United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended: March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURTIES EXCHANGE ACT OF 1934
For the transition period from_______________ to________________
Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
765 Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203)598-0397
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 whether the registrant is an accelerated filer
(as defined in Rule 126-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at May 5, 2003
Common Stock, $1 Par Value 8,362,177
KATY INDUSTRIES, INC.
FORM 10-Q
March 31, 2003
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 (unaudited) 2,3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Certifications 34, 35
- 1 -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
(Unaudited)
March 31, December 31,
2003 2002
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 6,096 $ 4,842
Trade accounts receivable, net 60,502 58,913
Inventories, net 66,870 57,967
Other current assets 1,988 1,942
Current assets of discontinued operations 6,387 5,970
--------- ---------
Total current assets 141,843 129,634
--------- ---------
OTHER ASSETS:
Goodwill 11,211 11,211
Intangibles, net 25,029 25,491
Equity method investment in unconsolidated affiliate 6,939 7,306
Other 11,764 12,342
Non-current assets of discontinued operations 2,971 3,100
--------- ---------
Total other assets 57,914 59,450
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 3,116 3,180
Buildings and improvements 13,977 14,707
Machinery and equipment 143,820 143,089
--------- ---------
160,913 160,976
Less - Accumulated depreciation (78,661) (74,083)
--------- ---------
Net property and equipment 82,252 86,893
--------- ---------
Total assets $ 282,009 $ 275,977
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 2 -
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
March 31, December 31,
2003 2002
---- ----
CURRENT LIABILITIES:
Accounts payable $ 33,475 $ 37,058
Accrued compensation 6,586 7,214
Accrued expenses 44,991 47,712
Current maturities, long-term debt 2,857 700
Revolving credit facility 50,402 44,751
Current liabilities of discontinued operations 2,328 2,444
--------- ---------
Total current liabilities 140,639 139,879
LONG-TERM DEBT, less current maturities 17,143 --
OTHER LIABILITIES 16,811 17,526
--------- ---------
Total liabilities 174,593 157,405
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 10, 12 and 13)
PREFERRED INTEREST OF SUBSIDIARY -- 16,400
STOCKHOLDERS' EQUITY
15% Convertible Preferred Stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 805,000 shares,
liquidation value $80,500 83,710 80,696
Common stock, $1 par value; authorized 35,000,000;
issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 50,247 46,701
Accumulated other comprehensive loss (2,518) (3,046)
Accumulated deficit (13,617) (11,773)
Treasury stock, at cost, 1,460,027 shares (20,228) (20,228)
--------- ---------
Total stockholders' equity 107,416 102,172
--------- ---------
Total liabilities and stockholders' equity $ 282,009 $ 275,977
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
2003 2002
---- ----
Net sales $ 95,840 $ 101,525
Cost of goods sold 79,072 84,052
-------- ---------
Gross profit 16,768 17,473
Selling, general and administrative expenses (15,747) (15,697)
Severance, restructuring and related charges (228) (2,296)
Loss on SESCO transaction -- (6,010)
-------- ---------
Operating income (loss) 793 (6,530)
Equity in (loss) income of unconsolidated affiliate (367) 307
Gain on sale of equipment 753 --
Interest, net (2,392) (1,454)
Other, net (39) (80)
-------- ---------
Loss before income taxes (1,252) (7,757)
Provision for income taxes (543) --
-------- ---------
Loss from continuing operations before distributions on preferred
interest of subsidiary (1,795) (7,757)
Distributions on preferred interest of subsidiary (net of tax) (123) (328)
-------- ---------
Loss from continuing operations (1,918) (8,085)
Income from operations of discontinued businesses (net of tax) 74 495
-------- ---------
Net loss (1,844) (7,590)
Gain on early redemption of preferred interest of subsidiary 6,560 --
Payment in kind of dividends on convertible preferred stock (3,014) (2,622)
-------- ---------
Net income (loss) attributable to common stockholders $ 1,702 $ (10,212)
======== =========
Income (loss) per share of common stock - Basic and diluted
Income (loss) from continuing operations attributable to common stockholders $ 0.19 $ (1.28)
Discontinued operations 0.01 0.06
-------- ---------
Net income (loss) attributable to common stockholders $ 0.20 $ (1.22)
======== =========
Weighted average common shares outstanding (thousands):
Basic and diluted 8,362 8,393
======== =========
See Notes to Condensed Consolidated Financial Statements.
- 4 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Thousands of Dollars)
(Unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (1,844) $(7,590)
Income from operations of discontinued businesses (74) (495)
-------- -------
Loss from continuing operations (1,918) (8,085)
Depreciation and amortization 5,445 5,124
Write-off and amortization of debt issuance costs 1,397 391
Gain on sale of assets (753) --
Loss on SESCO transaction -- 6,010
Other 8 (424)
Changes in operating assets and liabilities:
Accounts receivable (1,589) 1,667
Inventories (8,903) (4,502)
Accounts payable (3,583) 6,767
Accrued expenses (3,349) (2,451)
-------- -------
Net cash (used in) provided by continuing operations (13,245) 4,497
Net cash (used in) provided by discontinued operations (311) 1,715
-------- -------
Net cash (used in) provided by operating activities (13,556) 6,212
-------- -------
Cash flows from investing activities:
Capital expenditures of continuing operations (1,295) (3,702)
Capital expenditures of discontinued operations (20) (94)
Collections of notes receivable from sales of subsidiaries -- 412
Proceeds from sale of assets 1,900 --
-------- -------
Net cash provided by (used in) investing activities 585 (3,384)
-------- -------
Cash flows from financing activities:
Net borrowings (repayments) on revolving loans, prior to refinancing 7,965 (6,000)
Repayment of borrowings under revolving loans at refinancing (52,716) --
Proceeds on initial borrowings at refinancing -- term loans 20,000 --
Proceeds on initial borrowings at refinancing -- revolving loans 43,743 --
Net borrowings on revolving loans following refinancing 6,659 --
Direct costs associated with debt facilities (886) --
Redemption of preferred interest of subsidiary (9,840) --
Repayment of real estate and chattel mortgages (700) (17)
-------- -------
Net cash provided by (used) in financing activities 14,225 (6,017)
-------- -------
Effect of exchange rate changes on cash and cash equivalents -- 181
-------- -------
Net increase (decrease) in cash and cash equivalents 1,254 (3,008)
Cash and cash equivalents, beginning of period 4,842 7,836
-------- -------
Cash and cash equivalents, end of period $ 6,096 $ 4,828
======== =======
See Notes to Condensed Consolidated Financial Statements.
