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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2001
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)
984 Southford Road Middlebury, CT 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 598-0387
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 22, 2002, was $53,790,047. On that date 8,391,583
shares of Common Stock, $1.00 par value, were outstanding, the only class of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2002 annual meeting - Part III.
Exhibit index appears on page 65. Report consists of 68 pages.
PART I
Item 1. BUSINESS
Katy Industries, Inc. (Katy or the Company) was organized as a Delaware
corporation in 1967. We carry on our business through two principal operating
groups: Electrical/Electronics and Maintenance Products. Our other businesses
comprise of a waste-to-energy facility and a minority interest in a seafood
harvesting company. Each majority-owned company operates within a broad
framework of policies and corporate goals. Katy's corporate management is
responsible for overall planning, financial management, acquisitions,
dispositions, and other related administrative and corporate matters.
Recapitalization
On June 28, 2001, we completed a recapitalization of the Company. Katy
reached a definitive agreement on June 2, 2001 with KKTY Holding Company, LLC.
(KKTY), an affiliate of Kohlberg Investors IV, L.P. (Kohlberg), regarding the
recapitalization. On June 28, 2001, 1) our stockholders approved proposals to
effectuate the recapitalization at their annual meeting, including
classification of the board of directors into two classes with staggered terms,
and 2) Katy, KKTY and a syndicate of banks agreed to a new credit facility (the
New Credit Agreement) to finance the future operations of Katy. Under the terms
of the recapitalization, directors designated by KKTY represent a majority of
our Board of Directors. Pursuant to the shareholder vote at the annual meeting,
four of the elected directors are considered Class I directors, and were elected
for an initial term of one year. These directors include C. Michael Jacobi, the
new President and CEO, and three directors who were not designated by KKTY. The
Class I directors elected at the 2002 stockholders' meeting, and their
successors, will serve two year terms. Five of the elected directors are
considered Class II directors, and will serve terms of two years. All of the
Class II directors are designees of KKTY.
Under the terms of the recapitalization, KKTY purchased 700,000 shares of
newly issued preferred stock, $100 par value per share (Convertible Preferred
Stock), which is convertible into 11,666,666 common shares, for an aggregate
purchase price of $70.0 million. More information regarding the Convertible
Preferred Stock can be found in Note 9 to Consolidated Financial Statements of
Katy included in Part II, Item 8. The recapitalization allowed us to retire
obligations we had under our former revolving credit agreement (Former Credit
Agreement), which was agented by Bank of America. In connection with the
recapitalization, we entered into the New Credit Agreement, agented by Bankers
Trust Company. More information regarding the New Credit Agreement can be found
in Note 8 to Consolidated Financial Statements of Katy included in Part II, Item
8, and in the Liquidity and Capital Resources section of Management's Discussion
and Analysis of Financial Condition and Results of Operations, included in Part
II, Item 7.
Also in connection with the recapitalization, we entered into an agreement
with the holder of the preferred interest in our Contico International, L.L.C.
subsidiary (Contico) to redeem at a discount approximately half of such
interest, plus accrued distributions thereon, which had a stated value prior to
the recapitalization of $32.9 million. See Note 12 to Consolidated Financial
Statements. We utilized approximately $10.2 million of the proceeds from the
issuance of the Convertible Preferred Stock for this purpose. The difference
between the amount paid on redemption and the stated value of preferred interest
redeemed ($6.6 million, plus the tax effect of $0.1 million) was recognized as
an increase to Additional Paid in Capital on the Condensed Consolidated Balance
Sheets. The holder of the remaining preferred interest will retain approximately
50% of the original preferred interest, or a stated value of $16.4 million.
Following is a summary of the sources and uses of funds from, and in connection
with, the recapitalization:
(Thousands of Dollars)
Sources:
Sale of Convertible Preferred Stock $ 70,000
Borrowings under the New Credit Agreement 93,211
--------
$163,211
========
Uses:
Paydown of principal obligations under the Former Credit Agreement $144,300
Payment of accrued interest under the Former Credit Agreement 624
Purchase of one-half of preferred interest of Contico at a discount 9,900
Payment of accrued distributions on one-half of preferred interest of subsidiary 322
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
2
Operations
Selected operating data for each operating group can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Part II, Item 7. Information regarding foreign and
domestic operations and export sales can be found in Note 18 to Consolidated
Financial Statements of Katy included in Part II, Item 8. Set forth below is
information about our operating groups and investments and about our business in
general:
Maintenance Products Group
The maintenance products group's principal business is the manufacturing,
distribution, packaging and sale of sanitary maintenance supplies, professional
cleaning products, consumer products, abrasives and stains. The group accounted
for 65% of the Company's consolidated sales in 2001. Duckback Products, Inc.
(Duckback) is the only business in this group that is subject to significant
seasonal sales trends. The seven business units comprising this group are:
Contico International, L.L.C. (Contico) Contico is based in St. Louis,
Missouri and manufactures and distributes consumer storage, home and automotive
products, as well as janitorial and food service equipment and supplies.
Products are sold primarily to the consumer storage, home, automotive, food
service and sanitary maintenance markets, under both the Contico and Continental
brand names.
Glit/Disco, Inc. (Disco) Disco is located in McDonough, Georgia. Disco is
a manufacturer and distributor of cleaning and specialty products sold to the
restaurant/food service industry.
Duckback Products, Inc. (Duckback) Duckback, located in Chico, California,
is a manufacturer of high quality exterior transparent stains, coatings and
water repellents. These products are sold primarily under the trade names
Superdeck, Mason's Select, Supershade and Fightback. Duckback's revenues and
operating income are subject to seasonal trends, with low sales levels in the
fourth quarter.
Glit/Microtron Abrasives (Glit/Microtron) Glit/Microtron is headquartered
in Wrens, Georgia, and has additional manufacturing and sales facilities in
Pineville, North Carolina, and Mississauga, Ontario, Canada. Glit/Microtron
manufactures nonwoven floor maintenance pads, scouring pads and specialty
abrasive products for cleaning and finishing. Products are sold primarily to the
sanitary maintenance, restaurant supply and consumer markets. In addition,
Glit/Microtron manufactures a line of wood sanding products which are sold
through retail stores across the United States and Canada. Consumer products are
marketed through supermarkets and drug and variety stores under various brand
names, including Kleenfast.
Glit/Gemtex, Ltd. (Gemtex) Gemtex is headquartered in Etobicoke, Ontario,
Canada. Gemtex is a manufacturer and distributor of fiber disks and coated
abrasives for the automotive, industrial and consumer markets.
Loren Products (Loren) Loren is headquartered in Lawrence, Massachusetts.
Loren is a manufacturer and distributor of cleaning and abrasive products for
industrial markets and building products for consumer markets. Loren markets its
institutional products primarily under such brand names as Brillo and
manufactures certain products under private labels.
Wilen Products, Inc. (Wilen) Wilen is headquartered in Atlanta, Georgia.
Wilen is a manufacturer and distributor of a wide variety of professional
cleaning products, including mops, brooms and plastic cleaning accessories for
both the industrial and consumer markets.
Electrical/Electronics Group
The electrical/electronics group's principal business is the
manufacturing, distribution, packaging and sale of consumer electric corded
products, electrical and electronic accessories, electronic components and
nonpowered hand tools and specialty metals. The group accounted for 34% of the
Company's consolidated sales in 2001. Woods Industries, Inc. (Woods) and Woods
Industries (Canada), Inc. (Woods Canada) are subject to seasonal sales trends.
The five business units comprising this group are described below:
GC/Waldom Electronics, Inc. (GC/Waldom) GC/Waldom is headquartered in
Rockford, Illinois. GC/Waldom is a leading value-added distributor of high
quality, brand name electrical and electronic parts, components and accessories.
In addition, the company produces a full line of home entertainment component
parts and service technician products. GC/Waldom distributes primarily to the
electronic, automotive and communication industries. A significant portion of
GC/Waldom's products is sourced from Asia.
3
Hamilton Metals, L.P. (Hamilton) Hamilton, located in Lancaster,
Pennsylvania, re-rolls a wide range of precision metal strip and foil for the
medical, electronics, aerospace and computer industries. The company's products
are used in a wide range of high-tech applications.
Thorsen Tools, Inc. (Thorsen) Thorsen was headquartered in Carmel,
Indiana. Thorsen is a value-added distributor of nonpowered hand tools, and its
products are sourced from Asia. During the quarter ended March 31, 2001, the
Company determined that it would dispose of its investment in the Thorsen
business. The Company completed the sale on May 3, 2001.
Woods Industries (Canada), Inc. Woods Canada is headquartered in Toronto,
Ontario, Canada. Woods Canada designs, manufactures and markets a wide variety
of consumer corded products including low voltage garden lighting, extension
cords, multiple outlet and surge strips, specialty corded products, automotive
products and electronic timers.
Woods Industries, Inc. (Woods) Woods is headquartered in Carmel, Indiana
and has additional warehousing, distribution and manufacturing facilities in
Jasonville, Mooresville and Worthington, Indiana. Woods manufactures and
distributes consumer electric corded products, supplies and
electrical/electronics accessories. These products are sold to retailers located
principally in the United States and Canada. A significant portion of Woods'
products is sourced from Asia.
Other Operations
The companies in this group include a shrimp harvesting and farming
operation and a waste-to-energy facility. The two businesses comprising this
group are described below:
Sahlman Holding Company, Inc. (Sahlman) Sahlman harvests shrimp off the
coast of South and Central America and owns shrimp farming operations in
Nicaragua. Sahlman has a number of competitors, some of which are larger and
have greater financial resources. Katy's interest in this company is an equity
investment.
