completed.
On April 2, 2003, the Company completed the sale of GC/Waldom, a
Katy business that was part of the Electrical/Electronics group, for gross
proceeds of $8.3 million. Katy does not anticipate recording a significant gain
or loss on the sale of GC/Waldom during 2003. GC/Waldom is presented as a
discontinued operation for all periods presented in these financial statements.
See Note 7.
77
Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of Katy is incorporated herein by reference
to the information set forth under the section entitled "Election of Directors"
in the Proxy Statement of Katy Industries, Inc. for its 2003 Annual Meeting.
Information regarding executive officers of Katy is incorporated herein by
reference to the information set forth under the section entitled "Information
Concerning Directors and Executive Officers" in the Proxy Statement of Katy
Industries, Inc. for its 2003 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers is incorporated herein
by reference to the information set forth under the section entitled "Executive
Compensation" in the Proxy Statement of Katy Industries, Inc. for its 2003
Annual Meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of stock by certain beneficial owners
and by management of Katy is incorporated by reference to the information set
forth under the section "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Management" in the Proxy Statement of Katy Industries,
Inc. for its 2003 Annual Meeting.
Number of Securities
Remaining Available for
Number of Securities to Weighted-average Future Issuances Under Equity
Be Issued on Exercise of Exercise Price of Compensation Plans
Outstanding Option, Outstanding Options, (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
- ---------------------------- ------------------------ -------------------- -----------------------------
(a) (b) (c)
Equity Compensation
Plans Approved by
Stockholders 952,616 $7.42 159,588
Equity Compensation
Plans Not Approved by
Stockholders 2,018,824 $3.70 --
Equity Compensation Plans Not Approved by Stockholders
On June 28, 2001, the Company entered into an employment agreement
with C. Michael Jacobi, President and Chief Executive Officer. To induce Mr.
Jacobi to enter into the employment agreement, on June 28, 2001, the
Compensation Committee of the Board of Directors approved the Katy Industries,
Inc. 2001 Chief Executive Officer's Plan. Under this plan, Mr. Jacobi was
granted 978,572 stock options. Mr. Jacobi was also granted 71,428 stock options
under the Company's 1997 Incentive Plan. All stock options granted to Mr. Jacobi
will vest over a
78
three year period provided that certain performance measures are met in each
year, and vest unconditionally (assuming continued employment) in nine years.
On September 4, 2001, the Company entered into an employment
agreement with Amir Rosenthal, Vice President, Chief Financial Officer, General
Counsel and Secretary. To induce Mr. Rosenthal to enter into the employment
agreement, on September 4, 2001, the Compensation Committee of the Board of
Directors approved the Katy Industries, Inc. 2001 Chief Financial Officer's
Plan. Under this plan, Mr. Rosenthal was granted 123,077 stock options. Mr.
Rosenthal was also granted 126,923 stock options under the Company's 1995
Incentive Plan. All stock options granted to Mr. Rosenthal will vest over a
three year period provided that certain performance measures are met in each
year, and vest unconditionally (assuming continued employment) in nine years.
On November 21, 2002, the Board of Directors approved the 2002 Stock
Appreciation Rights Plan (the "2002 SAR Plan"), authorizing the issuance of up
to 1,000,000 stock appreciation rights (SARs). Vesting of the SARs occurs
ratably over three years. The 2002 SAR Plan provides limitations on redemption
by holders, specifying that no more than 50% of the cumulative number of vested
SARs held by an employee could be exercised in any one calendar year. The SARs
expire ten years from the date of issue. The Board approved grants on November
22, 2002, of 917,175 SARs to 60 individuals with an exercise price of $3.15,
which equaled the market price of Katy's stock on the grant date. An
insignificant amount of compensation expense was recorded as of December 31,
2002, associated with these grants. The 2002 SAR Plan also provides that in the
event of a Change in Control of the Company, all outstanding SARs become fully
vested. In accordance with the 2002 SAR Plan, a "Change in Control" is deemed to
have occurred upon any of the following events: 1) a sale of 100 percent of the
Company's outstanding capital stock, as may be outstanding from time to time; 2)
a sale of all or substantially all of the Company's operating subsidiaries or
assets; or 3) a transaction or series of transactions in which any third party
acquires an equity ownership in the Company greater than that held by KKTY
Holding Company, L.L.C. and in which Kohlberg & Co., L.L.C. relinquishes its
right to nominate a majority of the candidates for election to the Board of
Directors.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management is incorporated herein by reference to the information set forth
under the section entitled "Executive Compensation" in the Proxy Statement of
Katy Industries, Inc. for its 2003 Annual Meeting.