- 5 -
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(1) Significant Accounting Policies
Consolidation Policy
The condensed consolidated financial statements include the accounts of
Katy Industries, Inc. and subsidiaries in which it has a greater than 50%
interest, collectively "Katy" or "the Company". All significant intercompany
accounts, profits and transactions have been eliminated in consolidation.
Investments in affiliates that are not majority owned and where the Company
exercises significant influence are reported using the equity method. The
condensed consolidated financial statements at March 31, 2003 and December 31,
2002 and for the three month periods ended March 31, 2003 and March 31, 2002 are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial condition and results of operations of the
Company. Interim results may not be indicative of results to be realized for the
entire year. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in our Annual Report on Form 10-K for the year
ended December 31, 2002.
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.
Inventories
The components of inventories are as follows:
March 31, December 31,
2003 2002
---- ----
(Thousands of dollars)
----------------------
Raw materials $ 21,974 $ 19,472
Work in process 1,393 1,539
Finished goods 49,457 42,736
Inventory reserves (5,954) (5,780)
-------- --------
$ 66,870 $ 57,967
======== ========
At March 31, 2003 and December 31, 2002, approximately 35% of our
inventories (excluding discontinued operations) were accounted for using the
last-in, first-out ("LIFO") method of costing, while the remaining inventories
were accounted for using the first-in, first-out ("FIFO") method. Current cost,
as determined using the FIFO method, exceeded LIFO cost by $1.7 million and $1.3
million at March 31, 2003 and December 31, 2002, respectively.
Property, Plant and Equipment
As of January 1, 2003, the Company revised its estimate of the useful life
of certain manufacturing assets, specifically molds and tooling equipment used
in the manufacture of plastic products, from seven to five years. This change in
estimate was made following significant impairments to these types of assets
recorded during 2002. This change in estimate resulted in approximately $1.4
million of incremental depreciation during the three month period ended March
31, 2003, versus the amount that would have been recorded had the useful life
not been changed.
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 the applicable accounting
literature. No compensation expense was recorded related to stock awards during
the first quarter of 2003, and a nominal level of compensation expense related
to stock awards was recorded during the was recorded during the first quarter of
2002. Compensation expense for stock awards is recorded in selling,
- 6 -
general and administrative expenses in the Condensed Consolidated Statement of
Operations.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options. Statement of Financial Accounting Standards (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, compensation cost
would be recorded 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 (thousands of dollars
except per share data). No stock options were granted in either the first
quarter 2003 or 2002.
The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with the expected lives of five to
ten years for all grants.
Three months ended March 31,
2003 2002
---- ----
Net income (loss) attributed to common stockholders, as reported $ 1,702 $ (10,212)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (30) (30)
----------- ----------
Pro forma net income (loss) $ 1,672 $ (10,242)
=========== ==========
Earnings (loss) per share
Basic and diluted - as reported $ 0.20 $ (1.22)
Basic and diluted - pro forma $ 0.20 $ (1.22)
(2) New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (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 adopted SFAS No. 145 on January
1, 2003. SFAS No. 145 requires 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 of these costs and losses as extraordinary items,
reported separately on a tax-effected basis after income from continuing
operations. The adoption of SFAS No. 145 will require that the Company
reclassify a $1.2 million after-tax ($1.8 million pre-tax) write-off of
previously capitalized debt costs that occurred during 2001 from its previous
classification as an extraordinary item to interest expense as a component of
income from continuing operations during 2001. Future write-offs of capitalized
debt costs would be classified as interest expense in a similar manner. As a
result of the refinancing of our borrowing facility in February 2003, the
Company wrote off approximately $1.2 million of debt costs, pre-tax, during the
first quarter of 2003. These costs have been reported as interest expense as a
component of income from continuing operations.
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 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 initiated after December 31,
2002. The Company is 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 the Company commits to
and communicates such restructuring and exit plans. Our operating plans call for
additional restructuring and facility consolidation activity during 2003 and
2004, concerned mainly with the further consolidation of St. Louis, Missouri
plastics manufacturing facilities, and restructuring and consolidation of
certain abrasives manufacturing
- 7 -
facilities. The Company has adopted the provisions of SFAS No. 146 for all
restructuring activities initiated after December 31, 2002. Management has not
quantified the impact of SFAS No. 146 given that its consolidation plans have
not been finalized.
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
disclosure provisions of the new standard were adopted by the Company at
December 31, 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
were adopted in 2002.
In January 2003, the FASB released Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.
FIN No. 46 clarifies issues regarding the consolidation of entities which may
have features that make it unclear whether consolidation or equity method
accounting is appropriate. FIN No. 46 is generally effective in 2003. Katy is
evaluating FIN No. 46 to determine any potential impact on its financial
reporting.
In April 2003, the FASB released SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. Katy does not expect SFAS No.
149 to impact its results of operations or financial position.
(3) Goodwill and Intangible Assets
During 2002, Katy completed the transition to SFAS No. 142, Goodwill and
Other Intangible Assets, with regard to accounting and reporting of goodwill and
other intangible assets.
Following is detailed information regarding Katy's intangible assets (in
thousands):
March 31, December 31,
2003 2002
--------- ------------
Trade Names $ 8,916 $ 8,916
Customer lists 21,447 21,447
Patents 4,447 4,283
Non-compete agreements 1,000 1,000
-------- --------
Subtotal 35,810 35,646
Accumulated amortization (10,781) (10,155)
-------- --------
Intangible assets, net $ 25,029 $ 25,491
======== ========
Katy recorded the following amounts of amortization expense on intangible
assets: $0.6 million and $0.5 million in the three-month periods ending March
31, 2003 and 2002, 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
(4) Discontinued Operations
Two of Katy's operations have been classified as discontinued operations
as of March 31, 2003, and for all periods shown, in accordance with SFAS No.