Savannah Energy Systems Company (SESCO). SESCO owns and operates a
waste-to-energy facility in Savannah, Georgia. SESCO's profitability is seasonal
in that its fourth quarter results tend to be higher as a result of the
contractual nature of its business with a local municipality. On March 15, 2002,
we signed agreements with a third party that would effectively turn over
operation of the facility to them. We anticipate a final closing on these
agreements during April of 2002. This party would essentially assume SESCO's
position in various contracts relating to the facility's operation. See Note 22
to Consolidated Financial Statements.
Customers
We have several large customers in the mass merchant/discount/home
improvement retail markets. Two customers, Wal*Mart/Sam's Club and Home Depot,
accounted for 8% and 7% of consolidated net sales, respectively. A significant
loss of business at any of these retail outlets would have an adverse impact on
our Company's results.
Backlog
Electrical/Electronics:
Our aggregate backlog position for the electrical/electronics segment was
$9.1 million and $13.1 million as of December 31, 2001 and 2000, respectively.
The orders placed in 2001 are firm and are expected to be shipped during 2002.
Maintenance Products:
Our aggregate backlog position for the maintenance products segment was
$9.7 million and $11.1 million as of December 31, 2001 and 2000, respectively.
The orders placed in 2001 are firm and are expected to be shipped during 2002.
Markets and Competition
Electrical/Electronics:
We market branded electrical and electronics products primarily in North
America through a combination of direct sales personnel, manufacturers' sales
representatives and wholesale distributors. Our primary customer base consists
of major
4
national retail chains that service the home improvement, hardware, mass
merchant, discount and automotive markets, smaller regional concerns serving a
similar customer base and a variety of electrical and electronic distributors.
Electrical and electronic products sold by the Company are generally used
by consumers and include such items as extension cords, work lights, surge
suppressors, power taps and strips, computer connectivity devices, telephone
accessories, outdoor lights and timers and a variety of electronic connectors
and switches. We have entered into license agreements pursuant to which we
market certain of our products using certain other companies' proprietary brand
names. Overall demand for our products is highly correlated with consumer
demand, the performance of the general economy and to a lesser extent home
construction and resale activity.
The markets for our electrical and electronic products are highly
competitive. Competition is based primarily on price and the ability to provide
superior customer service in the form of complete on-time product delivery.
Other competitive factors include brand recognition, product design, quality and
performance. Foreign competitors, especially from Asia, provide an increasing
level of competition. In the retail extension cord market, there are two major
competitors who collectively, with us, account for the major share of the United
States market.
The markets in our remaining product lines are significantly more
fragmented and typically 5-8 primary competitors are competing for market share.
The basis for competition in these product categories is similar to the
extension cord market with brand identification representing a much greater
factor. In general, we believe we are competitive with respect to each of the
factors affecting each of the respective markets in which we compete.
Maintenance Products:
We market branded consumer storage, sanitary maintenance supplies,
professional cleaning products, abrasives and stains primarily in North America
and Europe through a combination of direct sales personnel, manufacturers' sales
representatives and wholesale distributors. Our maintenance products group
services the home improvement, hardware, sanitary maintenance, industrial, food
service and automotive markets.
Maintenance products sold by the Company include such items as plastic
storage containers, floor maintenance pads, scouring pads, sponges, specialty
abrasive products for cleaning and finishing; brooms, mops, buckets and other
plastic cleaning products; high quality exterior transparent stains, coating and
water repellents; and cleaning and specialty products for the restaurant/food
service industry.
The markets for our maintenance products are highly competitive.
Competition is based primarily on price and the ability to provide superior
customer service in the form of complete on-time product delivery. Other
competitive factors include brand recognition and product design, quality and
performance.
We compete for market share with several competitors in this industry. We
believe that we have established long standing relationships with our major
customers based on high quality products and service, while continuing our
position of being a low cost provider in this industry. Our ability to remain a
low cost provider in the industry is highly dependent on the price of our raw
materials, primarily resin. Resin prices are influenced to a certain degree by
market prices for natural gas and crude oil, as well as supply and demand
factors within the plastics manufacturing industry.
Raw Materials
Our operations have not experienced significant difficulties in obtaining
raw materials, fuels, parts or supplies for their activities during the most
recent fiscal year, but no prediction can be made as to possible future supply
problems or production disruptions resulting from possible shortages. We are
also subject to uncertainties involving labor relations issues at entities
involved in our supply chain, both at suppliers and in the transportation and
shipping area. Our Contico subsidiary (and some others to a lesser extent) uses
polyethylene, polypropylene and other thermoplastic resins as raw materials in a
substantial portion of its products. Prices of resin have declined gradually
over the course of 2001, compared to the relatively higher price levels in 2000
and the latter part of 1999. We have not employed an active hedging program
related to the commodity price risk, but are evaluating potential strategies for
doing so. In a climate of high resin costs, we experience difficulty in raising
prices to shift the higher costs of raw materials to consumers. We also use
copper, corrugated packaging materials, and other materials that may involve
commodity price risks. Our future earnings may be negatively impacted to the
extent increased costs for its raw materials cannot be recovered or offset.
5
Employees
As of December 31, 2001, we employed 2,922 people. Approximately 657 of
these employees were members of various unions. One union contract covering 40
employees was scheduled to expire on May 13, 2001, and was renewed without any
material effect on our operations. Our labor relations are generally
satisfactory and there have been no strikes in recent years. Our operations can
be impacted by labor relations issues involving other entities in our supply
chain.
Regulatory and Environmental Matters
We do not anticipate that federal, state or local environmental laws or
regulations will have a material adverse effect on our consolidated operations
or financial position. We anticipate making additional expenditures for
environmental matters during 2002, in accordance with terms agreed upon with the
United States Environmental Protection Agency and various state environmental
agencies. See Part II, Item 7 - Environmental and Other Contingencies.
Licenses, Patents and Trademarks
The success of our products historically has not depended largely on
patent, trademark and license protection, but rather on the quality of our
products, proprietary technology, contract performance, customer service and the
technical competence and innovative ability of our personnel to develop and
introduce salable products. However, we do rely on patent protection and
licensing arrangements in the marketing of certain products. Examples include
licensed branding programs involving Woods, Woods Canada and Loren, and the
development of patented products and technology at most of our operations.
6
Item 2. PROPERTIES
As of December 31, 2001, our total building floor area owned or leased was
4,651,302 square feet, of which 1,081,933 square feet were owned and 3,569,369
square feet were leased. The following table shows by industry segment a summary
of the size (in square feet) and character of the various facilities included in
the above totals together with the location of the principal facilities.
Industry Segment Owned Leased Total
- ---------------- ----- ------ -----
(In thousands of square feet)
Electrical/Electronics - primarily plant and
office facilities with principal facilities
located in Rockford, Illinois;
Taipei, Taiwan; Carmel,
Jasonville, Mooresville,
and Worthington, Indiana; Lancaster,
Pennsylvania; and Toronto, Ontario, Canada 524 554 1,078
Maintenance Products - primarily
plant and office facilities with principal
facilities located in Chico, Norwalk and
Santa Fe Springs, California; Wrens, Thomson,
McDonough, Atlanta, Georgia; Bridgeton,
Creve Coeur, Earth City and
Hazelwood, Missouri;
Pineville, North Carolina; Buffalo, New York;
Lawrence, Massachusetts; Winters, Texas;
Etobicoke and Mississauga, Ontario, Canada; and
Redruth, Cornwall, England 558 3,010 3,568
Corporate - office facility in Middlebury, Connecticut 5 5
We believe that our current facilities meet our needs in our existing
markets for the foreseeable future. During late 2001, we moved our corporate
headquarters to Middlebury, Connecticut, thereby prematurely terminating our
lease agreement for our previous corporate office facility in Englewood,
Colorado and an adjunct corporate office facility in Chicago, Illinois. We also
closed a warehouse facility related to our Wilen division in Phoenix, Arizona,
and consolidated certain administrative functions related to the Wilen business
to our Contico subsidiary in St. Louis, Missouri, over the course of 2001. Our
Disco subsidiary closed warehouse facilities in Texas and California during
2001, as well. During the first quarter of 2001, our Woods subsidiary undertook
a restructuring effort that involved facility closings in Bloomington and
Loogootee, Indiana.
7
Item 3. LEGAL PROCEEDINGS
Except as set forth below, no cases or legal proceedings are pending
against Katy, other than ordinary routine litigation incidental to Katy and our
businesses and other non-material cases and proceedings.
1. Environmental Claims - Administrative Order on Consent - W.J. Smith Wood
Preserving Company (W.J. Smith) and Katy Industries, Inc., U.S. EPA Docket No.
RCRA-VI-7003-93-02 and Texas Water Commission Administrative Enforcement Action.
The W. J. Smith case originated in the 1980s when the United States and
the State of Texas, through the Texas Water Commission, initiated environmental
enforcement actions against W.J. Smith alleging that certain conditions on the
W.J. Smith property violated environmental laws. Following these enforcement
actions, W.J. Smith engaged in a series of cleanup activities on its property
and implemented a groundwater monitoring program.
In 1993, the Texas Water Commission referred the entire matter to the
United States Environmental Protection Agency (EPA), which initiated a
Unilateral Administrative Order Proceeding under Section 7003 of the Resource
Conservation and Recovery Act against W.J. Smith and Katy. The proceeding
requires certain actions at the site and certain off-site areas, as well as
development and implementation of additional cleanup activities to mitigate
off-site releases. In December 1995, W.J. Smith, Katy and USEPA agreed to
resolve the proceeding through an Administrative Order on Consent under Section
7003 of RCRA. Pursuant to the Order, W.J. Smith is currently implementing a
cleanup.