Item 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Internal Controls
Within the 90 days prior to the filing date of this Annual Report on Form
10-K, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (Disclosure Controls). This evaluation
(Controls Evaluation) was done under the supervision and with the participation
of management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO).
Disclosure Controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
79
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our
Disclosure Controls or our internal controls and procedures for financial
reporting (Internal Controls) will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
but not absolute assurance that the objectives of a control system are met.
Further, any control system reflects limitations on resources, and the benefits
of a control system must be considered relative to its costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within Katy have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple errors or mistakes. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of a control. As design of a control system is
also based upon certain assumptions about the likelihood of future events, there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to errors or fraud may occur
and may not be detected.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, the Disclosure Controls are effective to
timely alert management to material information relating to Katy during the
period when our periodic reports are being prepared.
In accordance with SEC requirements, our CEO and CFO note that, since the
date of the Controls Evaluation to the filing date of this Annual Report, there
have been no significant changes in Internal Controls or in other factors that
could significantly affect Internal Controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
80
Part IV
Item 15. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of Katy are set forth in Part II,
Item 8, of this Form 10-K:
- Consolidated Balance Sheets as of December 31, 2002 and 2001
- Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
- Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000
- Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
- Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The financial statement schedule filed with this report is listed on
the "Index to Financial Statement Schedules" on page 86 of this Form
10-K.
3. Exhibits
The exhibits filed with this report are listed on the "Exhibit
Index."
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 15, 2003 KATY INDUSTRIES, INC.
Registrant
/S/ C. Michael Jacobi
---------------------------------------------
C. Michael Jacobi
President and Chief Executive Officer
/S/ Amir Rosenthal
---------------------------------------------
Vice President, General Counsel and Secretary
Chief Financial Officer
81
POWER OF ATTORNEY
Each person signing below appoints C. Michael Jacobi and Amir P.
Rosenthal, or either of them, his attorneys-in-fact for him in any and all
capacities, with power of substitution, to sign any amendments to this report,
and to file the same with any exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of this 15th day of April, 2003.
Signature Title
- --------- -----
/S/ William F. Andrews Chairman of the Board and Director
- ------------------------------------
William F. Andrews
/S/ C. Michael Jacobi President, Chief Executive Officer and
- ------------------------------------ Director (Principal Executive Officer)
C. Michael Jacobi
/S/ Amir Rosenthal Vice President, Chief Financial
- ------------------------------------ Officer, General Counsel and Secretary
Amir Rosenthal (Principal Financial and Accounting
Officer)
/S/ Christopher Lacovara Director
- ------------------------------------
Christopher Lacovara
/S/ Robert M. Baratta Director
- ------------------------------------
Robert M. Baratta
/S/ James A. Kohlberg Director
- ------------------------------------
James A. Kohlberg
/S/ Daniel B. Carroll Director
- ------------------------------------
Daniel B. Carroll
/S/ Wallace E. Carroll, Jr. Director
- ------------------------------------
Wallace E. Carroll, Jr.
82
/S/ Samuel P. Frieder Director
- ------------------------------------
Samuel P. Frieder
/S/ Christopher Anderson Director
- ------------------------------------
Christopher Anderson
83
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C. Michael Jacobi, Chief Executive Officer of the company, certify that:
1. I have reviewed this annual report on Form 10-K of Katy Industries, Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 15, 2003 By: /s/ C. Michael Jacobi
--------------------------------
C. Michael Jacobi
Chief Executive Officer
84
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Amir Rosenthal, Chief Financial Officer of the company, certify that:
1. I have reviewed this annual report on Form 10-K of Katy Industries, Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 15, 2003 By: /s/ Amir Rosenthal
-----------------------------
Amir Rosenthal
Chief Financial Officer
85
INDEX TO FINANCIAL STATEMENT SCHEDULES
Independent Accountants' Reports 86
Schedule II - Valuation and Qualifying Accounts 87
Independent Auditors' Consent 92
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements of Katy or the Notes thereto.
