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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14A
Proxy Statement Pursuant To Section 14(A)
Of The Securities Exchange Act Of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-12
KATY INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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KATY INDUSTRIES, INC.
6300 S. Syracuse Way, Suite 300,
Englewood, Colorado 80111
(303) 290-9300
To our Stockholders:
Katy and KKTY Holding Company, L.L.C., an affiliate of an investment fund
affiliated with Kohlberg & Co., L.L.C., have agreed to a revision of the
recapitalization of Katy described in Katy's Proxy Statement dated April 25,
2001.
Because of the revision in the transaction, the Annual Meeting of
Stockholders has been adjourned until June 26, 2001, at 10:00 a.m. New York
City time. The place of the adjourned Annual Meeting will be at the Inter-
Continental Central Park South, located at 112 Central Park South, New York,
New York.
The terms of the proposed recapitalization of Katy were revised because of
Katy interim operating results and lowered projections. Under the revised
transaction, we are asking for your approval to sell 700,000 shares of
convertible preferred stock, $100 par value per share, to KKTY Holding. The
preferred stock is convertible into shares of common stock at a conversion
price of $6.00 per share of common stock. Further, the holder of the
convertible preferred stock will be entitled to receive payment-in-kind
dividends (that is, dividends in the form of additional shares of Katy
convertible preferred stock) at a rate of 15% per annum compounded annually for
a period of three years and five months. To implement the revised transaction,
we are also asking for your approval to amend Katy's Restated Certificate of
Incorporation to authorize 1,200,000 shares of convertible preferred stock and
an additional 10,000,000 shares of common stock.
The enclosed Notice and Supplement provide important information about the
proposed transaction and related information. Your Board has determined that
the terms of the revised transaction are fair to and in the best interests of
Katy and its stockholders. YOUR BOARD OF DIRECTORS HAS APPROVED AND RECOMMENDS
THAT YOU VOTE FOR THE PROPOSALS AT THE ANNUAL MEETING.
Because of the need to increase Katy's liquidity in light of Katy's interim
operating results and lowered projections, Katy and KKTY Holding have
terminated the original recapitalization agreement, and KKTY Holding has
terminated its tender offer for up to 2,500,000 shares of Katy common stock.
Under the revised recapitalization, KKTY Holding has agreed instead to increase
its investment in Katy convertible preferred stock to $70 million from $40
million.
We have enclosed with this letter a revised Notice of Annual Meeting, the
Supplement, a new proxy card and a return envelope. The terms of the proposed
investment, as restructured, differ substantially from the terms described in
the Proxy Statement dated April 25, 2001. The enclosed Supplement describes the
changes to the terms of the proposed investment. We urge you to read the
enclosed Supplement and all of the other enclosed materials carefully.
For your vote to be counted on these important proposals, please sign, date
and return the enclosed proxy card in the enclosed, prepaid return envelope as
soon as possible. Your shares will be voted at the Annual Meeting in accordance
with your proxy instructions. Because of the significant changes in the
proposed transaction, proxies solicited by Katy prior to the date of this
Supplement are being disregarded. The enclosed blue proxy card replaces the
white proxy card previously sent to you. Your vote will only be counted at the
Annual Meeting if you fill in, date and sign the enclosed blue proxy card and
return it promptly in the enclosed return envelope.
On behalf of the Board of Directors and the employees of Katy, we cordially
invite all stockholders to attend the adjourned Annual Meeting on June 26,
2001. If you plan to attend the meeting, please mark the appropriate box on the
enclosed proxy card.
Sincerely,
/S/ ROBERT M. BARATTA
Robert M. Baratta
President and Chief Executive
Officer
YOUR VOTE IS IMPORTANT
Please Sign, Date and Return Your Proxy Card by June 26, 2001
If you have questions about voting your shares, please contact our proxy
solicitor, Innisfree M&A Incorporated, toll-free at 1-888-750-5834.
KATY INDUSTRIES, INC.
6300 S. Syracuse Way, Suite 300,
Englewood, Colorado 80111
(303) 290-9300
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REVISED NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Katy Industries, Inc.:
We are holding the adjourned Annual Meeting of Stockholders of Katy on June
26, 2001 at 10:00 a.m., local time. The adjourned Annual Meeting will be held
at the Inter-Continental Central Park South, located at 112 Central Park South,
New York, New York. At the adjourned Annual Meeting, you will be asked to vote
on the following:
1. A proposal to sell 700,000 shares of Katy's convertible preferred
stock, $100 par value per share, to KKTY Holding Company, L.L.C., an
affiliate of an investment fund affiliated with Kohlberg & Co., L.L.C., a
private investment firm.
2. A proposal to approve an amendment to Katy's Restated Certificate of
Incorporation to authorize 1,200,000 shares of convertible preferred stock.
3. A proposal to approve an amendment to Katy's Restated Certificate of
Incorporation authorizing the classification of the Board of Directors into
two classes with staggered terms.
4. The election of nine members of the Board of Directors to serve for
the staggered terms specified in the enclosed Proxy Statement or, if
Proposals 1, 2, 3 and 6 are not adopted by the stockholders, the election
of nine members of the Board of Directors to serve for a term of one year.
5. The ratification of the selection by the Board of Directors of the
firm of Arthur Andersen LLP as independent auditors of Katy for the current
year.
6. A proposal to approve an amendment to Katy's Restated Certificate of
Incorporation to increase the number of shares of common stock authorized
to be issued by Katy from 25,000,000 to 35,000,000.
7. The transaction of such other business as may properly come before
the Annual Meeting or any postponement or adjournment thereof.
As part of Proposal 1, we are also asking you to approve at this time the
issuance of shares of common stock to the holder of the convertible preferred
stock upon conversion of the convertible preferred stock in accordance with the
terms of the convertible preferred stock. The effectiveness of each of
Proposals 1, 2, 3 and 6 is contingent upon the approval of the others. No
action will be taken by Katy on Proposals 1, 2, 3 or 6 unless all four
proposals are approved.
The Proxy Statement dated April 25, 2001, as amended by the Supplement that
we are delivering with this revised Notice, contains important information
concerning the proposals to be considered at the Annual Meeting. You will be
able to vote your shares at the Annual Meeting if you were a stockholder of
Katy at the close of business on April 23, 2001. This revised Notice supersedes
in all respects the notice dated April 25, 2001 previously sent to you.
By order of the Board of Directors:
/S/ ARTHUR R. MILLER
Arthur R. Miller
Secretary
Dated: June 8, 2001
YOUR VOTE AT THE ANNUAL MEETING IS IMPORTANT.
PLEASE INDICATE YOUR VOTE ON THE ENCLOSED BLUE PROXY CARD AND RETURN IT IN
THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE, EVEN IF YOU PLAN TO ATTEND THE
MEETING. THE BLUE PROXY CARD REPLACES THE WHITE PROXY CARD PREVIOUSLY SENT TO
YOU. PROXIES GRANTED BY THE WHITE PROXY CARD WILL NOT BE COUNTED AT THE ANNUAL
MEETING.
IF YOU HAVE QUESTIONS ABOUT VOTING YOUR SHARES, PLEASE CONTACT OUR PROXY
SOLICITOR, INNISFREE M&A INCORPORATED, TOLL-FREE AT 1-888-750-5834.
IF YOU ATTEND THE MEETING, YOU WILL BE ABLE TO REVOKE YOUR PROXY AND VOTE IN
PERSON.
KATY INDUSTRIES INC.
6300 S. Syracuse Way, Suite 300,
Englewood, Colorado 80111
(303) 290-9300
SUPPLEMENT TO APRIL 25, 2001 PROXY STATEMENT
We are furnishing this Supplement to the April 25, 2001 Proxy Statement in
connection with the solicitation by the Board of Directors of Katy of proxies
to be voted at the adjourned Annual Meeting to be held at 10:00 a.m. local time
on June 26, 2001 at the Inter-Continental Central Park South, located at 112
Central Park South, New York, New York. This Supplement provides information
that you should read before you vote on the proposals that will be presented at
the Annual Meeting.
The Annual Meeting was originally scheduled for June 5, 2001. On April 25,
2001, Katy began mailing its Proxy Statement and a white proxy card to
stockholders of record at the close of business on April 23, 2001. On June 5,
2001, the Annual Meeting was adjourned in light of changes to the terms of the
proposed investment in Katy by KKTY Holding Company, L.L.C., an affiliate of an
investment fund affiliated with Kohlberg & Co., L.L.C. The terms of the
proposed investment, as initially structured, were described in the Proxy
Statement that was sent to stockholders in April.
This Supplement provides revised information with respect to the terms of
the proposed investment by KKTY Holding. The Supplement also describes new
Proposal 6 (to increase the number of shares of common stock Katy is authorized
to issue), which is being presented at the Annual Meeting as a result of
changes to the terms of the proposed investment. This Supplement also updates
some of the other information contained in the Proxy Statement. We are mailing
this Supplement and the enclosed blue proxy card on or about June 8, 2001 to
stockholders of record at the close of business on April 23, 2001. Stockholders
are asked to execute and return the enclosed blue proxy card. The blue proxy
card being sent to you replaces the white proxy card and proxies granted on the
white proxy card will not be counted at the Annual Meeting.
For convenience, we first provide a question-and-answer summary of the
changes to the terms of the proposed transactions with KKTY Holding.