Since 1990, we have spent approximately $7.0 million undertaking cleanup
and compliance activities in connection with this matter. While the ultimate
costs with respect to this matter is not easily determinable, we have recorded
and accrued amounts that we deem reasonable for prospective costs with respect
to this matter and we believe that any additional costs with respect to this
matter in excess of the accrual will not be material.
In addition to the claim specifically identified above, Katy and certain
of our current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by USEPA, state environmental
agencies and private parties as potentially responsible parties at a number of
waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) or equivalent state laws, and, as such,
may be liable for the costs of cleanup and other remedial activities at these
sites. The costs involved in these matters are, by nature, difficult to estimate
and subject to substantial change as litigation or negotiations with the United
States, states and other parties proceed. While ultimate liability with respect
to these matters is not easily determinable, we have recorded and accrued
amounts that we deem reasonable for prospective liabilities and we believe that
any costs with respect to such matters in excess of the accruals will not be
material.
2. Banco del Atlantico, S.A. v. Woods Industries, Inc., et al., Civil Action No.
L-96-139 (U.S. District Court, Southern District of Texas).
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of Katy, and against certain past and then
present officers and directors and former owners of Woods, alleging that the
defendants participated in a violation of the Racketeer Influenced and Corrupt
Organizations (RICO) Act involving allegedly fraudulently obtained loans from
Mexican banks, including the plaintiff, and "money laundering" of the proceeds
of the illegal enterprise. All of the foregoing is alleged to have occurred
prior to our purchase of Woods. The plaintiff also alleges that it made loans to
an entity controlled by certain officers and directors based upon fraudulent
representations. The plaintiff seeks to hold Woods liable for its alleged damage
under principles of respondeat superior and successor liability. The plaintiff
is claiming damages in excess of $24.0 million and is requesting treble damages
under RICO. Because certain procedural 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. We 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 we acquired Woods, and under state,
federal and common law. In addition, the purchase price under the purchase
agreement may be subject to adjustment as a result of the claims made by Banco
del Atlantico. The extent or limit of any such recourse cannot be predicted at
this time.
3. General
We also have a number of product liability and worker's 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. It can take up to 10 years from the date of the injury to reach a
final outcome for such claims. With respect to the product liability and
worker's compensation claims, we have provided for our share of expected losses
beyond the applicable insurance coverage, including those incurred but not
reported. Such accruals are developed using currently available claim
information, and represent our best estimates. The ultimate cost of any
individual
8
claim can vary based upon, among other factors, the nature of the injury, the
duration of the disability period, the length of the claim period, the
jurisdiction of the claim and the nature of the final outcome.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of 2001.
9
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange (NYSE). The
following table sets forth high and low sales prices for the common stock in
composite transactions as reported on the NYSE composite tape for the prior two
years and dividends declared during the respective periods.
Cash
Dividends
Period High Low Declared
- ------ ---- --- --------
2001
First Quarter $ 8.00 $ 5.60 $ .000
Second Quarter 7.35 4.05 .000
Third Quarter 4.80 2.95 .000
Fourth Quarter 3.55 3.00 .000
2000
First Quarter $ 11 5/8 $ 7 7/8 $ .075
Second Quarter 14 8 3/8 .075
Third Quarter 11 15/16 6 11/16 .075
Fourth Quarter 9 7/8 5 1/16 .075
Dividends are paid at the discretion of the Board of Directors. On March
30, 2001, our Board of Directors determined to suspend quarterly dividends in
order to preserve cash for operations. Additionally, under the restrictions
related to our New Credit Agreement, the payment of dividends has been suspended
through the term of that agreement.
As of March 22, 2002, there were 770 holders of record of our Common Stock
and there were 8,391,583 shares of Common Stock outstanding.
Sale of Unregistered Securities
On June 28, 2001, we sold 700,000 shares of preferred stock, $100
par value per share, to KKTY Holding Company, L.L.C. (KKTY) for a total purchase
price of $70,000,000. These shares were sold to KKTY based on exemption from
registration under Section 4(2) of the Securities Act of 1933 since the stock
was not sold in a public offering. The preferred stock is convertible into
11,666,666 shares of our common stock at the option of KKTY at any time after
the earlier of 1) June 28, 2006, 2) board approval of a merger, consolidation or
other business combination involving a change in control of Katy, or a sale of
all or substantially all of the assets or liquidation of Katy, or 3) a contested
election for directors of the Company nominated by KKTY. The preferred shares 1)
are non-voting (with limited exceptions), 2) are non-redeemable, except in
whole, but not in part, at the Company's option (as approved by the Class I
directors) at any time after June 30, 2021, 3) are entitled to receive
cumulative payment in kind (PIK) dividends through December 31, 2004, at a rate
of 15% percent, 4) have no preemptive rights with respect to any other
securities or instruments issued by the Company, and 5) have registration rights
with respect to any common shares issued upon conversion.
As discussed above, the preferred shares are entitled to a 15% PIK
dividend (that is, dividends in the form of additional shares of preferred
stock), compounded annually, which started accruing on August 1, 2001, and are
payable on the first day in August of 2002. No dividends will accrue or be
payable after December 31, 2004. If KKTY continues to hold the preferred stock
through December 31, 2004, it will receive an additional 431,555 shares of
preferred stock through PIK dividends, which would be convertible into an
additional 7,192,598 shares of common stock.
10
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Thousands of Dollars, except per share data and ratios)
Net sales $ 505,960 $ 579,629 $ 598,045 $ 382,041 $ 333,493
(Loss) income from continuing operations (62,080) (5,458) 12,155 13,082 9,643
Discontinued operations [a] -- -- (1,700) -- 1,959
Extraordinary loss on early extinguishment of debt (1,182) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (63,262) $ (5,458) $ 10,455 $ 13,082 $ 11,602
============ ============ ============ ============ ============
(Loss) earnings per share - Basic:
(Loss) income from continuing operations (7.14) (.65) 1.45 1.58 1.16
Discontinued operations [a] -- -- (.20) -- .24
Extraordinary loss on early extinguishment of debt (.14) -- -- -- --
------------ ------------ ------------ ------------ ------------
(Loss) earnings per common share $ (7.28) $ (0.65) $ 1.25 $ 1.58 $ 1.40
============ ============ ============ ============ ============
(Loss) earnings per share - Diluted:
(Loss) income from continuing operations (7.14) (.65) 1.38 1.55 1.15
Discontinued operations [a] -- -- (.17) -- .23
Extraordinary loss on early extinguishment of debt (.14) -- -- -- --
------------ ------------ ------------ ------------ ------------
(Loss) earnings per common share $ (7.28) $ (.65) $ 1.21 $ 1.55 $ 1.38
============ ============ ============ ============ ============
Total assets [b] $ 347,955 $ 446,723 $ 493,104 $ 294,131 $ 237,160
Total liabilities and preferred interest 190,091 296,390 332,793 144,815 97,989
Stockholders' equity 157,864 150,333 160,311 149,316 139,171
Long-term debt, excluding current portion [b] 12,474 771 150,835 39,908 9,948
Current portion of long-term debt 14,619 133,067 67 72 --
Revolving credit agreement, classified current 57,000 -- -- -- --
Depreciation and amortization [b] 22,468 23,598 20,172 7,162 4,568
Capital expenditures 12,566 14,196 21,066 15,921 10,699
Working capital [b] 2,357 (28,265) 120,893 100,971 103,252
Ratio of debt to capitalization 32.5% 42.2% 43.8% 21.1% 7.1%
Weighted average common shares outstanding - Basic 8,393,210 8,403,701 8,366,178 8,289,915 8,272,836
Weighted average common shares outstanding -Diluted 8,393,210 8,403,701 10,015,238 8,443,591 8,405,131
Number of employees 2,922 3,509 3,834 2,472 1,907
Cash dividends declared per common share $ 0.00 $ 0.30 $ 0.30 $ 0.30 $ 0.30
[a] Loss from operations for Discontinued Operations has been recorded in the
line item Loss from operations of discontinued businesses (net of tax) on the
1999 Consolidated Statement of Operations. See Note 5 to the Consolidated
Financial Statements.
[b] Total assets include $15,328 of net assets from Discontinued Operations for
1998 and $15,552 of net assets from Discontinued Operations for 1997.
Depreciation includes $454, $631 and $681 from Discontinued Operations for 1999,
1998 and 1997 respectively. Working capital includes $10,959 and $10,588 of net
current assets from Discontinued Operations for 1998 and 1997 respectively. See
Note 5 to the Consolidated Financial Statements.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For purposes of this discussion and analysis section, reference is made to
the table below and the Company's Consolidated Financial Statements (included in
Part II, Item 8). We have two principal operating groups: Electrical/Electronics
and Maintenance Products. Through one of our subsidiaries, we also operate a
waste-to-energy facility, and we also have a minority equity investment in a
seafood harvesting and farming company. We have disposed of our entire
previously reported Machinery Manufacturing Group and, accordingly, that group
has been reported as "Discontinued Operations" in our Consolidated Financial
Statements.
The table below and the narrative that follows summarize the key factors
in the year-to-year changes in operating results.