86
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Katy Industries, Inc.:
Our audits of the consolidated financial statements of Katy Industries, Inc. and
its subsidiaries, referred to in our report dated April 11, 2003, appearing in
this Form 10-K, also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
s/PricewaterhouseCoopers LLP
St. Louis, Missouri
April 11, 2003
87
KATY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Thousands of Dollars)
Balance at Additions Balance
Beginning Charged to Write-offs Other at End
Accounts Receivable Reserves of Year Expense to Reserves Adjustments of Year
---------------------------- ------------ ------------ ------------ ------------ ------------
Year ended December 31, 2002
Trade receivables $ 2,762 $ 3,684 $ (4,296) $ 656 $ 2,806
Long-term notes receivable 1,000 -- -- -- 1,000
------------ ------------ ------------ ------------ ------------
$ 3,762 $ 3,684 $ (4,296) $ 656 $ 3,806
Year ended December 31, 2001
Trade receivables $ 3,137 $ 5,343 (6,050) 332 $ 2,762
Long-term notes receivable 1,000 -- -- -- 1,000
------------ ------------ ------------ ------------ ------------
$ 4,137 $ 5,343 $ (6,050) $ 332 $ 3,762
Year ended December 31, 2000
Trade receivables $ 4,155 $ 5,070 $ (5,983) $ (105) $ 3,137
Long-term notes receivable 1,000 -- -- -- 1,000
------------ ------------ ------------ ------------ ------------
$ 5,155 $ 5,070 $ (5,983) $ (105) $ 4,137
Balance at Additions Balance
Beginning Charged to Write-offs Other at End
Inventory Reserves of Year Expense to the Reserve Adjustments of Year
-------------------------------- ------------ ------------ ------------ ------------ ------------
Year ended December 31, 2002 $ 5,864 $ 2,700 $ (3,611) $ 827 $ 5,780
Year ended December 31, 2001 $ 6,434 $ 3,675 $ (4,250) $ 5 $ 5,864
Year ended December 31, 2000 $ 8,308 $ 1,869 $ (3,743) $ -- $ 6,434
Balance at Balance
Beginning Other at End
Income Tax Valuation Allowances of Year Provison Reversals Adjustments of Year
-------------------------------- ------------ ------------ ------------ ------------ ------------
Year ended December 31, 2002 $ 13,854 $ 28,974 $ -- $ -- $ 42,828
Year ended December 31, 2001 $ 4,106 $ 9,748 $ -- $ -- $ 13,854
Year ended December 31, 2000 $ 3,203 $ 903 $ -- $ -- $ 4,106
88
KATY INDUSTRIES, INC.
INDEX OF EXHIBITS
DECEMBER 31, 2001
Exhibit
Number Exhibit Title Page
- ------ ------------- ----
2 Preferred Stock Purchase and Recapitalization Agreement, dated as of June 2, *
2001 (incorporated by reference to Annex B to the Company's Proxy Statement
on Schedule 14A filed June 8, 2001).
3.1 The Amended and Restated Certificate of Incorporation of the Company *
(incorporated by reference to Exhibit 3.1 of the Company's Current Report
on Form 8-K on July 13, 2001).
3.2 The By-laws of the Company, as amended (incorporated by reference *
to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
filed May 15, 2001).
4.1 Rights Agreement dated as of January 13, 1995 between Katy and *
Harris Trust and Savings Bank as Rights Agent (incorporated by
reference to Exhibit 2.1 of Katy's Form 8-A filed January 17,
1995).
4.1a Amendment dated as of October 31, 1996 to the Rights Agreement *
dated as of January 13, 1995 between Katy and Harris Trust and
Savings Bank as Rights Agent (incorporated by reference to Katy's
Current Report on Form 8-K filed November 8, 1996).