144, Accounting for the Impairments or Disposal of Long Lived Assets. The
Company adopted SFAS No. 144 on January 1, 2002.
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 then outstanding
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 Condensed
- 8 -
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. See Note 13 for additional information on the sale of GC/Waldom.
Both Hamilton and GC/Waldom had been presented as part of the Electrical
Products group for segment reporting purposes. Management and the board of Katy
determined that these businesses were not core to the Company's long-range
strategic goals.
The historical operating results have been segregated as "Discontinued
operations" on the Condensed Consolidated Statements of Operations and the
related assets and liabilities have been separately identified on the Condensed
Consolidated Balance Sheets. Following is a summary of the major asset and
liability categories for the discontinued operations (in thousands):
March 31, December 31,
2003 2002
--------- ------------
Current assets
Trade accounts receivable, net $ 3,579 $ 1,738
Inventories, net 2,636 4,164
Other 172 68
--------- ---------
$ 6,387 $ 5,970
========= =========
Non-current assets
Net properties and equipment $ 2,971 $ 3,100
--------- ---------
$ 2,971 $ 3,100
========= =========
Current liabilities
Accounts payable $ 1,555 $ 1,415
Other 773 1,029
--------- ---------
$ 2,328 $ 2,444
========= =========
Selected financial data for the discontinued operations is summarized as
follows (in thousands):
Three Months Ended March 31,
2003 2002
-------- --------
Net sales $ 6,032 $ 8,745
======== ========
Pre-tax profit $ 74 $ 495
======== ========
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 have not met the requirements of discontinued operations
treatment under the prior application provisions of APB Opinion 30. However, the
Company does not feel that it is probable that these divestitures will occur
within one year, and concedes that significant changes to plans or intentions
may occur. Therefore, these operations have not been classified as discontinued
operations.
(5) Sale of Assets
During February 2003, Kay's Woods Industries, Inc. (Woods) subsidiary sold
its wire fabrication facility in Moorseville, Indiana. The assets sold consisted
of land, building and equipment. The sale of the Moorseville facility followed
the shut down by Woods in December 2002 of all manufacturing facilities in the
U.S. Gross proceeds from the sale were $1.9 million. Proceeds were used to pay
off a $0.7 million mortgage debt payable related specifically to the Moorseville
property, with the remainder reducing Katy's outstanding debt obligations. Katy
recognized a gain on the sale of $0.8 million, which is shown on the Condensed
Consolidated Statements of Operations as a component of non-operating income.
- 9 -
(6) 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 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 which are
reflected in accrued expenses and other liabilities in the Condensed
Consolidated Balance Sheet (in thousands):
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 March 31, 2002, 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 March 31, 2003, 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 Condensed 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 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
- 10 -
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.
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
=======
(7) Indebtedness
On February 3, 2003, the Company refinanced its indebtedness and entered
into a new credit facility agented by Fleet Capital Corporation (the Fleet
Credit Agreement). The new $110 million facility, which is comprised of a $20
million term loan (Term Loan) and $90 million of revolving credit (Revolving
Credit Facility), involves a syndicate of banks, all of whom had participated in
the credit facility that was refinanced (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 (in thousands):
Sources:
Term borrowings under the Fleet Credit Agreement $20,000
Revolving borrowings under the Fleet Credit Agreement 43,743
-------
$63,743
=======
Uses:
Payment of principal and interest under the Deutsche Bank Credit Agreement $52,894
Purchase of the remaining preferred interest of subsidiary at a discount 9,840
Payment of accrued distribtutions on one-half of preferred interest of subsidiary 123
Certain costs associated with the Fleet Credit Agreement 886
-------
$63,743
=======
Under the Fleet Credit Agreement, the Term Loan has a final maturity date
of February 3, 2008 and quarterly repayments of $0.7 million, the first of which
was 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 Revolving Credit Facility 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 $22.2 million at March 28, 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,
with which the Company was in compliance at March 31, 2003. 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.
As a result of the refinancing, Katy's borrowing capacity was reduced from
$140 million under the Deutsche Bank Credit Agreement to $110 million under the
Fleet Credit Agreement, a reduction of 21%. Therefore, a proportionate share of
previously capitalized debt costs, amounting to approximately $1.2 million, were
written off to interest expense during the first quarter of 2003.
- 11 -
March 31, December 31,
2003 2002
----------- ------------
(Thousands of Dollars)
Term loan payable under Fleet Credit Agreement, interest based on
LIBOR and Prime Rates (3.38% - 5.25%), due through 2008 $ 20,000 $ --
Revolving loans payable under Fleet Credit Agreement, interest based on
LIBOR and Prime Rates (3.63 - 5.00%) 50,402 --
Revolving loans payable under Deutsche Bank Credit Agreement,
interest based on Eurodollar and Prime Rates (3.75 - 5.50%) -- 44,751
Real estate and chattel mortgages, with interest at fixed rates (7.14%),
due through 2003 -- 700
----------- -----------
Total debt 70,402 45,451
Less revolving loans, classified as current (50,402) (44,751)
Less current maturities (2,857) (700)
----------- -----------
Long-term debt $ 17,143 $ --
=========== ===========
Aggregate remaining scheduled maturities of the Term Loans are as follows
(in thousands):
2003 $ 2,143
2004 2,857
2005 2,857
2006 2,857
2007 2,857
2008 6,429
(8) Preferred Interest in Subsidiary
Coincident with the refinancing of Katy's debt obligations discussed in
Note 6, the Company redeemed early, at a discount, the remaining half of the
preferred interest in Contico, plus accrued distributions thereon, which 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, with $9.8 million
applied toward the preferred interest and the remainder applied to accrued
distributions through the date of redemption. The difference between the amount
paid on redemption and the stated value of preferred interest redeemed ($6.6
million, pre-tax) was recognized as an increase to Additional Paid-in Capital on
the Condensed Consolidated Balance Sheets, and is an addition to earnings
available to common shareholders in the calculation of basic earnings per share
during 2003.