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
(Thousands of dollars)
Electrical/Electronics Group
Net external sales $ 173,661 $ 210,187 $ 232,384
Net intercompany sales 52,864 64,793 59,992
Income (loss) from operations [a] 856 8,055 8,303
Operating margin (deficit) 0.5% 3.8% 3.6%
Total assets 81,924 103,676 126,090
Depreciation and amortization [b] 3,524 2,800 2,557
Capital expenditures 1,944 1,709 3,434
Maintenance Products Group
Net external sales $ 327,714 $ 365,752 $ 361,761
Net intercompany sales 13,950 9,062 11,141
Income (loss) from operations [a] (39,699) 10,298 29,458
Operating margin (deficit) (12.1%) 2.8% 8.1%
Total assets 231,179 299,292 318,906
Depreciation and amortization [b] 56,013 20,638 17,065
Capital expenditures 10,060 11,732 16,936
Other
Net external sales $ 4,585 $ 3,690 $ 3,900
Net intercompany sales 0 2 --
Income (loss) from operations (9,782) (889) (190)
Operating margin (deficit) (213.3%) (24.0%) (4.9%)
Total assets 8,995 18,468 17,903
Depreciation and amortization [b] 10,042 116 5
Capital expenditures 524 755 429
Discontinued Operations
Net external sales $ -- $ -- $ 10,025
Net intercompany sales -- -- --
Income (loss) from operations -- -- (190)
Operating margin (deficit) -- -- (1.9%)
Total assets -- -- --
Depreciation and amortization [b] -- -- 454
Capital expenditures -- -- 80
12
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Corporate
Corporate expenses $ 21,239 $ 9,258 $ 9,989
Total assets 25,857 25,287 30,205
Depreciation and amortization [b] 358 44 91
Capital expenditures 38 -- 187
Company
Net external sales [a] $ 505,960 $579,629 $608,070
Net intercompany sales 66,814 73,857 71,133
Income (loss) from operations [a] (69,864) 8,206 27,392
Operating margin (deficit) [a] (13.8%) 1.4% 4.5%
Total assets [a] 347,955 446,723 493,104
Depreciation and amortization [a] [b] 69,937 23,598 20,172
Capital expenditures 12,566 14,196 21,066
[a] Company balances include amounts from "Discontinued Operations" in the
consolidated financial statements for 1999. The (Loss) from operations for
Discontinued Operations has been recorded in the line item "Loss from operations
of discontinued businesses (net of tax)" on the 1999 Consolidated Statement of
Operations. See Note 5 to the Consolidated Financial Statements.
[b] Depreciation and amortization includes amounts recorded for impairments of
long-lived assets.
2001 Compared to 2000
Electrical/Electronics Group
The Electrical/Electronics Group's sales decreased $36.5 million or 17.4%
due to decreased volumes at Woods, Woods Canada and GC/Waldom. Sales at Hamilton
were also lower, but to a lesser extent than the other three businesses. We sold
Thorsen Tools during the second quarter of 2001, which accounted for $7.3
million of the sales decrease. Excluding the impact of Thorsen Tools, sales in
the group were lower by 13.9%. The sales decreases are primarily attributable to
slower economic conditions during 2001, especially as those conditions caused
retailers to reduce inventory levels during the early portion of 2001. Sales at
GC/Waldom were hurt specifically by softness in the telecommunications and
high-tech sectors
The group's operating income decreased $7.2 million or 89.4%. Operating
results were negatively impacted by unusual items of $9.5 million including $6.1
million of inventory lower of cost or market adjustments, the largest occurring
at Woods relating to exiting licensed branded product lines ($3.3 million) and
at GC/Waldom ($1.8 million). Other significant unusual items impacting operating
results include severance and restructuring charges of $1.8 million and related
impairments of long-lived assets of $0.7 million, and other items of $0.8
million. Unusual items impacted operating results in 2000 as well, including a
$0.8 million product recall and $0.4 million severance charge at Woods, and a
$0.5 million inventory valuation adjustment at GC/Waldom. Operating results
excluding the items detailed above improved in 2001, with operating income
increasing $1.6 million, or 16.5%, and operating margin increasing from 4.6% to
6.5%. Significant reductions in selling, general and administration costs at
Woods and Woods Canada in 2001 as compared to 2000. SG&A costs as a percentage
of sales for the two entities combined dropped from 10.6% to 8.9%, excluding the
unusual items discussed above.
Identifiable assets for the group decreased $21.8 million or 21.0% during
the year mainly as a result of lower working capital levels at Woods, Woods
Canada and GC/Waldom. These reductions were the result of aggressive efforts to
reduce inventories, as well as lower levels of capital expenditures. Also,
assets of Thorsen Tools, which were sold during 2001, accounted for
approximately $6.9 million of the reduction.
Maintenance Products Group
Sales from the Maintenance Products Group decreased $38.0 million or
10.4%. Sales decreased in 2001 at Contico and Wilen, and to a lesser extent at
Duckback, Gemtex and Disco. Sales increased at Glit/Microtron and Loren. The
group experienced weakness in both the retail and institutional sectors to which
it sells. Retailers' efforts to reduce inventories, especially in early 2001,
led to softer sales for Contico and Duckback, and a slower economy contributed
to softer sales in the
13
janitorial/sanitation markets.
The group's operating income decreased $50.0 million. We recorded an
impairment charge of $33.0 million at Wilen because consistently poor operating
performance led us to conclude that the carrying values of certain long-lived
assets were not recoverable through future cash flows. In addition to the
impairment at Wilen, an additional $3.1 million of impairment charges were
taken, related primarily to management decisions regarding the discontinuance of
certain property, plant and equipment. Additional items that negatively impacted
operating results during 2001 include severance and restructuring charges of
$3.5 million, primarily at Contico and Wilen, and valuation reserve adjustments
for inventory and receivables of $3.5 million. Operating results in 2000 were
negatively impacted by unusual items of $2.7 million, including $1.2 million in
severance and restructuring charges, a $0.7 million increase to its LIFO
inventory reserve at Contico and an inventory write down at Wilen of $0.9
million. Excluding the impact of unusual items, operating income for the group
declined $9.4 million, or 72%, and operating margin declined from 3.6% to 1.1%.
Selling, general and administrative expenses declined as a percentage of sales
from 15.5% to 15.0%, with improvements at Contico, Glit/Microtron, Loren and
Disco offset by higher percentages of SG&A at Wilen, Duckback and Gemtex. The
overall improvement in SG&A (excluding the unusual items) was offset by reduced
gross margins at all businesses, led by Contico. Decreased volumes and the
inability to reduce overhead accordingly was the main cause of the margin
decreases. The group saw its overall gross margin decrease from 19% to 16%,
excluding unusual items. Offsetting these factors were prices paid for various
resins, a key raw material for plastic products produced by Contico, which were
lower in 2001 than in 2000, especially for polypropylene. The lower prices for
resins taken alone accounted for approximately $4.7 million in lower cost goods
sold during 2001 versus 2000.
Identifiable assets for the group decreased $68.1 million, or 22.8%, in
part due to a $33.0 million write-off of long-lived assets in the mop, broom and
brush business. An inventory reduction effort on a company-wide basis resulted
in lower working capital levels at each division in 2001. Lower levels of
capital expenditures also contributed to the decline.
Other
Sales from other operations increased modestly as a result of higher sales
at the waste-to-energy facility.
Operating income from other operations decreased $8.9 million, primarily
as a result of a $9.8 million impairment of our investment in the
waste-to-energy facility and related property, plant and equipment. Excluding
the effect of the write-off, operating income increased $0.9 million as a result
of improved profitability at the waste-to-energy facility.
Identifiable assets for our other operations decreased $9.5 million in
connection with the write-off of Katy's investment in the waste-to-energy
facility.
Discontinued Operations
All of the companies included in Discontinued Operations were disposed of
as of December 31, 1999.
Corporate
Corporate expenses increased $12.0 million, or 129%; however, corporate
incurred $12.7 million of unusual charges, consisting primarily of restructuring
and severance charges and other costs incurred in connection with the
recapitalization. We recorded $8.7 million of severance and restructuring
charges, the majority of which relate to payments made in connection with
management transition. Included in this amount is approximately $1.0 million of
charges that relate to outside consultants working with Katy to modify operating
and financial strategies, and $0.7 million of non-cancelable rent and other exit
costs associated with the premature termination of our leased office facility in
Englewood, Colorado. We also incurred approximately $3.0 million of costs
associated with the recapitalization, such as non-capitalizable legal fees and
investment banker fees, board and committee fees and other internal incremental
costs. Other unusual items included increases to claims and environmental
reserves of $0.7 million and other items totaling $0.3 million. Operating
results in 2000 were negatively impacted by $0.6 million in unusual items,
including $0.9 million of severance and restructuring charges and $0.2 million
of costs associated with the recapitalization, partially offset by proceeds of
$0.5 million related to a previously written-off investment. Excluding these
unusual items, corporate costs decreased slightly from $8.7 million to $8.5
million, or 2%.
Identifiable assets at corporate increased primarily as a result of higher
cash levels at year-end relative to 2000, and a net long-term deferred tax asset
position at December 31, 2001 versus year end 2000, when a net long-term
deferred tax liability position existed.
Interest expense decreased $3.8 million, or 25.3%, due primarily to
reduced borrowings outstanding, especially during the second half of 2001 as a
result of the recapitalization. We also paid lower rates of interest during 2001
as a result of lower rates of interest available for our variable rate debt
facilities.
14
The income tax benefit from continuing operations (excluding the tax
effect of distributions on preferred securities) for 2001 is $20.4 million,
yielding an effective tax rate of 25.1%, compared to a rate of 35% in 2000. The
reduced effective tax rate is the result of valuation allowances applied to
certain net operating loss carryforwards created during 2000 and 2001.