4.1b Amendment dated as of January 8, 1999 to the Rights Agreement *
dated as of January 13, 1995 between Katy and LaSalle National
Bank as Rights Agent (incorporated by reference to Exhibit 4.1(b)
of Katy's Annual Report on Form 10-K filed March 18, 1999).
4.1c Third Amendment to Rights Agreement, dated March 30, 2001, *
between the Company and LaSalle Bank, N.A., as Rights Agent
(incorporated by reference to Exhibit (e) (3) to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 filed
April 25, 2001).
10.1 Katy Industries, Inc. 1994 Key Employee and Director Stock *
Purchase Plan (incorporated by reference to Exhibit 4.1 of Katy's
Registration Statement on Form S-8 filed September 28, 1994).
10.2 Katy Industries, Inc. Long-Term Incentive Plan (incorporated by *
reference to Katy's Registration Statement on Form S-8 filed
June 21, 1995).
10.3 Katy Industries, Inc. Non-Employee Director Stock Option Plan *
(incorporated by reference to Katy's Registration Statement on
Form S-8 filed June 21, 1995).
10.4 Katy Industries, Inc. Supplemental Retirement and Deferral *
Plan effective as of June 1, 1995 (incorporated by reference
to Katy's Registration Statement on Form S-8 filed June 21, 1995)
10.5 Katy Industries, Inc. Directors' Deferred Compensation Plan *
effective as of June 1, 1995 (incorporated by reference to Katy's
Registration Statement on Form S-8 filed June 21, 1995).
89
10.6 Preferred Unit Repurchase Agreement, dated as of March 28, 2001, *
between the Company, Contico International, LLC, and Newcastle
Industries, Inc. (incorporated by reference to Exhibit 10.13 to
the Company's Quarterly Report on Form 10-Q filed on May 15,
2001).
10.7 Amendment No. 1, dated as of March 28, 2001, to the Members *
Agreement. dated as of January 8, 1999, between the Company and
Newcastle Industries, Inc. (incorporated by reference to Exhibit
10.14 to the Company's Quarterly Report on Form 10-Q filed on May
15, 2001).
10.8 Credit Agreement dated as of June 28, 2001 (incorporated by *
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed August 14, 2001).
10.9 First Amendment and Waiver to Credit Agreement dated as of *
September 27, 2001 (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q dated November 14,
2001).
10.10 Second Amendment and Waiver to Credit Agreement dated November 26, *
2001, (incorporated by reference to exhibit 10.21 to the Company's
Annual Report on Form 10-K dated April 1, 2002.
10.11 Third Amendment and Waiver to Credit Agreement dated April 29, *
2002, (incorporated by reference to exhibit 10.22 in the Company's
Quarterly Report on Form 10-Q dated August 13, 2002.
10.12 Fourth Amendment and Waiver to Credit Agreement dated October 31, 2002, 93
filed herewith.
10.13 Employment Agreement dated as of June 28, 2001 between C. Michael *
Jacobi and the Company (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q filed August 14,
2001).
10.14 Katy Industries, Inc. 2001 Chief Executive Officer's Plan *
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q filed August 14, 2001).
10.15 Employment Agreement dated as of September 1, 2001 between Amir *
Rosenthal * and the Company (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q dated November
14, 2001).
10.16 Katy Industries, Inc. 2001 Chief Financial Officer's Plan *
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q dated November 14, 2001).
10.17 Katy Industries, Inc. 2002 Stock Appreciation Rights Plan, dated 93
November 21, 2002 filed herewith.
10.18 Loan Agreement dated as of January 31, 2003 with Fleet Capital 93
Corporation, filed herewith.
21 Subsidiaries of registrant 91
23 Independent Auditors' Consent 92
99.1 CEO Certification required by Section 906 of the Sarbanes-Oxley 93
Act of 2002
90
99.2 CFO Certification required by Section 906 of the Sarbanes-Oxley 93
Act of 2002
* Indicates incorporated by reference.
91