This Supplement should be read in conjunction with the Proxy Statement.
Except as specifically amended or supplemented by the information contained in
this Supplement, all information set forth in the Proxy Statement remains
accurate and should be considered in casting your vote by proxy or at the
Annual Meeting.
TABLE OF CONTENTS
Page
----
SUMMARY OF SUPPLEMENT.................................................... 1
What are the changes to the proposals at the Annual Meeting?........... 1
What are the changes to the related transactions?...................... 2
Why have the terms of the transactions with Purchaser been changed?.... 2
What factors should you take into account in considering the proposed
preferred stock purchase?............................................. 2
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING.......................... 4
The Annual Meeting..................................................... 4
This Proxy Solicitation................................................ 4
Voting Your Shares..................................................... 4
Vote Required for Approval............................................. 4
PROPOSAL 1--SALE OF CONVERTIBLE PREFERRED STOCK.......................... 5
Changes to Proposal 1.................................................. 5
Required Vote.......................................................... 6
Recommendation of the Board of Directors............................... 6
Information about the New Purchase Agreement........................... 6
New Voting Agreement................................................... 8
Revised Terms of the Convertible Preferred Stock....................... 9
Use of Proceeds........................................................ 9
Changes to the Related Transactions.................................... 9
Background of the Revised Transaction.................................. 10
Factors Considered by the Board of Directors........................... 13
Opinion of Bear Stearns................................................ 16
PROPOSAL 2--TO AUTHORIZE 1,200,000 SHARES OF CONVERTIBLE PREFERRED
STOCK................................................................... 25
General................................................................ 25
Required Vote.......................................................... 25
Recommendation of the Board of Directors............................... 26
PROPOSAL 3--ESTABLISHING A CLASSIFIED BOARD OF DIRECTORS................. 26
PROPOSAL 4--ELECTION OF DIRECTORS........................................ 26
Information Concerning Directors and Executive Officers................ 27
PROPOSAL 5--RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE
INDEPENDENT AUDITORS OF KATY............................................ 28
PROPOSAL 6--TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.. 28
General................................................................ 28
Required Vote.......................................................... 29
Recommendation of the Board of Directors............................... 29
INFORMATION ABOUT KATY STOCK OWNERSHIP................................... 30
Outstanding Shares..................................................... 30
Security Ownership of Certain Beneficial Owners........................ 30
Security Ownership of Management....................................... 32
EXECUTIVE COMPENSATION................................................... 33
Termination of Employment, Change of Control and Other Arrangements.... 33
Directors' Compensation................................................ 34
i
Page
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SUPPLEMENTARY FINANCIAL INFORMATION....................................... 34
Financial Statements.................................................... 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 48
FORWARD-LOOKING STATEMENTS................................................ 53
PROCEDURAL MATTERS........................................................ 54
OTHER MATTERS............................................................. 54
ANNEX A--Opinion of Bear Stearns & Co. Inc. dated June 2, 2001
ANNEX B--Preferred Stock Purchase and Recapitalization Agreement dated as of
June 2, 2001 between KKTY Holding Company, L.L.C. and Katy Industries,
Inc.
ANNEX C--Proposed Amendment to Katy's Restated Certificate of Incorporation
ANNEX D--Stock Voting Agreement dated as of June 2, 2001
ANNEX E--Termination Agreement dated as of June 2, 2001
ii
SUMMARY OF SUPPLEMENT
This summary answers basic questions about the changes to the terms of the
proposed recapitalization. Please read the Supplement and the Proxy Statement
in their entirety for full information about the proposals at the Annual
Meeting.
This Supplement contains forward-looking statements that involve risks and
uncertainties. The words "believe," "anticipate," "expect," "estimate,"
"intend" and similar expressions identify forward-looking statements. Actual
results could differ materially from those discussed in the forward-looking
statements as a result of certain factors. See "Forward-Looking Statements" on
page 53 of the Supplement.
What are the changes to the proposals at the Annual Meeting?
Under Proposal 1, you were asked to consider, among other things, the
issuance and sale by Katy of convertible preferred stock, $100 par value per
share, to KKTY Holding Company, L.L.C., an affiliate of an investment fund
affiliated with Kohlberg & Co., L.L.C. ("Kohlberg"). (We will use the term
"convertible preferred stock" to refer to the convertible preferred stock, $100
par value, that we are proposing to sell. We will use the term "Purchaser" to
refer to KKTY Holding Company, L.L.C., the buyer of the convertible preferred
stock.)
Under the revised terms of the transactions with Purchaser, the number of
shares of convertible preferred stock that Purchaser will purchase and the
number of shares of Katy common stock that Purchaser will receive upon
conversion of the convertible preferred stock has been increased. Under the
revised terms of the transactions with Purchaser, Purchaser will purchase
700,000 shares of convertible preferred stock (rather than 400,000 shares of
convertible preferred stock under the initial terms) at a purchase price of
$100 per share. Each share of convertible preferred stock is convertible into
16.67 shares of Katy common stock (rather than 12.5 shares under the initial
terms), so that the purchase price of convertible preferred stock is equivalent
to $6.00 per share of common stock into which the preferred stock is
convertible (rather than $8.00 per share of common stock under the initial
terms). 700,000 shares of convertible preferred stock would be convertible into
11,666,666 shares of common stock.
Under the revised terms of the transactions with Purchaser, the holder of
the convertible preferred stock is entitled to receive payment-in-kind
dividends (that is, dividends in the form of additional shares of Katy
convertible preferred stock) at a rate of 15% per annum (compounded annually)
for a period of three years and five months following closing. If the holder of
the convertible preferred stock continues to hold the convertible preferred
stock for the three-year and five-month period, it will receive an additional
431,555 shares of convertible preferred stock, which would be convertible into
an additional 7,192,598 shares of common stock.
Under Proposal 2, you were asked to consider an amendment to Katy's Restated
Certificate of Incorporation to authorize the shares of convertible preferred
stock. As a result of the revised terms of the proposed investment, we are now
asking you to authorize 1,200,000 shares of convertible preferred stock (rather
than 600,000 under the initial terms). If stockholders do not approve Proposal
2 (as revised), Katy will not be able to sell the convertible preferred stock
to Purchaser or pay the payment-in-kind dividends required under the terms of
the convertible preferred stock.
We are adding an additional proposal, new Proposal 6, which is also a
condition to the completion of the transactions with Purchaser. This proposal
is an amendment to Katy's Restated Certificate of Incorporation to increase the
number of shares of common stock Katy is authorized to issue from 25,000,000 to
35,000,000. Katy needs stockholders to authorize additional shares of common
stock to ensure that sufficient shares of common stock can be issued to the
holder of the convertible preferred stock upon conversion of the convertible
preferred stock as well as to satisfy existing commitments under stock options
that Katy has granted and to afford flexibility in the event that Katy needed
to issue additional shares under its employee stock option program or to
provide incentive compensation to consultants.
What are the changes to the related transactions?
As described in the Proxy Statement, the proposed sale of convertible
preferred stock was part of a series of transactions that included a tender
offer commenced by Purchaser on April 25, 2001 for up to 2,500,000 shares of
Katy common stock at an offer price of $8.00 per share. Because of the need to
increase liquidity in light of Katy's interim operating results and lowered
projections, Katy and Purchaser have terminated the original recapitalization
agreement, and Purchaser has terminated its tender offer. Under the revised
recapitalization, Purchaser has agreed instead to increase its investment in
Katy convertible preferred stock to $70 million from $40 million.
As part of the revisions to the terms of the transactions, Purchaser has
obtained a revised commitment letter from Bankers Trust Company to provide up
to $140 million of senior secured term and revolving loans to Katy, which will
replace Katy's existing senior bank loans.
As described in the Proxy Statement, under the initial terms of the
transactions with Purchaser, it was a condition to closing that Katy complete
the sale of its subsidiary Hamilton Metals, L.P. for gross proceeds in cash,
net of liabilities retained by Katy, of at least $20,000,000. Under the revised
terms of the transactions with Purchaser, Katy will retain Hamilton.
Why have the terms of the transactions with Purchaser been changed?
Following the mailing of the Proxy Statement, Purchaser re-evaluated the
terms of its tender offer and its proposed purchase of convertible preferred
stock in light of Katy's operating results for the first quarter and Katy's
preliminary operating results for April 2001. On May 8, 2001, representatives
of Purchaser advised representatives of Katy that Purchaser believed one or
more of the conditions to closing of the transactions may not be satisfied at
the expiration date of the tender offer and that consequently, Purchaser was
considering alternative courses of action to be negotiated with Katy, including
among other things, an increase in the size of its investment in Katy
convertible preferred stock, a decrease in the preferred stock conversion price
and a decrease in the number of shares of Katy common stock and price per share
to be purchased pursuant to the tender offer. Further, because of Katy's
operating results for the first quarter and the preliminary operating results
for April 2001 and the resulting decrease in earnings, Bankers Trust Company
determined that a reduction in the debt level that could be financed would be
required. In response, Purchaser decided to increase its direct equity
investment in Katy.
The terms of the revised transactions with Purchaser are the product of the
discussions and negotiations that followed between Katy and Purchaser.
What factors should you take into account in considering the proposed preferred
stock purchase?