2000 Compared to 1999
Electrical/Electronics
The Electrical/Electronics Group's sales decreased $22.6 million or 9.7%
primarily due to decreased volumes at Woods, GC/Waldom, and Thorsen Tools,
partially offset by increased volumes at Hamilton, and to a lesser extent, Woods
Canada. Sales decreases at Woods occurred partially as a result of 1999 sales
including final sales to a single large customer that withdrew its commitment to
purchase Woods products, as announced on November 4, 1998. Sales were also lower
late in 2000 compared to 1999 as a result of retail customers reducing orders
and inventory levels. Sales at GC/Waldom softened in 2000 to a certain extent
due to operational problems experienced primarily in 1999 as a result of the
consolidation of GC Electronics and Waldom Electronics, which in turn affected
those divisions' customer service.
The group's operating income decreased $0.3 million or 3.0%. Operating
results were negatively impacted by unusual items of $1.7 million including:
$0.4 million in restructuring and severance charges at Woods, a $0.8 million
product recall at Woods and a $0.5 million inventory valuation at GC/Waldom. The
group's 1999 operating income was negatively impacted by $0.6 million
restructuring charge, primarily for severance costs at Woods. Excluding these
items operating income increased $0.8 million or 4.7%. Operating results,
excluding unusual items, were positively affected by significant reductions in
selling, general and administration costs at Woods in 2000 as compared to 1999
Identifiable assets for the group decreased $22.4 million or 17.8% during
the year mainly as a result of lower working capital levels at Woods, Woods
Canada and GC Waldom, and lower levels of capital expenditures.
Maintenance Products
Sales from the Maintenance Products Group increased $4.0 million or 1.1%.
Sales remained relatively flat in 2000 as increased sales at Contico and to a
lesser extent at Disco were partially offset by decreased sales at
Glit/Microtron and Wilen, and to a lesser extent by lower sales at Gemtex,
Duckback and Loren.
The group's operating income decreased $19.2 million or 65.0%. Operating
results in 2000 were negatively impacted by unusual items of $2.8 million
including: $1.2 million in severance and restructuring charges, a $0.7 million
increase to its LIFO inventory reserve at Contico and an inventory write down at
Wilen of $0.9 million. The group's 1999 operating income was negatively impacted
by a $1.0 million increase to its LIFO inventory reserve at Contico, and a $0.3
million charge related to the restructuring of Contico's marketing
representative group. Excluding these items, operating income decreased by $17.7
million, or 58%. Higher costs for plastic resins resulted in reduced margins at
Contico. We estimate that resin costs negatively impacted 2000 results versus
prior year by $10.0 million, due to an inability to recover or offset higher
costs for raw materials. Also contributing to the decreased operating income
levels were poor performance at Wilen, which experienced systems and other
operational problems throughout 2000. Operating income was also lower, albeit to
lesser extents, at Glit/Microtron and Duckback. Most of our consolidated foreign
currency translation adjustment resulted from the translation of maintenance
products operations in Canada and the United Kingdom.
Identifiable assets for the group decreased $19.6 million or 6.2%
primarily as a result of lower working capital levels at Contico, Glit/Gemtex
and Wilen and lower levels of capital expenditures.
Other
Sales from other operations remained relatively stable compared to prior
year, decreasing $0.2 million or 5.4%.
Operating income attributable to other operations decreased $0.7 million
or 363.2% primarily as a result of increased maintenance costs coupled with
fixed revenue contracts.
Identifiable assets for other operations remained relatively stable
between years.
Discontinued Operations
All of the companies included in Discontinued Operations have been
disposed of as of December 31, 1999.
15
Corporate
Corporate expenses decreased $0.7 million or 7.3%. Operating results were
negatively impacted by $0.6 million in unusual items including: $0.9 million in
severance and restructuring charges, $0.2 million of costs associated with the
recapitalization, offset by proceeds of $0.5 million related to a previously
written-off investment. Corporate expenses in 1999 were impacted by an unusual
charge of $0.3 million associated with the attempted sale of the
Electrical/Electronics group. Excluding these items, Corporate expenses
decreased $1.0 million or 11.9%. This decrease is attributable to reduced
headcount and other salary related expenditures.
Identifiable assets at Corporate decreased primarily as a result of lower
cash levels at year end.
Interest expense increased $1.9 million or 14.7%, due primarily to higher
interest rates paid by Katy under the Former Credit Agreement during 2000 as
opposed to 1999. Interest income decreased $0.3 million as the Company
maintained lower average cash and cash equivalent balances during 2000 compared
to 1999. "Other, net" in 2000 was income of $0.4 million versus income of $1.6
million in 1999. The amounts in both years resulted from us receiving past due
balances on previously written-off notes and investments.
The income tax benefit in 2000 is $2.0 million, yielding an effective tax
rate of 35%. The provision for income taxes in 1999 was $3.2 or an effective tax
rate of 18.9%. The reduced 1999 effective tax rate resulted from the resolution
of specific income tax matters with the relevant tax authorities.
16
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources were improved at the end of the second
quarter of 2001 as a result of the completion of the recapitalization. Following
the recapitalization, we had borrowings outstanding under the New Credit
Agreement at June 30, 2001 of $89.2 million, which was reduced to $83.3 million
at December 31, 2001. $6.1 million of the borrowings under the New Credit
Agreement are due within one year, compared to borrowings under the Former
Credit Agreement at December 31, 2000 of $133.0 million, all of which was due
within one year. We have also determined that an additional $8.6 million of
borrowings will be prepaid on or around April 1, 2002 (see below). Following is
a summary of the sources and uses of funds involved in consummating the
recapitalization:
(Thousands of Dollars)
Sources:
Sale of Convertible Preferred Stock $ 70,000
Borrowings under the New Credit Agreement 93,211
--------
$163,211
========
Uses:
Paydown of principal obligations under the Former Credit Agreement $144,300
Payment of accrued interest under the Former Credit Agreement 624
Purchase of one half of preferred interest of Contico at a discount 9,900
Payment of accrued distributions on one-half of preferred interest of subsidiary 322
Certain costs associated with the recapitalization 8,065
--------
$163,211
========
We believe that our liquidity and financial strength has been increased as
a result of the cash infusion by the purchaser of the Convertible Preferred
Stock and borrowing availability under the New Credit Agreement. The New Credit
Agreement, which provides for a total borrowing facility of $140.0 million, has
a $30.0 million term loan portion (Term Loan) with a final maturity date of June
28, 2006 and quarterly repayments of $1.5 million, the first of which was made
on September 30, 2001. The Term Loan is based on orderly liquidation values of
the Company's property, plant and equipment. The remaining portion of the New
Credit Agreement is a $110.0 million revolving credit facility (Revolving Credit
Facility) that also has an expiration date of June 28, 2006. 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 $16.8 million at December 31, 2001. Borrowing availability would
have been higher at year end if not for several factors, including the
duplication of a significant letter of credit (letters of credit are added to
funded debt in determining availability) and an unusually high cash balance, due
in part to over-committed borrowings. All extensions of credit under the New
Credit Agreement are secured 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 on
the payment of dividends apply under the New Credit Agreement. Among other
financial covenants, the Company was required to generate earnings before
interest, taxes, depreciation and amortization and other adjustments (EBITDA, as
defined the in the New Credit Agreement) in excess of $26.0 million for the
twelve months ended December 31, 2001. The Company's actual EBITDA for 2001 in
this regard was $31.1 million. The minimum EBITDA covenant adjusts to $28.0
million for the twelve months periods ending September 30 and December 31, 2002.
Interest accrues on borrowings at approximately 275 basis points over the
Eurodollar rate for Eurodollar rate loans and 175 basis points over the prime
rate for base rate loans until the close of the second quarter of 2002.
Following that, interest will be based on our consolidated leverage ratio, as
defined in the New Credit Agreement. Total debt was 32.5% of total
capitalization at December 31, 2001.
In connection with the Revolving Credit Facility, the New Credit Agreement
requires lockbox agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements, combined with the existence of
a Material Adverse Effect (MAE) clause in the New Credit Agreement, cause the
Revolving Credit Facility to be classified as a current liability, per guidance
in the FASB's Emerging Issues Task Force 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 typical requirement in commercial credit agreements, allows
the lender to require the loan to become due if it determines there has been a
material adverse effect on our operations, business, properties, assets,
liabilities, condition or prospects. The classification of the Revolving Credit
Facility as a current liability is a result only of the combination of the two
aforementioned factors: the lockbox agreements and the MAE clause. However, the
Revolving Credit Facility does not expire or have a maturity date within one
year, but rather has a final expiration date of June 28, 2006. Also, we were in
compliance with the applicable financial covenants at December 31, 2001,
17
the lender has not notified us of any indication of a MAE at December 31, 2001,
and to our knowledge, we were not in default of any provision of the New Credit
Agreement at December 31, 2001.
The New Credit Agreement calls for scheduled repayments of Term Loans of
$6.0 million during 2002. However, the New Credit Agreement also has a provision
requiring the Company to repay Term Loans by a percentage of excess cash flow
("Consolidated Excess Cash Flow" as calculated under the New Credit Agreement)
generated during each annual reporting period. As a result of this provision,
and the calculation per the New Credit Agreement of Consolidated Excess Cash
Flow generated during fiscal 2001, we expect to repay Term Loans in the
approximate amount of $8.6 million on or around April 1, 2002. Much of the
Consolidated Excess Cash Flow was generated by improved working capital during
2001. This repayment would require us to convert Term Loans to Revolving Loans.
The most recently available calculations of our borrowing base (eligible
accounts receivable and inventory) performed as of the end of the February 2002
reporting period indicated that we had unused borrowing availability of $24.9
million. The prepayment would reduce this unused availability.