(9) Income Taxes
As of December 31, 2002, the Company had deferred tax assets, net of
deferred tax liabilities, of $42.8 million. Domestic net operating loss (NOL)
carry forwards comprised $22.8 million of the deferred tax assets. 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 Condensed Consolidated Balance
Sheets. For this reason, the Company was unable at December 31, 2002 and March
31, 2003 to conclude that NOLs and other deferred tax assets would be utilized
in the future. As a result, valuation allowances were recorded as of December
31, 2002 and March 31, 2003 for the full amount of deferred tax assets, less the
amount of deferred tax liabilities.
The provision for income taxes reflected on the Condensed Consolidated
Statements of Operations for the three months ended March 31, 2003 represents
current tax expense associated with state and foreign taxes.
(10) Commitments and Contingencies
As set forth more fully in the Company's Form 10-K, the Company and
certain of its current and former direct and
- 12 -
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 (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) 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 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 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 the 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 "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 such costs become probable and reasonably estimable.
(11) Industry Segment Information
The Company is a manufacturer and distributor of a variety of industrial
and consumer products, including sanitary maintenance supplies, coated
abrasives, stains, and electrical components. Principal markets are the United
States, Canada and Europe, and include the sanitary maintenance, restaurant
supply, retail, electronic and automotive markets. These activities are grouped
into two industry segments: Electrical Products and Maintenance Products.
- 13 -
The following table sets forth information by segment:
Three months ended March 31,
2003 2002
---- ----
(Thousands of dollars)
Maintenance Products Group
Net external sales $ 74,213 $ 76,566
Operating income 2,728 3,363
Operating margin 3.7% 4.4%
Severance, restructuring and related charges 209 728
Depreciation and amortization 5,125 4,775
Capital expenditures 1,242 3,597
Total assets 207,371 238,341
Electrical Products Group
Net external sales $ 21,627 $ 24,068
Operating income (loss) 644 (915)
Operating margin (deficit) 3.0% -3.8%
Severance, restructuring and related charges 14 1,313
Depreciation and amortization 298 285
Capital expenditures 45 29
Total assets 46,335 41,835
Total
Net external sales - Operating segments $ 95,840 $ 100,634
- Other [a] -- 891
--------- ---------
Total $ 95,840 $ 101,525
========= =========
Operating income (loss) - Operating segments $ 3,372 $ 2,448
- Other [a] -- (6,759)
- unallocated corporate (2,579) (2,219)
--------- ---------
Total $ 793 $ (6,530)
========= =========
Severance, restructuring and related charges - Operating segments $ 223 $ 2,041
- Unallocated corporate 5 255
--------- ---------
Total $ 228 $ 2,296
========= =========
Depreciation and amortization - Operating segments $ 5,423 $ 5,060
- Unallocated corporate 22 64
--------- ---------
Total $ 5,445 $ 5,124
========= =========
Capital expenditures - Operating segments $ 1,287 $ 3,626
- Other [a] -- --
- Unallocated corporate 8 76
- Discontinued operations -- 94
--------- ---------
Total $ 1,295 $ 3,796
========= =========
Total assets - Operating segments $ 253,706 $ 280,176
- Other [a] 6,946 8,173
- Unallocated corporate 11,999 26,207
- Discontinued operations 9,358 28,935
--------- ---------
Total $ 282,009 $ 343,491
========= =========
[a] Amounts shown as "Other" represent items associated with Katy's
waste-to-energy facility and the equity investments in the shrimp harvesting and
farming operation.
- 14 -
(12) Severance, Restructuring and Other Charges
During the first quarter of 2003, the Company recorded $0.2 million for
severance, restructuring and other charges. These costs related to equipment
moves, adjustments to non-cancelable lease liabilities for abandoned facilities,
severance, and other costs associated with consolidation of facilities and
administrative functions.
During the fourth quarter of 2002, the Company 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. As a result of this shut down, 361
employees were terminated. 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 expenses. 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 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 Road facility to the Bridgeton facility, as discussed
below. Each of these facilities is in the St. Louis, Missouri area.
During the third quarter of 2002, the Company recorded $9.5 million of
severance, restructuring and other charges. During the third quarter, the
Company committed to a plan to abandon Contico's Earth City facility and to
consolidate its operations into the Bridgeton facility. 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, whose operations are
also being consolidated into the Bridgeton facility. 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 the Bridgeton facility, 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 charge of $0.5 million was recorded for
payments for consultants working with the Company on sourcing and other
manufacturing and production efficiency initiatives.
During the second quarter of 2002, the Company recorded $3.8 million of
severance, restructuring, and other charges. Approximately $1.6 million of the
charges related to accruals for payments for consultants working with the
Company 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 were accrued at
June 30, 2002, as well as involuntary termination benefits of $0.1 million. The
Warson Road facility shutdown involved a reduction in workforce of nineteen
employees. The remaining $0.3 million (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, the Company recorded $2.3 million of
severance, restructuring and other charges. Approximately $1.9 million of the
charges related to accruals for payments for consultants working with the
Company 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.
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.
The table below details activity in restructuring reserves since December
31, 2002 (in thousands).
Restructuring liabilities at December 31, 2002 $ 14,499
Additions to restructuring liabilities 228
Payments on restructuring liabilities (2,713)
--------
Restructuring liabilities at March 31, 2003 $ 12,014
========
- 15 -
The table below summarizes the remaining obligations for severance and
restructuring charges detailed above which are included in accrued compensation,
accrued expenses and other liabilities in the Condensed Consolidated Balance
Sheets (in thousands):
2003 $ 4,974
2004 1,592
2005 1,601
2006 1,368
2007 1,300
Thereafter 1,179
--------
Total Payments $ 12,014
========
(13) Subsequent Events
During April 2003, the Company completed the sale of GC/Waldom, a Katy
business that was formerly part of the Electrical Products group, for gross
proceeds of $8.3 million. Katy will record the gain/loss on the sale of
GC/Waldom during the second quarter of 2003, and does not anticipate a
significant gain/loss as a result of the sale. GC/Waldom is shown as a
discontinued operation for all periods presented in the financial statements.
During April 2003, Katy acquired Spraychem, Limited (Spraychem), a United
Kingdom distributor of spray bottles and related products. The purchase price of
Spraychem was the equivalent of $1.5 million U.S. dollars. Available borrowings
under the Fleet Credit Agreement were used for the purchase of the business.