Katy's Board unanimously approved the revised transactions with Purchaser,
because it believed they would be in the best interests of Katy and its
stockholders. (We will use the term "unanimously" in the Supplement to refer to
actions by all current members of Katy's Board, except William F. Andrews, an
operating principal of Kohlberg, who did not take part in the discussions
relating to the transactions with Purchaser.) You should consider the factors
described at pages 13-15 of the Supplement. Positive factors considered by the
Board in connection with the revised transactions include:
--The Board received an opinion from Bear, Stearns & Co. Inc. that, as of
the date of such opinion, the proposed sale of convertible preferred stock
to Purchaser (as revised) was fair from a financial point of view to Katy.
A copy of the Bear Stearns opinion is attached as Annex A.
--Katy's liquidity and financial strength will be increased as a result of
the cash infusion by Purchaser and borrowing availability under the new
credit facility with Bankers Trust Company.
2
--Katy's sales and income have declined since the date that the initial
terms of the transactions with Purchaser were agreed to, as have the
expectations of Katy's management for earnings before interest, taxes,
depreciation and amortization for 2001.
--Katy's existing credit agreement must be refinanced by June 30, 2001. If
the transactions with Purchaser are not completed, considering the current
market environment, a substantial risk exists that Katy will be unable to
obtain further waivers of the covenant violation under the current credit
facility, that Katy will be unable to obtain, on reasonable terms or at
all, financing necessary to replace its current credit facility, and that
Katy will be unable to repay the amounts outstanding under a $16.8 million
tranche of Katy's current credit facility (and would not have a facility
to back-up or issue letters of credit) when it expires on June 30, 2001.
If Katy is unable to refinance its existing bank loans, the entire amount
under the existing credit agreement could be declared due and payable not
later than June 30, 2001.
--The revised terms of the transactions with Purchaser were the product of
arm's length negotiation between Katy and Purchaser and were the most
advantageous terms available to Katy for a transaction with Purchaser
under the circumstances.
Negative factors considered by the Board include:
--The issuance of the convertible preferred stock will have a dilutive
effect on Katy's existing stockholders. If the 700,000 shares of
convertible preferred stock to be purchased by Purchaser are converted,
Purchaser will receive 11,666,666 shares of common stock, which would
represent 58.2% of the outstanding shares of common stock, calculated on a
fully diluted basis (excluding outstanding options) after giving effect to
the conversion. Over the three-year five-month life of the payment-in-kind
dividend right, Katy will issue to Purchaser an additional 431,555 shares
of convertible preferred stock. Upon the conversion of such additional
convertible preferred stock, Purchaser will receive an additional
7,192,598 shares of Katy common stock. The shares of common stock issuable
on the conversion of the convertible preferred stock issued to Purchaser
at closing, together with the shares of common stock issuable on the
conversion of the convertible preferred stock issuable to Purchaser
through the payment-in-kind dividend right, would represent 69.2% of the
outstanding shares of common stock, calculated on a fully diluted basis
(excluding outstanding options) after giving effect to the conversion.
--If the proposed sale of convertible preferred stock to Purchaser and the
conversion of all of the convertible preferred stock issuable to Purchaser
(at closing and through the payment-in-kind dividend right) were to have
occurred as of December 31, 2000, these issuances would have had the pro
forma effect of reducing the book value per share of common stock from
$17.91 to $8.11.
--The holders of the convertible preferred stock will have preferential
rights with respect to distributions if Katy is liquidated. Purchaser will
receive more shares of convertible preferred stock under the revised terms
of the transactions with Purchaser than was contemplated under the initial
terms.
The Board believed that, on balance, the possible benefits to Katy
stockholders from the positive factors outweighed the possible detriments from
the negative factors.
3
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
The disclosure under the heading "Information about the Annual Meeting and
Voting" in the Proxy Statement is supplemented as follows:
The Annual Meeting
The adjourned Annual Meeting will be held on June 26, 2001 at the Inter-
Continental Central Park South, located at 112 Central Park South, New York,
New York, at 10:00 a.m. local time.
This Proxy Solicitation
Katy is sending you this Supplement to the Proxy Statement because Katy's
Board of Directors is seeking your proxy to vote your shares at the Annual
Meeting and any postponement or adjournment thereof. On or about June 8, 2001,
we began mailing this Supplement and the accompanying blue proxy card to all
people who, according to our stockholder records, owned shares at the close of
business on April 23, 2001.
Katy will pay the cost of requesting these proxies. Katy's directors,
officers and employees may request proxies in person or by telephone, mail,
telecopy or letter. Katy also has retained Innisfree M&A Incorporated to assist
in distributing proxy solicitation materials and seeking proxies. Katy will pay
Innisfree a fee of approximately $15,000, plus reasonable out-of-pocket
expenses, for this assistance. Katy will reimburse brokers and other nominees
their reasonable out-of-pocket expenses for forwarding proxy materials to
beneficial owners of stock.
Voting Your Shares
The proxy holders intend to propose one or more adjournments of the Annual
Meeting so that the Annual Meeting can take place on the same day as, or soon
before, the satisfaction of the conditions to the transactions with Purchaser.
Any adjournment will require the affirmative vote of a majority of those shares
of common stock present at the Annual Meeting in person or by proxy. The proxy
holders will vote those proxies required to be voted "For" Proposals 1, 2, 3
and 6 in favor of such adjournment, and will vote those proxies required to be
voted "Against" any of Proposal 1, 2, 3 or 6 against such adjournment.
Vote Required for Approval
Proposal 6, the proposed amendment to Katy's Restated Certificate of
Incorporation to increase the number of shares of common stock that Katy is
authorized to issue, requires the affirmative vote of the holders of a majority
of the voting power of Katy's outstanding capital stock entitled to vote at the
Annual Meeting.
The effectiveness of each of Proposal 1, 2, 3 and 6 is contingent on the
approval of the others. Katy will not take any action on Proposal 1, 2, 3 or 6
unless stockholders approve all four. Therefore, if you vote against approving
any of the three amendments to Katy's Restated Certificate of Incorporation,
this will have the same effect as voting against the proposed sale of
convertible preferred stock to Purchaser.
Certain members of the Wallace E. Carroll, Jr. family, trusts for the
benefit of members of the Carroll family and entities associated with the
Carroll family (the "Agreement Shareholders") have entered into a new Stock
Voting Agreement dated as of June 2, 2001 (the "New Voting Agreement"). The New
Voting Agreement requires, among other things, that the Agreement Shareholders
vote 2,480,000 of their shares of Katy common stock in favor of Proposals 1, 2,
3, 4 and 6. The 2,480,000 common shares subject to these voting obligations
represent, as of June 2, 2001, approximately 29.5% of the shares of Katy
capital stock entitled to vote at the Annual Meeting. The New Voting Agreement
is included as Annex D to this Proxy Statement.
4
PROPOSAL 1--SALE OF CONVERTIBLE PREFERRED STOCK
The disclosure under the heading "Proposal 1--Sale of Convertible Preferred
Stock" in the Proxy Statement is supplemented as follows:
Changes to Proposal 1
As described in the Proxy Statement under "Proposal 1--Sale of Convertible
Preferred Stock", Katy and KKTY Holding Company, L.L.C. ("Purchaser"), an
affiliate of an investment fund affiliated with Kohlberg & Co., L.L.C.
("Kohlberg"), entered into a Preferred Stock Purchase and Recapitalization
Agreement (the "Purchase Agreement") dated as of March 29, 2001. Under the
terms of the Purchase Agreement, and subject to the conditions in the Purchase
Agreement, Katy agreed to issue and sell, and Purchaser agreed to buy, 400,000
shares of newly-issued convertible preferred stock, $100 par value per share,
for a price of $100 per share (the "Preferred Stock Purchase"). The Purchase
Agreement is described in the Proxy Statement in the section entitled
"Information about the Purchase Agreement" under the heading "Proposal 1--Sale
of Convertible Preferred Stock" and is included as Annex B to the Proxy
Statement.
On June 2, 2001, Purchaser and Katy terminated the original Purchase
Agreement in accordance with the terms of a termination agreement (the
"Termination Agreement") and entered into a new Purchase Agreement (the "New
Purchase Agreement"). The New Purchase Agreement revises the terms of the
Preferred Stock Purchase, and provides that, upon the terms and subject to the
conditions in the New Purchase Agreement, Katy will issue and sell, and
Purchaser will buy, 700,000 shares of convertible preferred stock (the "Amended
Preferred Stock Purchase"). Accordingly, Katy is now asking you to approve a
sale of 700,000 shares of convertible preferred stock, $100 par value per
share, for a price of $100 per share (rather than 400,000 shares of convertible
preferred stock, as set forth in the Proxy Statement). Katy is also asking you
to approve at this time the issuance of shares of common stock to the holder of
the convertible preferred stock upon conversion of the convertible preferred
stock in accordance with the terms of the convertible preferred stock.
As described in the Proxy Statement, the Preferred Stock Purchase was part
of a series of transactions that included a tender offer commenced by Purchaser
on April 25, 2001 for up to 2,500,000 shares of Katy common stock at an offer
price of $8.00 per share (the "Tender Offer"). Because of the need to increase
liquidity in light of Katy's interim operating results and lowered projections,
Purchaser and Katy have terminated the Purchase Agreement in accordance with
the terms of the Termination Agreement, and Purchaser has terminated the Tender
Offer. Under the New Purchase Agreement, Purchaser has agreed to increase its
investment in Katy convertible preferred stock to $70 million from $40 million.