As the result of an agreement related to the recapitalization, we reduced
the amount outstanding of the preferred interest in Contico by acquiring
approximately one-half of such interest at a significant discount. This will
result in a reduction of preferred cash distributions by approximately $1.3
million annually.
Key components of working capital (excluding cash, current portion of
deferred taxes, current maturities of debt, and the Revolving Credit Facility)
decreased from December 31, 2000 by $37.4 million. The decrease was due in large
part to a $37.1 million reduction in inventories. Reductions in accounts
receivable and accounts payable roughly offset each other. Included in the
inventory decrease was $9.0 million of valuation adjustments for excess and
obsolete inventory. Lower sales levels also contributed to the decrease.
However, a significant portion of the decrease was due to management efforts to
operate the business with reduced stock levels and to monetize aged inventory.
We expect to commit $12.0 million for capital projects in the continuing
businesses over the course of 2002. Funding for these expenditures and for
working capital needs is expected to be accomplished through the use of
available cash under the New Credit Agreement. While a maximum of $140.0 million
is available under the New Credit Agreement, our borrowing base is limited under
the Revolving Credit Facility to eligible accounts receivable and inventory. We
feel that the New Credit Agreement provides sufficient liquidity for the
Company's operations going forward. Our borrowing availability at December 31,
2001, based on eligible accounts receivable and inventory, exceeded our
outstanding borrowings at year end by approximately $16.8 million. Borrowing
availability would have been higher at year end if not for several factors,
including the duplication of a significant letter of credit (letters of credit
are added to funded debt in determining availability) and an unusually high cash
balance, due in part to over-committed borrowings.
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.
Off-Balance Sheet Arrangements
An indirect wholly-owed subsidiary of Katy, Savannah Energy Systems
Company (SESCO), owns a waste-to-energy facility, in Savannah, Georgia. SESCO is
under contract with the Resource Recovery Development Authority (the Authority)
for the City of Savannah (the City) to receive and dispose of the City's solid
waste through 2007 under a service agreement (the Service Agreement). The
Authority issued $55.0 million of Industrial Revenue Bonds in 1984 and lent the
proceeds to SESCO for the acquisition and construction of the facility under a
loan agreement between SESCO and the Authority (the Loan Agreement). SESCO's
ability to repay under the Loan Agreement is dependent upon money it receives as
a result of contract obligations of the City to deliver minimum quantities of
waste and for the Authority to pay a related disposal fee, a component of which
is the debt service for the loan. As of December 31, 2001, $40.3 million of the
bonds remained outstanding.
On March 15, 2002, the Company and SESCO signed agreements that would
effectively turn over operation of the facility to a third party. We anticipate
a final closing on these agreements during April of 2002. This party would
essentially assume SESCO's position in various contracts relating to the
facility's operation. See the caption below entitled Joint Venture Arrangement
Involving SESCO.
Under the Service Agreement, SESCO is obligated to receive and process a
certain amount of waste generated by the City each year, and to produce certain
amounts of steam and energy. The Authority is obligated to deliver a certain
tonnage of waste generated by the City during each year and to pay a monthly
disposal fee, notwithstanding delivery of less than minimum amounts of waste
during a given period. The Authority must pay the disposal fee whether or not
the Facility is operating unless 1) SESCO and Katy are insolvent, and 2) the
facility is deemed incapable of incinerating the required amount of waste. SESCO
is liable for liquidated damages if it fails to accept the minimum amount of
waste or to meet other performance standards under the Service Agreement. The
liquidated damages, an off balance sheet risk for Katy, are equal to the amount
of the bonds outstanding, less $4.0 million maintained in a debt service reserve
trust. We do not expect non-performance by the other parties.
SESCO's obligations under the Service Agreement are, except in limited
circumstances relating to a default by the Authority, guaranteed by Katy. The
obligation of SESCO to repay the loan is dependent upon debt service payments
received from the Authority as part of the monthly disposal fee. The obligation
of the Authority to provide for debt service payments is expected to be
fulfilled from money derived from the City under a waste disposal contract. If
all other parties fail to fulfill their respective obligations to provide funds
for payments of principal and interest and premium on the bonds under the
contract documents, the City is unconditionally obligated to provide the funds
for such payments (even during periods of force majeure), unless 1) SESCO and
Katy are insolvent, and 2) the facility is deemed to be incapable of
incinerating the required amount of
18
waste. The obligation of the City to make such payments constitutes a general
obligation of the City for which its full faith and credit are irrevocably
pledged.
With the consent of the City and other parties to the contracts (and
without the approval of the holders of the bonds), 1) SESCO may be replaced as
operator of the facility if the experience of the substitute operator in
operating mass-burn resource recovery facilities similar to the facility equals
or exceeds that of Katy and SESCO, and 2) Katy may be replaced as guarantor of
SESCO's performance under the Service Agreement by a third party, whose senior
unsecured long-term debt is rated investment grade or better. To the extent the
above qualifications are not met, the consent of the majority of bondholders
would be required to authorize the replacement.
Based on consultations with 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. Accordingly, the amounts owed to and due from SESCO have been netted
for financial reporting purposes and are not shown on the consolidated
statements of financial position.
Following are scheduled principal repayments on the Loan Agreement (and
the Industrial Revenue Bonds) (in thousands):
2002 $ 4,445
2003 5,385
2004 6,765
2005 8,370
2006 15,300
-------
Total $40,265
=======
Joint Venture Arrangement Involving SESCO
On March 15, 2002, the Company and SESCO signed agreements that would
effectively turn over operation of the facility to a third party. The closing of
the agreements is contingent upon receipt of certain consents from interested
parties, and we anticipate a final closing during April of 2002. The Company has
entered into these agreements as a result of evaluations of SESCO's business.
The Company has determined that SESCO is not a core component to Katy's
long-term strategic goals. Moreover, Katy does not feel it has the management
expertise to deal with certain risks and uncertainties presented by the
operation, given that SESCO is the only waste-to-energy facility in which the
Company has an interest. Katy has explored options for divesting SESCO for a
number of years, and management feels that the agreements contemplated currently
offer a reasonable exit strategy from this business.
The third party would essentially assume SESCO's position in various
contracts relating to the facility's operation. Under the agreements, SESCO will
contribute its assets and liabilities (except for its liability under the Loan
Agreement) to a joint venture. While SESCO will maintain a 99% limited
partnership interest in the joint venture, the third party will have control of
the joint venture. SESCO will give a note payable as consideration for the
transaction of $6,600,000. Certain amounts may be due to SESCO upon expiration
of the Service Agreement in 2008. Also, the third party may purchase SESCO's
remaining interest in the joint venture at that time. Also, if the Service
Agreement were extended, further amounts would be due to SESCO from the third
party.
While SESCO (and therefore the Company) will maintain an investment in the
joint venture, it will have a zero value since no positive return will be
realized from it and SESCO will not be able to exert any meaningful level of
control over it. Upon completion of the transaction, the Company expects to
recognize a loss consisting of 1) a charge for the discounted value of the
$6,600,000 note, which is payable over seven years, and 2) an amount
representing the carrying value of certain assets contributed to the joint
venture, consisting primarily of machinery spare parts. It should be noted that
all of SESCO's long-lived assets were written to zero value at December 31,
2001, so no additional impairment will be required. However, the Company will
incur higher than normal expenses related to SESCO as a result of legal fees and
other costs to complete the transaction, and higher operational expenses during
2002 as a result of the ceasing of cost capitalization (i.e., costs previously
considered capital expenditures are now being expensed in 2002) given the zero
book value of long-lived assets.
On a going forward basis, Katy would expect little if any income statement
activity as a result of its involvement in the joint venture, and Katy's balance
sheet will carry the note payable mentioned above. We have not booked any
amounts receivable or other assets relating to amounts that may be received at
the time the Service Agreement expires, given their uncertainty.
19
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 (b) $ 57,000 $ -- $ -- $ 57,000 $ --
Term loans 26,325 14,552 11,773 -- --
Preferred interest of subsidiary 16,400 -- -- 16,400 --
Operating leases 62,516 11,860 21,915 15,395 13,346
Other 768 67 701 -- --
----------- ----------- ----------- ----------- -----------
Total Contractual Obligations $ 163,009 $ 26,479 $ 34,389 $ 88,795 $ 13,346
=========== =========== =========== =========== ===========
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 $ 530 $ 530 $ -- $ -- $ --
Stand-by letters of credit 9,678 5,305 4,373 -- --
Guarantees (a) 40,265 4,445 12,150 23,670 --
----------- ----------- ----------- ----------- -----------
Total Commercial Commitments $ 50,473 $ 10,280 $ 16,523 $ 23,670 $ --
=========== =========== =========== =========== ===========
(a) As discussed in the Off-Balance Sheet Arrangements section above, SESCO, an
indirect wholly-owned subsidiary of Katy, operates a waste-to-energy facility,
under which it has certain contractual obligations, and for which Katy provides
certain guarantees. If SESCO 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 certain trusts 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 14 to Consolidated Financial Statements.
(b) As discussed in the Liquidity and Capital Resources section above, the
entire Revolving Credit Facility is classified as a current liability on the
Consolidated Statements of Financial Position as a result of the combination in
the new credit agreement of 1) lockbox agreements on Katy's depository bank
accounts and 2) a subjective Material Adverse Effect (MAE) clause. The revolving
credit facility expires on June 28, 2006.