Spraychem's annual revenues were approximately the equivalent of $2.6 million
U.S. dollars.
- 16 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 versus Three Months Ended March 31, 2002
The table below and the narrative that follows summarize the key factors
in the year-to-year changes in operating results.
Percentage
2003 2002 Variance
---- ---- --------
(Thousands of dollars)
Maintenance Products Group
Net external sales $ 74,213 $ 76,566 -3.1%
Operating income 2,728 3,363 -18.9%
Operating margin 3.7% 4.4% N/A
Severance, restructuring and related charges 209 728 -71.3%
Depreciation and amortization 5,125 4,775 7.3%
Capital expenditures 1,242 3,597 -65.5%
Total assets 207,371 238,341 -13.0%
Electrical Products Group
Net external sales $ 21,627 $ 24,068 -10.1%
Operating income (loss) 644 (915) 170.4%
Operating margin (deficit) 3.0% -3.8% N/A
Severance, restructuring and related charges 14 1,313 -98.9%
Depreciation and amortization 298 285 4.6%
Capital expenditures 45 29 55.2%
Total assets 46,335 41,835 10.8%
Total Company [a]
Net external sales [b] $ 95,840 $ 101,525 -5.6%
Operating income (loss) [b] 793 (6,530) 112.1%
Operating margin (deficit) [b] 0.8% -6.4% N/A
Severance, restructuring and related charges [b] 228 2,296 -90.1%
Depreciation and amortization [b] 5,445 5,124 6.3%
Capital expenditures [b] 1,295 3,796 -65.9%
Total assets [c] 282,009 343,491 -17.9%
[a] Included in "Total Company" are certain amounts in addition to those shown
for the Maintenance Products and Electrical Products segments, including amounts
associated with 1) unallocated corporate expenses, 2) our equity investment in a
shrimp harvesting and farming operation, and 3) the SESCO partnership. See Note
11 to the Condensed Consolidated Financial Statements for detailed
reconciliations of segment information to the Condensed Consolidated Financial
Statements.
[b] Excludes discontinued operations
[c] Includes discontinued operations
Sales in the Maintenance Products group decreased from $76.6 million to
$74.2 million, a decrease of $2.4 million or 3.1%. The most significant sales
shortfalls as compared to prior year were realized in Contico's
janitorial/sanitation business. We believe that this business continues to be
impacted by the slow economy and reduced demand for cleaning products, due to
commercial real estate vacancy rates and reduced demand in the travel and
hospitality industries. Sales were also lower at the Loren Products division,
particularly with regard to their roofing products. General economic conditions
and their impact on construction activity are impacting the sales levels for
this business. These sales reductions were offset by higher sales in the
Glit/Microtron janitorial/sanitation abrasives business, which experienced
higher sales levels to retail outlets.
The group's operating income decreased from $3.4 million to $2.7 million,
a decrease of 18.9%. Operating income was impacted in both years by severance,
restructuring and related charges. Excluding these items, operating income
- 17 -
decreased by $1.2 million, or 28%. The group's profitability was negatively
impacted by higher prices for plastic resins, a key raw material in Contico's
plastics manufacturing operation. Also contributing to the decrease in operating
income is higher depreciation expense at the Contico division, the result of a
change in estimates on the useful lives of certain equipment, beginning on
January 1, 2003. The incremental depreciation recorded in the three months ended
March 31, 2003 is approximately $1.4 million, compared to the amount that would
have been booked had the useful life estimates not been revised. Profitability
was improved at Glit/Microtron, mainly as a result of higher sales, and at the
Wilen mop, broom and brush division, due primarily to cost reduction efforts.
Profitability was lower at the Loren division, due mainly to lower sales volume.
The group recorded severance, restructuring and related charges of $0.2
million during the first quarter of 2003 and $0.7 million during the first
quarter of 2002. The 2003 costs were related primarily to equipment moves,
adjustments to non-cancelable lease liabilities for abandoned facilities,
severance, and other costs associated with consolidation of facilities and
administrative functions. The 2002 costs were associated with severance related
to headcount reduction at the executive management level ($0.3 million),
consulting fees related to a resourcing project ($0.3 million), and other costs
associated with the consolidation of administrative functions ($0.1 million).
Total assets in the Maintenance Products group decreased from $238.3
million at March 31, 2002 to $207.4 million at March 31, 2003 due to 1) higher
levels of depreciation than capital expenditures from March 31, 2002 through
March 31, 2003, and 2) impairments of certain property, plant and equipment and
intangible assets recorded in 2002.
Sales in the Electrical Products group decreased from $24.1 million to
$21.6 million, a decrease of 10%. The decrease was primarily attributable to
lower sales at the Woods U.S. business, partially off set by a small increase at
the Woods Canada business. The largest portion of the sales shortfall relates to
Woods U.S.' largest retail customer, to whom sales were planned to be lower in
the first quarter of 2003 because of unusually high sales levels in the first
quarter of 2002. The high sales levels in 2002 were in part due to the
customer's inventory management practices driven by sales trends from as early
as late 2001. 2003 sales are also lower due to slower retail sales due as a
result of general economic conditions.
The group's operating income improved from a loss of ($0.9) million to
income of $0.6 million, an improvement of $1.5 million. Operating income was
impacted in the first quarter of 2002 by severance, restructuring and related
charges. Excluding these items, operating income increased by $0.3 million, or
65%. Operating income was higher at Woods Canada and lower at Woods U.S., driven
primarily by fluctuations in sales volumes as previously discussed. However,
cost reduction strategies at the Woods entities have allowed profitability
relative to sales levels to remain consistent year over year
The group recorded severance, restructuring and related charges of $1.3
million in the first quarter of 2002. These costs consisted of consulting fees
incurred by both Woods U.S. and Woods Canada related to a resourcing project
that has been completed. During the first quarter of 2003, Woods U.S. also
recognized a $0.8 million gain on the sale of a building which had housed a
manufacturing operation. The facility was closed concurrent with the decision to
outsource all of Woods finished goods inventory from third party vendors. This
gain was reported as a component of non-operating income.