As part of the series of transactions, Purchaser has obtained a revised
commitment letter from Bankers Trust Company to provide up to $140 million of
senior secured term and revolving loans to Katy, which will replace Katy's
existing bank loans.
As described in the Proxy Statement, it was a condition to Purchaser's
obligation to consummate the Preferred Stock Purchase and Tender Offer that
Katy complete the sale of its subsidiary Hamilton Metals, L.P. ("Hamilton") for
cash proceeds, net of liabilities retained by Katy, of $20,000,000. Under the
New Purchase Agreement, Katy is required to retain ownership of Hamilton
through closing.
Katy engaged Bear Stearns to provide an updated fairness opinion in
connection with the revised transactions with Purchaser. On June 2, 2001, Bear
Stearns delivered an opinion to the Board of Directors that, as of the date of
such opinion, the Amended Preferred Stock Purchase was fair, from a financial
point of view, to Katy. Bear Stearns' written opinion is included as Annex A to
this Supplement. The opinion sets forth the assumptions made, matters
considered and limitations on the review undertaken in connection with the
opinion. The opinion of Bear Stearns does not constitute a recommendation as to
how any holder of Katy stock should vote with respect to any proposal at the
Annual Meeting. You should read the entire opinion carefully. Additional
information about the opinion can be found at pages 16-25 of this Supplement.
5
Required Vote
The affirmative vote of the holders of a majority of the outstanding shares
of common stock entitled to vote at the Annual Meeting that are present in
person or by proxy is required to approve Proposal 1. Approval of Proposal 1 is
contingent on approval of Proposal 2, Proposal 3 and Proposal 6.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MATTERS SET FORTH IN
PROPOSAL 1 AND BELIEVES THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF KATY
AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF PROPOSAL 1.
Information about the New Purchase Agreement
The terms of the New Purchase Agreement are substantially identical to those
of the original Purchase Agreement, except for the material differences that
are described below. The New Purchase Agreement is included as Annex B to this
Supplement. You should read the entire New Purchase Agreement including the
Annexes and Exhibits included with the New Purchase Agreement.
The Preferred Stock Issuance
The New Purchase Agreement provides that, subject to the conditions in the
New Purchase Agreement, Katy will issue and sell, and Purchaser will buy,
700,000 shares of newly-issued convertible preferred stock, $100 par value per
share, for a price of $100 per share. 700,000 shares of convertible preferred
stock would be convertible into 11,666,666 shares of common stock at an
exchange ratio of 16.67 shares of common stock per share of convertible
preferred stock (which, based on the $100 purchase price for a share of
convertible preferred stock, is the equivalent of $6.00 per share of common
stock).
The holder of the convertible preferred stock will be entitled to receive
payment-in-kind dividends (that is, dividends in the form of additional shares
of Katy convertible preferred stock) at a rate of 15% per annum (compounded
annually) for three years and five months following the closing of the
transactions with Purchaser. During the three-year and five-month period, the
holder of the convertible preferred stock will receive an additional 431,555
shares of convertible preferred stock. Upon the conversion of this additional
convertible preferred stock, the holder of the convertible preferred stock
would receive an additional 7,192,598 shares of Katy common stock.
The Tender Offer
The New Purchase Agreement does not provide for a tender offer by Purchaser.
The termination of the Tender Offer enabled Purchaser to increase its equity
infusion into Katy. Purchaser has agreed to increase its investment in Katy
convertible preferred stock to $70 million from $40 million.
Corporate Governance
With the addition of Proposal 6, the approval of which is a new condition to
the completion of the transactions with Purchaser, the approval of Proposal 3,
the proposal relating to the classification of the Board of Directors, will
also be contingent on the approval of Proposal 6.
The New Purchase Agreement refers to certain directors as "Other Directors."
The "Other Directors" are those persons (except C. Michael Jacobi) elected at
the 2001 shareholder meeting to serve until the 2002 shareholder meeting, and
their successors whose nomination for election or appointment to the board was
recommended or approved by a majority of such persons or their successors so
elected or appointed.
6
At elections held within five years after the closing for positions held by
Other Directors, Purchaser must nominate for election (or re-election) the
persons designated by a majority of the current Other Directors and vote any
common shares it owns in favor of those designees. If an Other Director
resigns, is removed or dies, that vacancy will be filled by a person elected by
a majority vote of the remaining Other Directors and that person will hold
office for the remaining term of his or her predecessor (and until that
person's successor director is elected and qualified, or until that person's
earlier resignation, removal or death).
All fees Katy pays to Purchaser (or its affiliates) and any transactions
between Katy and Purchaser (or its affiliates) are subject to the Other
Directors' approval.
Katy's board will amend Katy's by-laws to reflect, effective on the closing,
the classified board, the procedure for filling vacancies resulting from any
Other Director's resignation, removal or death, restrictions on Purchaser
selling common stock, and fees paid to or transactions with Purchaser. These
provisions in Katy's by-laws can then only be amended with the approval of a
majority of Other Directors and a majority of the holders of Katy's common
stock except Purchaser and its affiliates.
Except as set out in this section entitled "Corporate Governance", the
governance provisions described in the section entitled "Information about the
Purchase Agreement-Corporate Governance" under the heading "Proposal 1--Sale of
Convertible Preferred Stock" in the Proxy Statement still apply.
Conditions to Purchasing the Preferred Stock
The New Purchase Agreement eliminates the condition that Katy complete the
sale of its subsidiary Hamilton for gross proceeds in cash, net of liabilities
retained by Katy, of at least $20,000,000. Further, the New Purchase Agreement
provides that Katy will not enter into an agreement with respect to the sale of
Hamilton.
One of the conditions to the Preferred Stock Purchase contained in the
Purchase Agreement was the condition relating to the absence of a material
adverse change in financial or credit agreement syndication markets after the
commencement of the Tender Offer that results in Katy not obtaining funding
under the Bankers Trust Company loan commitment letter. Under the New Purchase
Agreement, this condition is revised to only cover changes that occur following
May 29, 2001.
Another condition to the Preferred Stock Purchase contained in the Purchase
Agreement was the condition that there be no change in the financial condition,
businesses, operations, properties, results of operations, assets or prospects
of Katy and its subsidiaries that has a material adverse effect on Katy and its
subsidiaries. Under the New Purchase Agreement, this condition is revised in
connection with the Amended Preferred Stock Purchase to only cover changes that
occur following the execution of the New Purchase Agreement. However, an
additional condition has been added in the New Purchase Agreement: that Bankers
Trust Company has not declined to fund the credit facilities as a result of a
material adverse change since December 31, 2000 in the business, operations,
properties, assets, liabilities, condition or prospects of Katy and its
subsidiaries or in the information relating to Katy and its subsidiaries and
the proposed recapitalization presented to Bankers Trust Company as of May 29,
2001.
Under the New Purchase Agreement, the Amended Preferred Stock Purchase is
also conditional on the approval by stockholders of the amendment to Katy's
Restated Certificate of Incorporation attached as Annex C. The proposed
amendment to Katy's Restated Certificate of Incorporation is the subject of
Proposals 2, 3 and 6.
The condition in the Purchase Agreement that the Agreement Shareholders
enter into a stock voting agreement with respect to electing Purchaser
designees as directors at stockholder meetings after the 2001 annual meeting is
no longer a condition in the New Purchase Agreement. The Agreement Shareholders
and Purchaser have entered into the New Voting Agreement which requires that
the Agreement Shareholders vote
7
2,480,000 of their shares of Katy common stock with respect to electing
Purchaser designees as directors at stockholder meetings after the 2001 annual
stockholder meeting. See "New Voting Agreement" below.
The conditions to the Amended Preferred Stock Purchase must be satisfied or
waived on or before the closing of the Amended Preferred Stock Purchase. Katy
does not currently have notice that any of the conditions to the Amended
Preferred Stock Purchase, as set forth in the Proxy Statement (in connection
with the description of the original Preferred Stock Purchase), as supplemented
by this Supplement, will not be satisfied on or before the closing of the
Amended Preferred Stock Purchase. The only conditions to the Amended Preferred
Stock Purchase that have been satisfied to date are the condition relating to
the receipt by Katy of an unqualified audit opinion on its financial statements
for the year ended December 31, 2000 and the condition requiring the Board of
Directors to have unanimously approved the nomination of the Purchaser's
designees for election by the shareholders and an amendment to Katy's by-laws
reducing the number of directors constituting the Board of Directors to nine.
Conditions relating solely to the Tender Offer have been removed. The
conditions relating to matters to be voted on by the shareholders have been
revised to reflect the amended proposals set forth in this Supplement.
Transaction Fee and Expenses
If the transactions with Purchaser are completed, Katy's Board of Directors
has approved paying Kohlberg a transaction fee of $3 million and to pay
Purchaser's costs and expenses (not related to the refinancing of Katy's
existing bank loans) incurred prior to the closing of the recapitalization of
Katy in an amount up to $1.2 million. Katy's Board of Directors has also
approved paying in such circumstances Purchaser's costs and expenses incurred
in connection with the refinancing of Katy's existing bank loans, including,
without limitation, the costs associated with the appraisal and the legal fees
and expenses incurred in connection with the negotiation of the Bankers Trust
Company financing documentation.