OTHER ITEMS
Effect of Transactions with Related and Certain Other Parties
In connection with the Contico acquisition on January 8, 1999, we entered
into building lease agreements with Newcastle Industries, Inc. Newcastle is
majority-owned by Lester I. Miller, who was appointed to our Board of Directors
on January 8, 1999, and who resigned in September 2000. Newcastle also is the
holder of the preferred interest in Contico. Also, several additional properties
utilized by Contico are leased directly from Lester I. Miller. Rental expense
for these properties approximates historical market rates. Related party rental
expense for the year ending December 31, 2001, 2000 and 1999 was approximately
$1.5 million, $1.5 million and $5.5 million, respectively.
We paid Newcastle $2.0 million of preferred dividends for the year ended
December 31, 2001, compared to $2.6 million for each of the years ended December
31, 2000 and 1999. In connection with the recapitalization, we agreed with the
holder of the preferred interest in Contico to redeem, at a discount,
approximately half of such interest. As a consequence of the redemption, annual
preferred cash distributions required to be paid pursuant to the purchase
agreement were lower in 2001, and will decrease in future years by approximately
$1.3 million from fiscal year 2000 and 1999 levels.
Kohlberg, whose affiliate holds all 700,000 shares of our Convertible
Preferred Stock, provides ongoing management oversight and advisory services to
Katy. We paid $250,000 for such services in 2001, and expect to pay $500,000
annually in future years.
20
Restructuring Efforts and Severance Charges
During the fourth quarter of 2001, we recorded $3.2 million of severance
and restructuring charges. Approximately $1.0 million was related to severance
payments. These payments related to the closing of the former corporate
headquarters in Englewood, Colorado and an adjunct corporate office in Chicago
and the related terminations of employees, as well as severance paid to
employees at operating divisions in headcount reduction efforts. Approximately
$1.4 million of the charges related to a consultant working with us on sourcing
and other manufacturing and production efficiency initiatives. Approximately
$0.4 million of the charges related to transition activities within the Company.
Other costs related to manufacturing restructuring initiatives at Contico.
During the third quarter of 2001, we recorded $6.5 million of severance
and restructuring charges, of which $5.1 million related to the payment or
accrual of severance and other payments associated with the management
transition resulting from the recapitalization. Additionally, $1.0 million of
costs were incurred related primarily to consultants working with the Company on
sourcing and other manufacturing and production efficiency initiatives.
During the second quarter of 2001, Contico undertook restructuring efforts
that resulted in severance payments to various individuals. Forty three
employees, including two members of Contico and Katy executive management,
received severance benefits. Total severance costs were $1.6 million.
Also during the second quarter of 2001, the Company recognized severance
and exit costs associated with the closing of a warehouse facility and
consolidation of certain administrative functions, both of which relate to the
mop, broom and brush business. Seven warehouse employees and 19 administrative
employees were being affected by these actions. Total severance and exit costs
associated with these efforts were $0.4 million.
We incurred charges for non-cancelable rent and other exit costs
associated with the planned closure of our Englewood, Colorado corporate office.
Total costs recognized in the second quarter of 2001 were $0.7 million. An
additional $0.1 million was added to this cost estimate in the fourth quarter
(see above).
During the first quarter of 2001, Woods undertook a restructuring effort
that involved reductions in senior management headcount as well as facilities
closings. We closed facilities in Loogootee and Bloomington, Indiana, as well as
the Hong Kong office of Katy International, a subsidiary which coordinates
sourcing of products from Asia. Sixteen management and administrative employees
received severance packages. Total severance and other exit costs were $0.7
million.
During the third and fourth quarters of 2000, the Company implemented a
workforce reduction that reduced headcount by approximately 90. Employees
affected were primarily in general and administrative functions, with the
largest number of affected employees coming from the Maintenance Products group.
The workforce reduction included severance and related costs for certain
employees. Total severance and related costs was $2.4 million.
In June 1999, we began a restructuring plan for our Electrical/Electronics
businesses as a result of weaker than expected sales performance and lower
margins. The cost of the 1999 restructuring, which included severance costs
related to the elimination of 22 management employees, resulted in a pre-tax
charge to earnings in the second quarter of 1999 of approximately $0.6 million.
Additionally, plant personnel levels were reduced in excess of 100 persons and
24 unfilled administrative positions were eliminated.
As of December 31, 2001 accrued severance and restructuring totaled $3.6
million which will be paid through the year 2009.
The table below summarizes the future obligations for severance and
restructuring charges detailed above:
(Thousands of dollars)
2002 $3,209
2003 265
2004 55
2005 55
2006 22
Thereafter --
------
Total payments $3,606
======
21
Outlook for 2002
We anticipate a continuation of the difficult economic conditions and
business environment in 2002, which will present challenges in maintaining top
line net sales. In particular, we expect to see softness continue in the
restaurant, travel and hotel markets to which we sell cleaning products. 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 costs increases for raw materials.
Gross margins are expected to improve during 2002 as we realize the
benefits of various profit-enhancing strategies begun in 2001. These strategies
include sourcing previously manufactured products, as well as locating new
sources for products already sourced outside the Company. We have significantly
reduced headcount, and continue to examine issues related to excess facilities.
Cost of goods sold is subject to variability in the prices for certain raw
materials, most significantly thermoplastic resins used by Contico in the
manufacture of plastic products. We are also exposed to price changes for copper
(used by Woods and Woods Canada), corrugated packaging material and other raw
materials. We have not employed any hedging techniques in the past, but are
evaluating alternatives in the area of commodity price risk. We anticipate
mitigating these risks in part by creating efficiencies in and improvements to
our production processes.
Selling, general and administrative costs are expected to remain stable or
improve as a percentage of sales from 2001 levels. Cost reduction efforts are
ongoing throughout the Company. Our corporate office has relocated, and we
expect to maintain modest headcount and rental costs. We have begun the process
of transferring most back-office functions of our Wilen subsidiary from Atlanta
to St. Louis, the headquarters of Contico. We will evaluate the possibility of
further consolidation of administrative processes at our other companies.
It should be noted that we may incur further unusual charges during 2002
for potential restructuring efforts related to decisions on manufacturing and
distribution facilities, as well as administrative operations. These charges
could be for any or all of severance, plant closure costs and asset impairments.
We are also pursuing a strategy of developing the Katy Maintenance Group
(KMG). This process involves bundling certain products of the
janitorial/sanitation business of Contico, Wilen, Glit/Microtron and Disco for
customers in the janitorial/sanitation markets. The new organization would allow
customers to order certain products from all of the companies using a single
purchase order, and billing and collection would be consolidated as well. In
addition to administrative efficiencies, we believe that combining sales and
marketing efforts of these entities will allow us a unique marketing opportunity
to have improved delivery of both product and customer service. We do not expect
significant financial benefits from this project in 2002, but believe it to be a
key to improving profitability and the long-term success of the Company
Interest expense is expected to be significantly lower during 2002 as
opposed to 2001, given a full year of lower debt levels as a result of the
recapitalization. Also, we have benefited from lower prevailing rates of
interest in recent months as a result of variable rate borrowing facilities. We
cannot predict the future levels of these interest rates.
The effective tax rate for 2002 is expected to be higher than the federal
statutory rate as a result of state and foreign income tax provisions. The
effective tax rate is also subject to ongoing adjustments as a result of the
Company's ongoing evaluations of its abilities to utilize certain deferred tax
assets, particularly net operating losses.
We are continually evaluating the possibility of divesting certain
businesses. This strategy would allow us to de-leverage our current financial
position and allow available cash, as well as management focus, to be directed
at core business activities.
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.
22
- Our inability to reduce product costs, including manufacturing,
sourcing, freight, and other product costs.
- Our inability to reduce administrative costs through consolidation
of functions and systems improvements.
- 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 facility.
- Our inability to meet covenants associated with the New Credit
Agreement.
- 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. We are not obligated to update
or revise any forward-looking statements or to advise changes in the
assumptions on which they are based, whether as a result of new
information, future events or otherwise. All forward looking statements
should be viewed with caution.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements. Certain of our accounting policies as
discussed below require the application of significant judgment by management in
selecting the appropriate assumptions for calculating amounts to record in our
financial statements. By their nature, these judgments are subject to an
inherent degree of uncertainty.
Accounts Receivable - We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customer's
current credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payment from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provision established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past. Since our accounts
receivable are concentrated in a relatively few number of large sized customers,
a significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectibility of our
accounts receivable and our future operating results.
Inventories - We value our inventory at the lower of the actual cost to
purchase and/or manufacture the inventory or the current estimated market value
of the inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements for the next twelve
months. A significant increase in the demand for our products could result in a
short-term increase in the cost of inventory purchases while a significant
decrease in demand could result in an increase in the amount of excess inventory
quantities on hand. Additionally, our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore,
23
although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or product
developments could have a significant impact on the value of our inventory and
our reported operating results.
Deferred income taxes - We recognize deferred income tax assets and
liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. Deferred income tax assets
also include net operating loss carry forwards primarily due to the significant
operating losses incurred during recent years. We regularly review our deferred
income tax assets for recoverability and establish a valuation allowance when it
is more likely than not such assets will not be recovered, taking into
consideration historical net income (losses), projected future income (losses)
and the expected timing of the reversals of existing temporary differences. As
of December 31, 2001, we had a valuation allowance of $13.9 million. During the
year ended December 31, 2001, the valuation allowance was increased by $9.7
million, reducing our effective tax rate benefit to 25% and our total income tax
benefit to $21.7 million . We will continue to evaluate our valuation allowance
requirements based on future operating results and business acquisitions and
dispositions. As circumstances change that require an increase or decrease in
our income tax valuation allowance, the change in valuation allowance will be
reflected in current operations through our income tax provision (benefit).