Total assets in the Electrical Products group were higher due mainly to
higher inventory levels at the Woods U.S. business. Inventory levels were
expected to be higher at Woods U.S. versus prior year as a result of the fully
outsourced business model in place following the shutdown of all U.S.
manufacturing operations in December of 2002.
Net income for the three months ended March 31, 2003 was also impacted by
a $0.4 million equity loss of a 43%-owned unconsolidated subsidiary, Sahlman
Holdings, Inc., which is in the business of shrimp harvesting and farming.
During the three months ended March 31, 2002, the same investment resulted in
equity income of $0.3 million. The Sahlman business has been negatively impacted
by low shrimp prices and high fuel prices.
Interest expense increased from $1.5 million to $2.4 million, an increase
of 60%. During the first quarter of 2003, we wrote off $1.2 million of
capitalized debt issuance costs due to the reduction in our borrowing capacity
as a result of the refinancing of our debt obligations. The amount of this
write-off is included in interest expense. Excluding this write-off, interest
expense decreased by $0.3 million, or 20%, due mainly to lower average
borrowings and low interest rates.
The provision for income taxes for the three months ended March 31, 2003
reflects current expense for state and foreign income taxes. No federal benefit
was recorded on the pre-tax net loss for the first quarter of 2003 as valuation
allowances were recorded related to any deferred tax asset created as a result
of the book loss. For similar reasons, no tax benefits were recorded during the
three month period ended March 31, 2002.
- 18 -
Total assets for Katy were significantly impacted by discontinued
operations, which decreased from $28.9 million to $9.3 million, a reduction of
68%, by reductions in unallocated corporate assets, which decreased from $26.2
million to $12.0 million, a reduction of 54%, and by the decreases in total
assets in the Maintenance Products group discussed above. The reduction in
discontinued operations assets is due to 1) the assets of Hamilton Precision
Metals being included at March 31, 2002, but not at March 31, 2003 due to the
sale of that business in October 2002, and 2) valuation reductions in the
carrying values of assets of GC/Waldom recorded in the fourth quarter of 2002 in
anticipation of the sale of that business, which occurred in April 2003. The
reduction in unallocated corporate assets is due primarily to valuation
allowances placed on deferred tax assets in the fourth quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity was negatively impacted during the first quarter of 2003 as a
result of lower operating cash flow during the quarter. The Company used $13.6
million of operating cash compared to operating cash flow generated during the
first quarter of 2002 of $6.2 million. Debt obligations increased from December
31, 2002 by $25.0 million. However, $9.8 million of the increase in debt
obligations related to the early redemption of higher-interest preferred units
of a subsidiary, which were redeemed at a discount coincident with the
refinancing of Katy's debt obligations in February 2003. Excluding the impact on
debt obligations of this factor, debt increased by $15.2 million during the
first quarter of 2003 from December 31, 2002. Most of this increase in debt was
the result of working capital changes, primarily higher inventory and lower
payables and accruals. The inventory build was expected to a certain extent,
given historical sales trends and seasonality in the Electrical Products group
and the move to outsourced finished goods inventory by Woods U.S. in December
2002. However, the higher inventory level is also due to lower than expected
sales experienced in the first quarter of 2003.
In February 2003, we funded a new credit agreement, agented by Fleet
Capital Corporation (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 is
comprised of a $20 million term loan (Term Loan) and $90 million of revolving
credit (Revolving Credit Facility), 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.
In April 2003, we sold the GC/Waldom business for gross proceeds of $8.3
million, which allowed us to further reduce our debt obligations. The proceeds
of this sale will result in a positive impact to cash flows from investing
activities for the six months ended June 30, 2003. We do not expect a
significant gain or loss on the sale of GC/Waldom.
With the early pay down of the term loan in October 2002 after the sale of
our Hamilton Precision Metals subsidiary, we were determined to enter a new term
loan, which is collateralized by real and personal property. This structure
allows us 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. Below is a
summary of the sources and uses associated with the funding of the Fleet Credit
Agreement (in thousands):
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 $52,894
Purchase of outstanding preferred interest of Contico at a discount 9,840
Payment of accrued distributions on outstanding preferred interest of Contico 123
Certain costs associated with the Fleet Credit Agreement 886
-------
$63,743
=======
Under the Fleet Credit Agreement, the Term Loan has a final maturity date
of February 3, 2008 and quarterly repayments of $0.7 million, the first of which
was made on April 1, 2003. A final payment of $5.7 million is scheduled to be
made in 2008. The term loan is collaterized by the Company's property, plant and
equipment. The Revolving Credit Facility 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.
- 19 -
Unused borrowing availability on the Revolving Credit Facility was $22.2
million at March 31, 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, and we were in compliance with these covenants as of
March 31, 2003. 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 charged to expense during the first
quarter of 2003 $1.2 million of previously capitalized debt issuance costs from
the Deutsche Bank Credit Agreement. While approximately $5.6 million of previous
unamortized debt issuance costs which 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 Deutsche 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 of $0.9 million, will be amortized over the life of the Fleet Credit
Agreement through January 2008.
The Revolving Credit Facility under the Fleet Credit Agreement requires
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 Fleet Credit Agreement, causes 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 does 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. The Revolving Credit Facility does not expire or have a maturity
date within one year, but rather has a final expiration date of January 31,
2008. Also, we were in compliance with the applicable financial covenants at
March 31, 2003. The lender had not notified us of any indication of a MAE at
March 31, 2003, and to our knowledge, we were not in default of any provision of
the Fleet Credit Agreement at March 31, 2003.
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
believe 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 excess of carrying value over redemption price is
an addition to stockholders' equity, and favorably impacts 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 for 2003 are expected to be higher
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 steps in reducing our
cost structure to a competitive level.
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.
- 20 -
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 Mooresville, 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.
We have recorded valuation allowances of $42.8 million on deferred tax
assets as of December 31, 2002. These deferred tax assets include $22.8 million
of domestic net operating loss carry forwards. To the extent we generate taxable
income in future years, these net operating loss carry forwards will be
available to reduce future income tax liabilities.