With the addition of Proposal 6, the approval of which is a condition to the
completion of the transactions with Purchaser, the approval of Proposal 6 (in
addition to Proposals 1, 2, 3 and 4) is required for the transaction fee of $3
million (and all of Purchaser's costs and expenses described in the immediately
preceding paragraph) to be payable pursuant to these approvals.
New Voting Agreement
The Agreement Shareholders have entered into the New Voting Agreement with
Purchaser. The New Voting Agreement replaces the Stock Voting and Tender
Agreement dated as of March 29, 2001 (the "Voting Agreement") between the
Agreement Shareholders and Purchaser.
Under the New Voting Agreement, the Agreement Shareholders have agreed to
vote 2,480,000 of their shares of Katy common stock in favor of, among other
things: the election of the directors nominated by Katy's Board of Directors;
the authorization and adoption of amendments to Katy's Restated Certificate of
Incorporation authorizing 1,200,000 shares of convertible preferred stock,
authorizing the classification of the Board of Directors into two classes with
staggered terms and authorizing an additional 10,000,000 shares of common
stock; the issuance and sale of convertible preferred stock; and the issuance
of shares of common stock on the conversion of the convertible preferred stock.
The Agreement Shareholders have also agreed to vote 2,480,000 of their shares
of Katy common stock against any actions intended, or that could reasonably be
expected, to impede or delay the transactions.
Until Purchaser converts any convertible preferred stock or the New Voting
Agreement is terminated, the Agreement Shareholders have also agreed to vote
2,480,000 of their shares of Katy common stock with respect to electing
Purchaser designees as directors at stockholder meetings after the 2001 annual
stockholder meeting.
As in the original Voting Agreement, the Agreement Shareholders have agreed
that, before the closing of the transactions, they will not solicit, initiate
or encourage inquiries or proposals, or participate in discussions or
negotiations, about competing transactions meeting certain criteria (although
an Agreement Shareholder can, in his or her capacity as a Katy director or
officer, take any action permitted under the New Purchase Agreement).
The 2,480,000 shares subject to being voted in accordance with the New
Voting Agreement represent approximately 29.5% of Katy's common stock as of
June 2, 2001.
8
A copy of the New Voting Agreement is attached as Annex D to this Proxy
Statement. You should read the entire New Voting Agreement.
Revised Terms of the Convertible Preferred Stock
The complete text of the proposed amendment to Katy's Restated Certificate
of Incorporation (as revised by the New Purchase Agreement), which establishes
the convertible preferred stock, is included in this Supplement as Annex C. You
should read Annex C in its entirety.
The revised certificate of amendment establishing the convertible preferred
stock authorizes 1,200,000 shares of convertible preferred stock, par value
$100 per share (rather than 600,000 shares of convertible preferred stock, as
set forth in the Proxy Statement). Each share of convertible preferred stock is
convertible, at the holder's option, into 16.67 shares of common stock (rather
than 12.5 shares of common stock, as set forth in the Proxy Statement).
Further, under the revised certificate of amendment, the holder of the
convertible preferred stock will be entitled to receive payment-in-kind
dividends (that is, dividends in the form of additional shares of Katy
convertible preferred stock) at a rate of 15% per annum (compounded annually)
for three years and five months following the closing of the transactions with
Purchaser. During the three-year and five-month period, the holder of the
convertible preferred stock will receive an additional 431,555 shares of
convertible preferred stock.
If the 700,000 shares of convertible preferred stock to be purchased by
Purchaser at closing are converted, Purchaser will receive 11,666,666 shares of
common stock, which would represent 58.2% of the outstanding shares of common
stock, calculated on a fully diluted basis (excluding outstanding options)
after giving effect to the conversion. Upon the conversion of the additional
431,555 shares of convertible preferred stock issued through the payment-in-
kind dividend right, Purchaser will receive an additional 7,192,598 shares of
Katy common stock. The shares of common stock issuable on the conversion of the
convertible preferred stock issued to Purchaser at closing, together with the
shares of common stock issuable on the conversion of the convertible preferred
stock issuable to Purchaser through the payment-in-kind dividend right, would
represent 69.2% of the outstanding shares of common stock, calculated on a
fully diluted basis (excluding outstanding options) after giving effect to the
conversion.
Use of Proceeds
Under the terms of the revised transactions with Purchaser, Purchaser will
acquire 700,000 shares of convertible preferred stock at a price of $100 per
share. The gross proceeds from the sale will be $70 million. Katy expects to
use these funds, together with the proceeds of the new $140 million secured
loan facility, to refinance its existing bank debt (approximately $155
million), to partially redeem a third party's preferred interest in a Katy
subsidiary for approximately $10 million and to pay approximately $9 million
towards the transaction costs of the transactions with Purchaser. The costs of
the transactions with Purchaser include expenses such as financing fees (in
connection with the refinancing), professional fees (including those incurred
by Purchaser), printing costs and the transaction fee payable to Kohlberg.
Changes to the Related Transactions
The Tender Offer
Purchaser has terminated the Tender Offer in accordance with the terms of
the Termination Agreement. A copy of the Termination Agreement is attached as
Annex E to this Proxy Statement. You should read the entire Termination
Agreement.
The termination of the Tender Offer enabled the Purchaser to increase its
equity infusion into Katy. The Purchaser has agreed to increase its investment
in Katy convertible preferred stock from $40 million to $70 million.
9
Bankers Trust Credit Facility
Bankers Trust Company has entered into a new commitment letter with
Purchaser to provide Katy with up to $140,000,000 of senior secured term and
revolving loan facilities, consisting of a term loan of up to $30,000,000
(rather than $40,000,000 under the initial commitment letter) and a revolving
loan of up to $110,000,000 upon consummation of the Amended Preferred Stock
Purchase.
In light of the $10 million reduction in the amount of the term loan, annual
amortization of the term loan has been reduced to $6,000,000. In addition, the
condition to Bankers Trust Company's obligation to fund the commitment that no
material adverse change in Katy have occurred since December 31, 1999 has been
changed so that any such material adverse change would be measured from
December 31, 2000.
Background of the Revised Transaction
On April 25, 2001, Purchaser commenced the Tender Offer and filed its Tender
Offer Statement on Schedule TO with the SEC. That day, Katy filed the Proxy
Statement and its Solicitation/Recommendation Statement on Schedule 14D-9. The
parties commenced mailing of the Tender Offer Statement, Proxy Statement and
Solicitation/Recommendation Statement on April 25, 2001.
On April 25, 2001, C. Michael Jacobi, who Purchaser has proposed be
appointed Chief Executive Officer of Katy upon the closing of the
recapitalization, met with members of Katy's senior management to discuss
Katy's latest operating results. At that meeting, members of the management for
Katy's maintenance group indicated to Mr. Jacobi that sales for April for the
maintenance group (which includes Katy's Contico and Wilen subsidiaries) were
expected to be substantially below plan and that sales for 2001 as a whole
would also be below plan. Katy management also informed Mr. Jacobi that sales
for April at Katy's GC Waldom and Woods Canada subsidiaries were expected to be
below plan.
Following the commencement of the Tender Offer, Purchaser and its counsel
(with the assistance of representatives of Katy) continued to work with Bankers
Trust Company and its counsel to put in place a credit agreement prior to the
initial expiration of the Tender Offer on June 5, 2001.
In early May 2001, in a telephone conversation with Robert M. Baratta, the
Chief Executive Officer of Katy, Christopher Lacovara, an authorized manager of
Purchaser, expressed concern about Katy's deteriorating financial condition and
noted that Katy's financial condition could make it difficult to complete the
proposed financing with Bankers Trust Company. Mr. Lacovara also indicated
that, based on his review of the draft sale agreement relating to Hamilton that
had been provided to him, he did not feel that Katy would meet the condition in
the original Purchase Agreement relating to the sale of Hamilton for proceeds,
net of retained liabilities, of $20 million.
On May 7, 2001, representatives of Katy delivered to Purchaser the final
results for the first quarter of 2001 and the preliminary earnings and sales
results for April 2001. While earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the first quarter were in line with the forecasts
given to Mr. Jacobi on April 16 and April 17, the preliminary results for April
indicated a shortfall of approximately $515,000 from the EBITDA forecasts for
April and $2,303,950 from the sales forecasts for April implied in the
forecasts given to Mr. Jacobi on April 16 and April 17.
On May 8, 2001, Mr. Baratta and Mr. Lacovara discussed by telephone Katy's
financial results, as well as the terms of the proposed sale of Hamilton. Mr.
Lacovara advised Mr. Baratta that Purchaser was re-evaluating the Tender Offer
and Preferred Stock Purchase in light of Katy's operating results for the first
quarter and Katy's preliminary operating results for April 2001. Mr. Lacovara
advised Mr. Baratta that Purchaser believed one or more of the conditions to
the Tender Offer and Preferred Stock Purchase may not be satisfied at the
expiration date of the Tender Offer and that consequently, Purchaser was
considering alternative courses of action to be negotiated with Katy, including
among other things, an increase in the size of its preferred stock investment
in Katy, a decrease in the preferred stock conversion price and a decrease in
the number of shares of
10
Katy common stock and price per share to be purchased pursuant to the Tender
Offer. Mr. Lacovara specifically referred both to the condition relating to the
sale of Hamilton and to Katy's deteriorating financial condition.