Workers' compensation and product liabilities - We make payments for
workers' compensation and product liability claims generally through the use of
a third party claims administrator. We have purchased insurance coverage for
large claims over our self-insured retention levels. Our workers' compensation
and health benefit liabilities are developed using actuarial methods based upon
historical data for payment patterns, cost trends, and other relevant factors.
While we believe that our liabilities for workers' compensation and product
liability claims of $9.1 million as of December 31, 2001, are adequate and that
the judgment applied is appropriate, such estimated liabilities could differ
materially from what will actually transpire in the future.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board authorized the
issuance of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001. SFAS No. 141 requires intangible
assets to be recognized if they arise from contractual or legal rights or are
"separable," i.e., it is feasible that they may be sold, transferred, licensed,
rented, exchanged or pledged. As a result, it is likely that more intangible
assets will be recognized under SFAS No. 141 than under its predecessor,
Accounting Principles Board (APB) Opinion No.16 although in some instances
previously recognized intangibles will be subsumed into goodwill.
Under SFAS No. 142, goodwill will no longer be amortized on a straight
line basis over its estimated useful life, but will be tested for impairment on
an annual basis and whenever indicators of impairment arise. The goodwill
impairment test, which is based on fair value, is to be performed on a reporting
unit level. A reporting unit is defined as an operating segment determined in
accordance with SFAS No. 131 or one level lower. Goodwill will no longer be
allocated to other long-lived assets for impairment testing under SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Additionally, goodwill on equity method investments will no
longer be amortized; however, it will continue to be tested for impairment in
accordance with APB Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. Under SFAS No. 142 intangible assets with
indefinite lives will not be amortized. Instead they will be carried at the
lower of cost or market value and tested for impairment at least annually. All
other recognized intangible assets will continue to be amortized over their
estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 although goodwill on business combinations consummated after July 1, 2001
will not be amortized. In addition, goodwill on prior business combinations will
cease to be amortized. The Company is unable at this time to determine the
impact that this Statement will have on goodwill and intangible assets at the
time of adoption in the first quarter of 2002, or whether a cumulative effect
adjustment will be required upon adoption. During the second quarter of 2001,
the Company recorded an impairment of $33.0 million on the long-lived assets of
its Wilen subsidiary, as discussed in Note 7 to Consolidated Financial
Statements. However, even considering this impairment, the terms of the recently
completed recapitalization (see Note 3 to Consolidated Financial Statements)
indicate that the fair value of the Company may be less than the carrying value
represented on the consolidated balance sheets. Therefore, the Company
recognizes the possibility of impairments of goodwill and certain intangibles
upon adoption in the first quarter of 2002.
In August, 2001, the FASB released SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Previously, two accounting models
existed for long-lived assets to be disposed of, as SFAS No. 121, Accounting for
the
24
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, did
not address the accounting for a segment of a business accounted for as a
discontinued operation under APB Opinion 30. This statement establishes a single
model based on the framework of SFAS No. 121. This statement also broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. While the Company is still evaluating the potential impact of the
statement, it anticipates that this statement could have an impact on its
financial reporting as it liberalizes the presentation of discontinued
operations. If the Company were to divest of certain businesses that are under
consideration, Katy anticipates they would possibly qualify as discontinued
operations under SFAS No. 144, whereas they would have not met the requirements
of discontinued operations treatment under APB Opinion 30.
Environmental and Other Contingencies
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies and
private parties as potentially responsible parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability (Superfund) Act or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. Based on its estimate of allocation of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent,
public companies, will fully pay the costs apportioned to them, currently
available information concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company has
recorded and accrued for indicated environmental liabilities amounts that it
deems reasonable and believes that any liability with respect to these matters
in excess of the accrual will not be material. The ultimate costs will depend on
a number of factors and the amount currently accrued represents management's
best current estimate of the total cost to be incurred. The Company expects this
amount to be substantially paid over the next one to four years.
The most significant environmental matter in which the Company is
currently involved relates to the W.J. Smith site. In 1993, the United States
Environmental Protection Agency (USEPA) 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 USEPA agreed to resolve the proceeding
through an Administrative Order on Consent under Section 7003 of RCRA. Pursuant
to the Order, W.J. Smith is currently implementing a cleanup to mitigate
off-site releases.
With regard to non-environmental contingencies, 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 our purchase of Woods.
The plaintiff also alleges that it made loans to an entity controlled by certain
officers and directors based upon fraudulent representations. The plaintiff
seeks to hold Woods liable for its alleged damage under principles of respondeat
superior and successor liability. The plaintiff is claiming damages in excess of
$24.0 million and is requesting treble damages under RICO. Because certain
procedural 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. We 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 we acquired Woods, and under state, federal and common law. In
addition, the purchase price under the purchase agreement may be subject to
adjustment as a result of the claims made by Banco del Atlantico. The extent or
limit of any such recourse cannot be predicted at this time.
We also have a number of product liability and worker's 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. It can take up to 10 years from the date of the injury to reach a
final outcome for such claims. With respect to the product liability and
worker's compensation claims, we have provided for our share of expected losses
beyond the applicable insurance coverage, including those incurred but not
reported, which are developed using actuarial techniques. Such accruals are
developed using currently available claim information, and represent 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.
25
Although we believe that these actions individually and in the aggregate
are not likely to have a material adverse effect on the Company, further costs
could be significant and will be recorded as a charge to operations when such
costs become probable and reasonably estimable.
26
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk associated with changes in interest rates
relates primarily to our debt obligations and 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.
The holder of the preferred interest in Contico redeemed with Katy, at a
discount, approximately half of such interest at the time of the
recapitalization. We utilized approximately $10.2 million of the proceeds from
the issuance of the Convertible Preferred Stock for the purpose of redeeming
approximately 50% of the preferred interest. The holder will retain
approximately 50% of the preferred interest, or a stated value of $16.4 million.
Additionally, in connection with the recapitalization, the agreement governing a
put option was amended to, among other things, provide that in the event of a
change of control, or at any time during the period beginning on the earlier to
occur of 1) June 28, 2006 , or 2) the date at which all indebtedness incurred by
us in connection with the recapitalization has been paid in full and lenders
have released all security interests in connection with such indebtedness, and
ending on January 7, 2010, the holder of the preferred interest shall have the
right to require us to purchase from them any portion of their preferred
interest at its stated value. In the same amendment, provisions regarding our
call option on the preferred interest were amended to allow us to purchase the
outstanding preferred interest at stated value at any time following the
recapitalization. See Note 12 to Consolidated Financial Statements
The following table presents our financial instruments, rates of interest
and indications of fair value:
Expected Maturity Dates
(Thousands of Dollars)
ASSETS
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Temporary cash investments
Fixed rate $ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Average interest rate -- -- -- -- -- --
LONG-TERM DEBT
Fixed rate debt $ 67 $ 701 $ -- $ -- $ -- $ -- $ 768 $ 768
Average interest rate 7.14% 7.14% -- -- -- -- 7.14%
Variable rate debt $14,552 $ 6,000 $ 5,773 $ -- $ 57,000 $ -- $ 83,325 $83,325
Average interest rate 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
PREFERRED INTEREST OF SUBSIDIARY
Fixed rate obligation $ -- $ -- $ -- $ -- $ 16,400 $ -- 16,400 (a)
Average interest rate 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
(a) The Company cannot estimate the fair value of the preferred interest due to
lack of a market. The fair value of the preferred interest in Contico is
impacted by two factors: the rate of interest paid on the stated amount, and the
market price of Katy's common stock. During 2001, market rates for similar
instruments decreased, which would have the effect of increasing the fair value
of the preferred interest. Also during 2001, the value of Katy's common stock
declined, which caused the fair value of the preferred interest to decrease.
Upon exercise of the put option, the holder would receive 780,968 shares of Katy
common stock, implying a $21.00 per share value when divided into the
post-redemption value of $16.4 million. Katy's stock closed at $17.00 on January
8, 1999, the date of the Contico acquisition, and closed at $3.42 on December
31, 2001.
27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT
Our management is responsible for the fair presentation and consistency of
all financial data included in this Annual Report in accordance with generally
accepted accounting principles. Where necessary, the data reflects management's
best estimates and judgments.
Management also is responsible for maintaining an internal control
structure with the objective of providing reasonable assurance that our assets
are safeguarded against material loss from unauthorized use or disposition and
that authorized transactions are properly recorded to permit the preparation of
accurate financial data. Cost-benefit analyses are an important consideration in
this regard. The effectiveness of internal controls is maintained by: (1)
personnel selection and training; (2) division of responsibilities; (3)
establishment and communication of policies; and (4) ongoing internal review
programs and audits. Management believes that our system of internal controls is
effective and adequate to accomplish the above described objectives.
/s/ C. Michael Jacobi
- --------------------------------------
C. Michael Jacobi
President and Chief Executive Officer
/s/ Amir Rosenthal
- --------------------------------------
Amir Rosenthal
Vice President, Chief Financial Officer, General Counsel and Secretary
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO KATY INDUSTRIES, INC.:
We have audited the accompanying consolidated balance sheets of KATY INDUSTRIES,
INC., (a Delaware corporation) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Katy Industries, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
March 26, 2002