On April 20, 2003, we announced a plan to repurchase up to $5 million of
our common stock. This repurchase will be funded through our credit facility. As
of May 12, 2003, we have not begun repurchasing stock under the plan.
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 Condensed
Consolidated Statements of Operations (Total Company), with EBITDA, a measure we
use on a routine basis:
- 21 -
(In thousands) Three Months Ended
--------------------------------------------------
Excluding
March 31, Unusual Unusual
2003 Items Items % of sales
--------------------- ----------------------
Net sales $ 95,840 $ -- $ 95,840 100.0%
Cost of goods sold 79,072 -- 79,072 82.5%
--------------------- ----------------------
Gross profit 16,768 -- 16,768 17.5%
Selling, general & administrative expenses 15,747 -- 15,747 16.4%
Impairments of long-lived assets -- -- --
Severance, restructuring & related costs 228 (228)(a) --
--------------------- ----------------------
Operating income 793 228 1,021 1.1%
Equity in income of unconsolidated investment (367) -- (367) -0.4%
Gain on sale of assets 753 (753)(b) --
Interest (2,392) -- (2,392) -2.5%
Other, net (39) -- (39) 0.0%
--------------------- ----------------------
Loss before provision for income taxes (1,252) (525) (1,777) -1.8%
Provision for income taxes (543) -- (543) -0.6%
--------------------- ----------------------
Loss before distributions on preferred interest in subsidiary (1,795) (525) (2,320) -2.4%
Distributions on preferred interest of subsidiary, net of tax (123) -- (123) -0.1%
--------------------- ----------------------
Loss from continuing operations $ (1,918) (525) $ (2,443) -2.5%
===================== ======================
Earnings before interest, taxes, depreciation and amortization Pretax income $ (1,777)
(excluding unusual items) Interest 2,392
Depreciation and
amortization 5,445
---------
EBITDA $ 6,060 6.3%
=========
Three Months Ended
--------------------------------------------------
Excluding
March 31, Unusual Unusual
2002 Items Items % of sales
--------------------- ----------------------
Net sales $ 101,525 $ -- $ 101,525 100.0%
Cost of goods sold 84,052 -- 84,052 82.8%
--------------------- ----------------------
Gross profit 17,473 -- 17,473 17.2%
Selling, general & administrative expenses 15,697 15,697 15.5%
Severance, restructuring & related costs 2,296 (2,296)(a) --
Loss on SESCO transaction 6,010 (6,010)(b) --
--------------------- ----------------------
Operating (loss) income (6,530) 8,306 1,776 1.7%
Equity in income of unconsolidated investment 307 -- 307 0.3%
Interest (1,454) -- (1,454) -1.4%
Other, net (80) -- (80) -0.1%
--------------------- ----------------------
(Loss) income before provision for income taxes (7,757) 8,306 549 0.5%
Provision for income taxes -- (209)(c) (209) -0.2%
--------------------- ----------------------
(Loss) income before distributions on preferred interest in subsidiary (7,757) 8,097 340 0.3%
Distributions on preferred interest of subsidiary, net of tax (328) -- (328) -0.3%
--------------------- ----------------------
(Loss) income from continuing operations $ (8,085) 8,097 $ 12 0.0%
===================== ======================
Earnings before interest, taxes, depreciation and amortization Pretax income $ 549
(excluding unusual items) Interest 1,454
Depreciation and
amortization 5,124
---------
EBITDA $ 7,127 7.0%
=========
- 22 -
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:
a) 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.
b) Gain on the sale of assets includes a gain recorded on the sale of
the Woods U.S. wire fabrication facility in Mooresville, Indiana.
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.
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 partnership
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.
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. 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 March 31, 2003, 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
- 23 -
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] $ 50,402 $ -- $ -- $50,402 $ --
Term loans 20,000 2,857 5,714 5,714 5,715
Operating leases [c] 49,164 12,005 20,071 12,056 5,032
Severance and restructuring [c] 1,906 1,513 378 15
SESCO payable to Montenay [b] 5,800 1,000 2,050 2,200 550
-------- ------- ------- ------- -------
Total Contractual Obligations $127,272 $17,375 $28,213 $70,387 $11,297
======== ======= ======= ======= =======
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 $ 450 $ 450 $ -- $ -- $ --
Stand-by letters of credit 7,310 7,310 -- -- --
Guarantees [a] 35,820 5,385 15,135 15,300 --
-------- ------- ------- ------- -------
Total Commercial Commitments $ 43,580 $13,145 $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 6 to the Condensed Consolidated
Financial Statements.
(b) Amount owed to Montenay as a result of the SESCO partnership, discussed
above and in Note 6 to the Condensed Consolidated Financial Statements. $1.0
million of this obligation is classified in the Condensed 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 $9.9 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.
- 24 -
(d) As discussed in the Liquidity and Capital Resources section above, the
entire Fleet Revolving Credit Facility is classified as a current liability on
the Condensed Consolidated Balance Sheets as a result of the combination in the
Fleet Credit Agreement of 1) lockbox agreements on Katy's depository bank
accounts and 2) a subjective Material Adverse Effect (MAE) clause.
SEVERANCE, RESTRUCTURING AND RELATED CHARGES
During the first quarter of 2003, we recorded $0.2 million for severance,
restructuring and other charges. These costs related to equipment moves,
adjustments to non-cancelable lease liabilities for abandoned facilities,
severance, and other costs associated with consolidation of facilities and
administrative functions.
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. As a result of this shut down, 361
employees were terminated. 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 expenses. 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 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 Road facility to the Bridgeton facility, as discussed
below. Each of these facilities is in the St. Louis, Missouri, area.
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. 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, whose operations are also being
consolidated into the Bridgeton facility. 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 the Bridgeton facility, 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 charge of $0.5 million was recorded for
payments to consultants working with us on sourcing and other manufacturing and
production efficiency initiatives.
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 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 (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.
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 the
estimated sub-lease revenue estimates, charges could be recognized in future
periods to update the estimated liability and cost to Katy for these facilities.