On May 8, 2001, Katy issued a press release announcing its results for the
first quarter of 2001, reporting a net loss of $8,372,000 or $1.00 per diluted
share, compared to net income of $645,000, or $.08 per diluted share, in the
first quarter of 2000. The first quarter of 2001 results included unusual
charges totaling $6,188,000 after-tax, or $0.74 per share. The May 8 press
release reported the concerns expressed by Mr. Lacovara in his telephone call
with Mr. Baratta of earlier that day.
On May 11, 2001, Mr. Lacovara sent to Katy a term sheet setting out a
proposal to amend the terms of the Preferred Stock Purchase and Tender Offer.
Under the terms of Purchaser's proposal, Purchaser would purchase a maximum of
2,000,000 shares of Katy common stock in the Tender Offer (rather than
2,500,000) for an offer price of $5.00 (rather than $8.00). Further, Purchaser
would invest in 600,000 (rather than 400,000) shares of convertible preferred
stock, par value $100, for a total investment in preferred stock totaling $60
million (rather than $40 million). Each share of convertible preferred stock
would have a conversion price of $5.50 per share (rather than $8.00 per share).
The Purchaser proposal also provided for a payment-in-kind dividend rate of 15%
per annum (compounded annually) for the life of the convertible preferred stock
(which is non-callable by Katy for 20 years). Under the Purchaser proposal, the
condition relating to the sale of Hamilton would be eliminated.
On May 14, 2001, the Board of Directors met with representatives of Bear
Stearns and Debevoise & Plimpton. At that meeting, representatives of Katy's
senior management updated the Board of Directors on Katy's operating results
and prospects, including the prospects of obtaining stand-alone financing
without an equity contribution. The Board of Directors authorized
representatives of Katy management to negotiate the terms of the revised
proposal with Purchaser and to discuss with Bear Stearns its proposed
engagement to opine on the fairness of the Purchaser proposal.
On May 16, 2001, Mr. Baratta and Stephen P. Nicholson, the Chief Financial
Officer of Katy, met with representatives of Purchaser (including Mr. Lacovara)
to discuss the Purchaser proposal. Messrs. Baratta and Nicholson requested,
among other things, that both the proposed Tender Offer price and the
conversion price for the convertible preferred stock be increased, and that the
payment-in-kind dividend right be eliminated or limited in its duration. At the
conclusion of the meeting, Mr. Lacovara agreed to limit the term of the
payment-in-kind dividend right on the convertible preferred stock to three
years, but said that Purchaser would not increase the proposed Tender Offer
price or the conversion price of the convertible preferred stock. At the May 16
meeting, Mr. Lacovara indicated that Purchaser's proposal was based on the
expectation that Katy's EBITDA for 2001 would be $28.2 million and on the
understanding that operating results for May and June of 2001 would be below
the April 16 and 17 forecasts. Mr. Lacovara agreed that the $28.2 million
EBITDA number would be the benchmark against which Katy material adverse
changes would need to be measured.
On May 18, 2001, representatives of Hunton & Williams delivered to Debevoise
& Plimpton an initial draft of the proposed amendments to the Purchase
Agreement. On May 22, 2001, representatives of Debevoise & Plimpton, on behalf
of Katy, delivered to Hunton & Williams comments on the initial draft of the
proposed amendments to the Purchase Agreement.
On May 23, 2001, Mr. Lacovara informed Mr. Baratta that, while Bankers Trust
Company was still interested in providing financing to Katy upon the closing of
the transactions with Purchaser, Bankers Trust had proposed reducing the
maximum amount of the financing to $130,000,000 from $150,000,000, in light of
Katy's operating results for the first quarter and for April 2001. Mr. Lacovara
indicated that Katy and Purchaser would need to find a way to recover the
reduction in post-closing liquidity resulting from the reduced loan amount.
Various alternatives were discussed. Mr. Lacovara suggested further
restructuring the transaction to eliminate the tender offer component
altogether and to increase Purchaser's investment in convertible preferred
stock from $60 million to $70 million.
11
On May 24, 2001, the Board of Directors met with representatives of Bear
Stearns and Debevoise & Plimpton to review the status of discussions with
respect to Purchaser's proposal and the proposed amendments to the Purchase
Agreement. At that meeting, representatives of Katy's senior management gave a
further update of information about Katy's operating results and prospects. The
Board of Directors authorized Katy management to consider proposals made by
Purchaser to improve liquidity in light of the reduced loan amount (including
the possible elimination of the Tender Offer) and to continue negotiations with
Purchaser on the proposed amendments to the Purchase Agreement.
On May 25, 2001, Messrs. Baratta and Nicholson discussed with Mr. Lacovara
the remaining issues to the entering into of a revised transaction, including
possible changes to the structure of the transaction to resolve the liquidity
concern. The parties tentatively determined to proceed with negotiation of a
transaction, subject to Katy board approval, the receipt of a fairness opinion
from Bear Stearns, and mutually acceptable documentation, on the basis of a
further revision to the terms, under which the Tender Offer would be terminated
and the size of Purchaser's equity infusion would rise to $70 million (700,000
shares of convertible preferred stock at $100 per share). Further, each share
of convertible preferred stock would have a conversion price of $6.00 per share
(rather than $5.50 per share) and the payment-in-kind dividend right on the
convertible preferred stock would be extended by five months to three years and
five months.
On May 29, 2001, representatives of Hunton & Williams delivered to Debevoise
& Plimpton an initial draft of the New Purchase Agreement. On May 30, 2001,
representatives of Debevoise & Plimpton, on behalf of Katy, delivered to Hunton
& Williams comments on the initial draft of the New Purchase Agreement. On May
31, 2001, representatives of Hunton & Williams delivered to Debevoise &
Plimpton an initial draft of the proposed termination agreement in connection
with the Purchase Agreement and an initial draft of the New Voting Agreement.
On May 25 and May 30, 2001, Messrs. Baratta and Nicholson discussed with
representatives of Bankers Trust Company the status of the proposed financing.
During the period from May 29, 2001 to May 31, 2001, representatives of Katy
and its legal advisers finalized the terms of the New Purchase Agreement and
Termination Agreement with representatives of Purchaser and its legal advisers.
During this period, representatives of the Agreement Shareholders negotiated
the terms of the New Voting Agreement with representatives of Purchaser.
On May 31, 2001, a revised draft of the New Purchase Agreement was prepared
and distributed to the Board of Directors. A new commitment letter from Bankers
Trust Company to refinance the existing loans of Katy on a secured basis was
also distributed to the Board of Directors.
On June 1, 2001, the Board of Directors met with representatives of
Debevoise & Plimpton to review the legal documentation in connection with the
proposed transactions with Purchaser and to receive a further update from
Katy's senior management about Katy's operating results and prospects.
On June 2, 2001 the Board of Directors met again with representatives of
Bear Stearns and Debevoise & Plimpton. At that meeting, Bear Stearns presented
its updated financial analysis to the Board of Directors and delivered to the
Board of Directors its oral opinion, later confirmed in writing, to the effect
that, as of that date, and subject to the matters stated in the opinion, the
Amended Preferred Stock Purchase was fair to Katy from a financial point of
view. Following further discussion and deliberation, the Board of Directors of
Katy, by the unanimous vote of all directors present (Mr. Andrews was not
present): (i) approved the New Purchase Agreement, the Amended Preferred Stock
Purchase and the other transactions contemplated by the New Purchase Agreement,
(ii) determined that the terms of the Amended Preferred Stock Purchase were
fair to and in the best interests of Katy's stockholders, (iii) approved
amendments to Katy's Restated Certificate of Incorporation to authorize
1,200,000 shares of convertible preferred stock (having the terms contemplated
by the New Purchase Agreement, including the payment-in-kind dividend right)
and to increase the number of shares of common stock Katy is authorized to
issue from 25,000,000 to 35,000,000 and recommended that they
12
be submitted to the stockholders for approval, and (iv) adopted amendments to
Katy's by-laws to give effect to the corporate governance provisions in the New
Purchase Agreement.
The parties executed and delivered the New Purchase Agreement, the
Termination Agreement and the New Voting Agreement as of June 2, 2001. On June
3, 2001, Katy and the Purchaser issued a press release announcing these events.
We have included projections in this section of the Supplement solely
because such projections were furnished to Purchaser in the course of the
discussions that led to the execution of the New Purchase Agreement. The
inclusion of such projections should not be regarded as an indication that
Katy, Purchaser or any other person who received such information considers it
a reliable prediction of future events, and Purchaser has informed Katy that it
has not relied (nor should any other person rely) on them as such.
Katy's internal financial forecasts (upon which the projections provided to
Purchaser were based in part) are, in general, prepared solely for internal use
and capital budgeting and other management decision-making purposes and are
subjective in many respects and thus susceptible to various interpretations and
periodic revision based on actual experience and business developments.
The projections given to Purchaser are based on estimates and assumptions
made by Katy's management with respect to industry performance, general
business, economic, market and financial conditions and other matters, all of
which are subject to significant contingencies and are difficult to predict,
and many of which are beyond the control of Katy, Purchaser or their respective
advisors. These projections were prepared by Katy's management based on
numerous assumptions including, among others, projections of revenues,
operating income, benefits and other expenses, depreciation and amortization,
capital expenditures and working capital requirements. No assurances can be
given with respect to any such assumptions. These projections do not give
effect to the Preferred Stock Purchase or the Amended Preferred Stock Purchase.