- 25 -
The table below details activity in restructuring reserves since December
31, 2002 (in thousands):
Restructuring liabilities at December 31, 2002 $ 14,499
Additions to restructuring liabilities 228
Payments on restructuring liabilities (2,713)
--------
Restructuring liabilities at March 31, 2003 $ 12,014
========
The table below summarizes the remaining obligations for severance and
restructuring charges detailed above (in thousands):
2003 $ 4,974
2004 1,592
2005 1,601
2006 1,368
2007 1,300
Thereafter 1,179
----------
Total Payments $ 12,014
==========
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
year-over-year top line growth from those businesses in 2003 as we experienced
in 2002. 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 of our facilities. 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, effective January 1, 2003. The amount of incremental
depreciation expense during 2003 as a result of this reduction in depreciable
lives is $5.8 million. However, many of these assets will become fully
depreciated during 2003 since the Contico acquisition occurred in early 1999.
Therefore, depreciation expense related to these assets is expected to reduce
again in 2004 and subsequent years. Our total depreciation expense in 2004 and
subsequent years will depend on changes in the level of depreciable assets due
to changes in property, plant and equipment.
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 was relocated in 2001 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.
- 26 -
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 Road 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.
The large 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 in the United States
to lower cost sources. Prior to the plant closures, Woods U.S. already sourced
approximately half of its finished goods from vendors. The plant closures took
place in December 2002. While outsourcing of the Woods U.S products is a
cost-saving measure, Woods U.S. 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 will require 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 will be spent mainly in 2003.
We continue to pursue a strategy of developing the Katy Maintenance Group
(KMG). By the latter portion of 2003, we expect to be operating 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
because 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 March 31, 2003. 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
deferred tax assets that may be generated in 2003.
We are continually evaluating alternatives that relate to divestitures of
non-core 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.
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- Our inability to reduce product costs, including manufacturing,
sourcing, freight, and other product costs.
- 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.
ENVIRONMENTAL AND OTHER CONTINGENCIES
As set forth more fully in our Form 10-K, we and certain of our 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 (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) 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, we have recorded and accrued for indicated environmental liabilities
amounts that we deem 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. We expect
this amount to be substantially paid over the next one to four years.
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The most significant environmental matter in which we are currently
involved relates to the W.J. Smith site. In 1993, the 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 the 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 our Woods subsidiary 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.
We also have a number of product liability and workers' compensation
claims pending against us and our 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. We estimate 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, we have provided for our share of
expected losses beyond the applicable insurance coverage, including those
incurred but not reported to us or our insurance providers, which are developed
using actuarial techniques. Such accruals are developed using currently
available claim information, and represent our 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 Katy, further costs could be
significant and will be recorded as a charge to operations when such costs
become probable and reasonably estimable.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (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 adopted SFAS No. 145 on January 1, 2003.
SFAS No. 145 requires 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 of these costs and losses as extraordinary items, reported
separately 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 from its previous classification as an extraordinary
item to interest expense as a component of income from continuing operations
during 2001. Future write-offs of capitalized debt costs would be classified as
interest expense in a similar manner. As a result of the refinancing of our
borrowing facility in February 2003, we wrote off approximately $1.2 million of
debt costs, pre-tax, during the first quarter of 2003. These costs have been
reported as interest expense as a component of income from continuing
operations.
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
- 29 -
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 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. We have adopted the provisions of SFAS No.
146 for all restructuring activities initiated after December 31, 2002.
Management has not quantified the impact of SFAS No. 146 given that its
consolidation plans have not been finalized.
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
disclosure provisions of the new standard were adopted by the Company at
December 31, 2002. We 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 were adopted in
2002.
In January 2003, the FASB released Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.
FIN No. 46 clarifies issues regarding the consolidation of entities which may
have features that make it unclear whether consolidation or equity method
accounting is appropriate. FIN No. 46 is generally effective in 2003. Katy is
evaluating FIN No. 46 to determine any potential impact on its financial
reporting.
In April 2003, the FASB released SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. We do not expect SFAS No. 149
to impact our results of operations or financial position.
CRITICAL ACCOUNTING POLICIES
We disclosed details regarding certain of our critical accounting policies
in the Management's Discussion and Analysis section of (Part II., Item 7.) our
2002 Form 10-K. There have been no changes to policies as of March 31, 2003.
Item 3. 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 temporary cash investments. We
currently do not use derivative financial instruments relating to either of
these exposures. Our interest obligations on outstanding debt are indexed from
short-term Eurodollar rates. We do not believe our exposures to interest rate
risks are material to our financial position or results of operations.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our SEC filings is reported within
the time periods specified in the SEC's rules, and that such information is
accumulated and communicated to the management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. We also have investments in certain
unconsolidated entities. As we do not control or manage these entities, the
disclosure controls and procedures with respect to such entities are necessarily
more limited than those we maintain with respect to our consolidated
subsidiaries.
Within the 90 days prior to the filing date of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that
- 30 -
our disclosure controls and procedures are effective in timely alerting them to
material information relating to Katy (including its consolidated subsidiaries)
required to be included in our periodic SEC filings. There have been no
significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
- 31 -
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
During the quarter for which this report is filed, there have been
no material developments in previously reported legal proceedings, and no other
cases or legal proceedings, other than ordinary routine litigation incidental to
the Company's business and other nonmaterial proceedings, brought against the
Company.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
99.1 Certification by C. Michael Jacobi, Chief Executive Officer of
Katy Industries, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Amir Rosenthal, Chief Financial Officer of Katy
Industries, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
None.
(b) Reports on Form 8-K
None.
- 32 -
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
---------------------
Registrant
DATE: May 12, 2003 By /s/ C. Michael Jacobi
----------------------------------------
C. Michael Jacobi
President and Chief Executive Officer
By /s/ Amir Rosenthal
----------------------------------------
Amir Rosenthal
Vice President, Chief Financial Officer,
General Counsel and Secretary
- 33 -
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 quarterly report on Form 10-Q of Katy Industries, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 this
quarterly 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: May 12, 2003 By: /s/ C. Michael Jacobi
-----------------------
C. Michael Jacobi
Chief Executive Officer
- 34 -
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 quarterly report on Form 10-Q of Katy Industries, Inc.
(the "registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 12, 2003 By: /s/ Amir Rosenthal
------------------------
Amir Rosenthal
Chief Financial Officer
- 35 -