Risks and uncertainties faced by Katy are discussed in greater detail in Katy's
periodic filings with the SEC. Also, many of the assumptions upon which the
projections were based are dependent upon economic forecasting (both general
and specific to Katy's businesses) which is inherently uncertain and
subjective. Accordingly, there can be no assurance that the assumptions made in
preparing the projections will prove accurate and actual results may be
materially greater or less than those contained in the projections.
None of Katy, Purchaser or any of their representatives has made, or makes,
any representation to any person regarding the information contained in the
projections, and none of them intends to update or otherwise revise the
projections to reflect circumstances existing after the date when made or to
reflect the occurrence of future events even in the event that any or all of
the assumptions underlying the projections are shown to be in error. In
addition, the projections given to Purchaser were not prepared in accordance
with generally accepted accounting principles, and neither Katy's nor
Purchaser's independent accountants has examined or compiled any of the
projections or expressed any conclusion or provided any other form of assurance
with respect to the projections and accordingly assume no responsibility for
these projections. The projections given to Purchaser were prepared with a
limited degree of precision, and were not prepared with a view to public
disclosure or compliance with the published guidelines of the SEC or the
guidelines established by the American Institute of Certified Public
Accountants regarding projections, which would require a more complete
presentation of data than as shown above. The inclusion of the projections in
the Supplement should not be regarded as a representation that the projected
results will be achieved. These projections should be read in conjunction with
Katy's historical financial information.
Factors Considered by the Board of Directors
The Board of Directors has approved the New Purchase Agreement and the
Amended Preferred Stock Purchase and recommends that stockholders approve the
Amended Preferred Stock Purchase.
13
The material factors that the Board of Directors considered in connection
with the New Purchase Agreement and the Amended Preferred Stock Purchase are
described below. Except as noted below, the Board considered the following
factors to be positive factors supporting its determination that the Amended
Preferred Stock Purchase is fair to, and in the best interests of, the
stockholders. The material positive factors the Board considered were:
(1) Katy's liquidity and financial strength will increase as a result of
Purchaser's $70 million cash infusion and from the borrowing availability
under the new credit facility with Bankers Trust Company, which would not
have been provided unless Katy entered into the New Purchase Agreement and
the transactions contemplated by the New Purchase Agreement.
(2) The conversion price ($6.00 per share of common stock) of the
convertible preferred stock exceeds the market value of Katy's common stock
anticipated by the Board of Directors, if Katy did not proceed with the
transactions with Purchaser.
(3) The Amended Preferred Stock Purchase will decrease the percentage of
Katy's capitalization that consists of debt.
(4) Katy's sales and income have declined since the date that the
Purchase Agreement was signed, as have the expectations of Katy's
management for EBITDA for 2001.
(5) Kohlberg Investors IV, L.P. has executed a new commitment letter to
fund Purchaser with $70 million in equity financing and Purchaser has
agreed to proceed with its investment in Katy convertible preferred stock.
(6) Bear Stearns has delivered its oral opinion and supporting analysis,
delivered to the Board of Directors at the June 2, 2001 meeting and later
confirmed in writing, that, as of the date of such opinion, and subject to
the matters stated in the opinion, the Amended Preferred Stock Purchase was
fair from a financial point of view to Katy.
(7) It is expected that, unless the transactions with Purchaser are
completed and Katy's existing bank debt is refinanced, Katy on June 30,
2001 will be in violation of financial covenants of the existing credit
agreement. Further, on June 30, 2001, a $16.8 million tranche of Katy's
existing credit agreement will expire and Katy will be required to repay
all amounts outstanding under such tranche (and will not have a facility to
back-up or issue letters of credit). If the transactions with Purchaser are
not completed, considering the current market environment, a substantial
risk exists that Katy will be unable to obtain further waivers of the
covenant violation under the existing credit agreement, that Katy will be
unable to obtain, on reasonable terms or at all, financing necessary to
replace its current credit agreement, and that Katy will be unable to repay
the amounts outstanding under the $16.8 million tranche when it expires on
June 30, 2001. If Katy is unable to refinance its existing bank loans, the
entire amount under the existing credit agreement could be declared due and
payable not later than June 30, 2001.
(8) The Board of Directors believes that Katy would have difficulty
securing alternative sources of equity or mezzanine debt financing to cover
the expected shortfall in any replacement financing for Katy's existing
credit agreement, if available, from the amount owing under the existing
credit agreement.
(9) Katy's Board of Directors did not believe any of the alternatives
that it believed might be available to Katy--in particular, seeking to
refinance its existing indebtedness on an asset-backed basis or negotiating
with Katy's existing lenders (with or without bankruptcy court protection)
or selling component businesses--were as favorable to Katy's stockholders
as the Amended Preferred Stock Purchase.
(10) The terms of the Amended Preferred Stock Purchase were the product
of arm's length negotiation between Katy and Purchaser and Katy's Board of
Directors believed they were the most advantageous terms available to Katy
for a transaction with Purchaser under the circumstances.
(11) In the New Purchase Agreement, Purchaser has agreed to vote any
shares of common stock owned by it in favor of the election of the three
continuing non-Kohlberg directors for a period of five
14
years after the closing of the transactions with Purchaser, and, in the
event of the resignation, removal or death of one or more of the three
continuing non-Kohlberg directors, will vote in favor of the nominee or
nominees designated by the remaining continuing non-Kohlberg director or
directors.
(12) The changes to the conditions in the Purchase Agreement increase
the likelihood that the transactions with Purchaser will be completed.
Specifically, the condition relating to the sale of Hamilton has been
eliminated, and the condition relating to the absence of changes having a
material adverse effect has been amended to cover only the absence of
changes following June 2, 2001, the effective date of the New Purchase
Agreement.
(13) The Board of Directors expects that Katy and its stockholders would
benefit from Kohlberg's managerial assistance and support and the services
of C. Michael Jacobi, who Purchaser has proposed be appointed Chief
Executive Officer of Katy following closing. Kohlberg has substantial
experience in providing companies in which its affiliates invest with
financial and managerial advisory services aimed at building value and
improving operational, marketing and financial performance.
The Board also considered the following negative factors in making its
determination. You should consider these in deciding whether to vote for the
Amended Preferred Stock Purchase:
(14) The issuance of the convertible preferred stock will dilute the
holdings of Katy's existing stockholders even more than would have been the
case under the original Purchase Agreement. Following the closing of the
transactions with Purchaser under the New Purchase Agreement, existing
stockholders will hold a lesser proportion of common equity (calculated on
a fully diluted basis). If the 700,000 shares of convertible preferred
stock to be purchased by Purchaser are converted, Purchaser will receive
11,666,666 shares of common stock, which would represent 58.2% of the
outstanding shares of common stock, calculated on a fully diluted basis
(excluding outstanding options) after giving effect to the conversion. Over
the three-year five-month life of the payment-in-kind dividend right, Katy
will issue to Purchaser an additional 431,555 shares of convertible
preferred stock. Upon the conversion of such additional convertible
preferred stock, Purchaser will receive an additional 7,192,598 shares of
Katy common stock. The shares of common stock issuable on the conversion of
the convertible preferred stock issued to Purchaser at closing, together
with the shares of common stock issuable on the conversion of the
convertible preferred stock issuable to Purchaser through the payment-in-
kind dividend right, would represent 69.2% of the outstanding shares of
common stock, calculated on a fully diluted basis (excluding outstanding
options) after giving effect to the conversion.
(15) If the Amended Preferred Stock Purchase and the conversion of all
of the convertible preferred stock issuable to Purchaser (at closing and
through the payment-in-kind dividend right) were to have occurred as of
December 31, 2000, these issuances would have had the pro forma effect of
reducing the book value per share of common stock from $17.91 to $8.11.
(16) The holders of the convertible preferred stock will have
preferential rights on distributions if Katy is liquidated, which means
that holders of common stock will not receive any distribution on
liquidation until the holders of the convertible preferred stock receive
their liquidation preference. Under the New Purchase Agreement, Purchaser
will receive 700,000 shares of convertible preferred stock at closing
(rather than 400,000 shares under the original Purchase Agreement), and
will receive an additional 431,555 shares of convertible preferred stock
under the payment-in-kind dividend right over the three-year five-month
period of the payment-in-kind dividend right.
The Board of Directors believed that, on balance, the possible benefits to
Katy stockholders from the positive factors outweighed the possible detriments
from the negative factors summarized above.
In view of the variety of factors considered, the Board of Directors found
it impracticable to, and did not, quantify, rank or otherwise assign relative
weights to the above factors considered or determine that any factor was of
particular importance in reaching its determination. Rather, the Board of
Directors views this belief as to the net benefits from the Amended Preferred
Stock Purchase and its recommendation to Katy stockholders as
15
being based upon its judgment, in light of the totality of the information
presented and considered, of the overall effect of the Amended Preferred Stock
Purchase on the stockholders compared to any reasonably available alternative
transaction.
Opinion of Bear Stearns
Overview
At the June 2, 2001 meeting of Katy's Board of Directors, Bear Stearns
presented the analysis of its opinion and then delivered its oral opinion,
subsequently confirmed in writing, that, as of June 2, 2001, and based upon and
subject to the assumptions, qualifications and limitations set forth in its
opinion, the Amended Preferred Stock Purchase is fair, from a financial point
of view, to Katy.
THE FULL TEXT OF THE FAIRNESS OPINION DATED JUNE 2, 2001, WHICH SETS FORTH,
AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE SCOPE OF THE REVIEW
UNDERTAKEN BY BEAR STEARNS IN RENDERING ITS FAIRNESS OPINION, IS ATTACHED AS
ANNEX A TO THIS DOCUMENT. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE
FAIRNESS OPINION CAREFULLY AND IN ITS ENTIRETY. THE FAIRNESS OPINION WAS
DELIVERED TO THE KATY BOARD OF DIRECTORS FOR ITS USE IN CONNECTION WITH ITS
CONSIDERATION OF THE AMENDED PREFERRED STOCK PURCHASE AND ADDRESSES ONLY, AS OF
THE DATE OF THE FAIRNESS OPINION, THE FAIRNESS OF THE AMENDED PREFERRED STOCK
PURCHASE FROM A FINANCIAL POINT OF VIEW, TO KATY. THE FAIRNESS OPINION IS NOT
INTENDED TO BE, AND DOES NOT CONSTITUTE, A RECOMMENDATION TO THE BOARD OF
DIRECTORS OF KATY OR TO ANY STOCKHOLDER OF KATY AS TO HOW TO VOTE THEIR SHARES
OF COMMON STOCK OF KATY. THE FAIRNESS OPINION DOES NOT ADDRESS THE UNDERLYING
BUSINESS DECISION OF THE BOARD OF DIRECTORS OF KATY TO RECOMMEND THE AMENDED
PREFERRED STOCK PURCHASE TO KATY OR THE UNDERLYING BUSINESS DECISION OF KATY TO
ENTER INTO THE NEW PURCHASE AGREEMENT, THE RELATIVE MERITS OF THE AMENDED
PREFERRED STOCK PURCHASE AS COMPARED TO ANY ALTERNATIVE BUSINESS STRATEGIES
THAT MIGHT EXIST FOR KATY OR THE EFFECTS OF ANY OTHER TRANSACTION IN WHICH KATY
MIGHT ENGAGE. THE SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS DOCUMENT IS
QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE FAIRNESS OPINION.
The terms of the Amended Preferred Stock Purchase and the form of the
consideration were determined by arm's-length negotiations between Katy and
Purchaser and were not based on any recommendation by Bear Stearns. Katy did
not provide specific instructions or impose any limitations on Bear Stearns
with respect to the investigations made or the procedures followed by Bear
Stearns in rendering its opinion.
Bear Stearns Opinion
In connection with rendering its opinion, Bear Stearns, among other things:
. reviewed a draft of the New Purchase Agreement dated May 31, 2001
(including the terms of the convertible preferred stock as set forth in
the form of amendment to Katy's Certificate of Incorporation attached to
the New Purchase Agreement as Exhibit C);
. reviewed a draft of the New Voting Agreement dated May 31, 2001;
. reviewed a commitment letter from Kohlberg Investors IV, L.P. to Katy
dated May 29, 2001, relating to the Amended Preferred Stock Purchase;
. reviewed the commitment letter from Bankers Trust Company to Purchaser
dated March 29, 2001 ("Commitment Letter");
16
. reviewed Katy's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended December 31, 1998 through 2000, its Quarterly
Report on Form 10-Q for the period ended March 31, 2001, its Proxy
Statement on Schedule 14A dated March 31, 2000, its Report on Form 8-K
dated January 15, 1999 and its Report on Form 8-K/A dated March 22, 1999;
. reviewed the Amended and Restated Credit Agreement dated as of December
11, 1998, among Katy, Bank of America National Trust and Savings
Association, as Administrative Agent and Issuing Bank, La Salle National
Bank, as Managing Agent, and the other financial institutions party
thereto;
. reviewed certain operating and financial information, including (i) the
most up-to-date projections on a standalone basis provided to Bear
Stearns by Katy's management for the seven years ended December 31, 2007
relating to Katy's business and prospects ("Standalone Projections") and
(ii) projections on a pro forma basis (after consummation of the
transactions contemplated by the Amended Preferred Stock Purchase)
provided to Bear Stearns by Katy's management for the seven years ended
December 31, 2007 after discussions with Purchaser and C. Michael Jacobi,
Purchaser's senior management designee, regarding their business plan for
Katy ("Pro Forma Projections");
. met with certain members of Katy's senior management to discuss Katy's
business, operations, historical and projected financial results and
future prospects;
. met, along with certain members of Katy's senior management, with certain
members of Purchaser and C. Michael Jacobi, Purchaser's senior management
designee, to discuss Katy's business, operations, historical and
projected financial results and future prospects;
. reviewed the historical prices, trading multiples and trading volumes of
the shares of common stock of Katy;
. reviewed publicly available financial data, stock market performance data
and trading multiples of companies which Bear Stearns deemed generally
comparable to Katy;
. reviewed the terms of selected precedent merger and acquisition
transactions of, and investment transactions involving, companies which
Bear Stearns deemed generally comparable to Katy and the Amended
Preferred Stock Purchase;
. performed discounted cash flow analyses based on the Standalone
Projections and Pro Forma Projections for Katy furnished to Bear Stearns
by the management of Katy;
. reviewed the pro forma financial results, financial condition and
capitalization of Katy giving effect to the Amended Preferred Stock
Purchase and the refinancing contemplated by the Commitment Letter; and
. conducted such other studies, analyses, inquiries and investigations as
Bear Stearns deemed appropriate.
Bear Stearns has relied upon and assumed, without independent verification,
the accuracy and completeness of the financial and other information, including
without limitation the Standalone Projections and the Pro Forma Projections,
provided to it by Katy. With respect to Katy's Standalone Projections and the
Pro Forma Projections, Bear Stearns has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the senior management of Katy (after discussions, in the case of
the Pro Forma Projections, with Purchaser and C. Michael Jacobi, as
appropriate), as to the expected future performance of Katy. Bear Stearns does
not assume any responsibility for the independent verification of any such
information, the Standalone Projections or the Pro Forma Projections provided
to it, and it has further relied upon the assurances of the senior management
of Katy (after discussions, in the case of the Pro Forma Projections, with
Purchaser and C. Michael Jacobi, as appropriate) that they are unaware of any
facts that would make the information, the Standalone Projections or the Pro
Forma Projections provided to Bear Stearns incomplete or misleading.
17
In arriving at its opinion, Bear Stearns has taken into account, with Katy's
consent, the risks inherent in Katy's current business plans, including the
view of the senior management of Katy that in the current capital markets
environment there exists a risk that Katy would be unable in the future to
obtain continued waivers of the defaults under its current credit facility and
that Katy would be unable to obtain, on reasonable terms, financing necessary
to replace its current credit facility. Bear Stearns has also considered (i)
that, according to the senior management of Katy, (a) no other potential
investor or acquiror has made any investment or acquisition proposal to Katy
since November 6, 2000 (the date of the public announcement by Katy that it was
exploring its strategic alternatives, including the possible sale of Katy, and
that it was in discussions with a potential purchaser relating to a possible
purchase of Katy), March 2, 2001 (the date of the public announcement by Katy
that it was engaged in discussions with a potential purchaser of a substantial
equity position in Katy) or May 8, 2001 (the date of the public announcement by
Katy that Purchaser was re-evaluating the prior transaction agreement between
Katy and Purchaser) and (b) the prospects for obtaining access to additional
financing in the public or private capital markets are limited, (ii) the
potential positive impact on the common stock of Katy of new senior management,
(iii) Katy's recent financial performance, current financial condition and
future prospects and (iv) the potential negative impact on the price of the
common stock of Katy in the absence of the Amended Preferred Stock Purchase or
another similar extraordinary transaction in view of the Standalone
Projections.
In arriving at its opinion, Bear Stearns has not performed or obtained any
independent appraisal of the assets or liabilities (contingent or otherwise) of
Katy, nor has Bear Stearns been furnished with any such appraisals. In
connection with its engagement, Bear Stearns was not requested to, and it did
not, solicit third party indications of interest involving an investment in, a
recapitalization of, or acquisition of all or part of, Katy. Bear Stearns
assumed that the Amended Preferred Stock Purchase and the refinancing
contemplated by the Commitment Letter will be consummated in a timely manner
and in accordance with the terms of the New Purchase Agreement and the
Commitment Letter without any limitations, restrictions, conditions, amendments
or modifications that collectively would have a material effect on Katy.
Bear Stearns did not express any opinion as to the price or range of prices
at which the shares of common stock of Katy may trade subsequent to the
announcement of the Amended Preferred Stock Purchase and the refinancing
contemplated by the Commitment Letter or as to the price or range of prices at
which the shares of common stock of Katy may trade subsequent to the
consummation of the Amended Preferred Stock Purchase and the refinancing
contemplated by the Commitment Letter.
Summary of Analysis
The following is a brief summary of the material valuation and financial and
comparative analyses considered by Bear Stearns in connection with the
rendering of its opinion. This summary does not purport to be a complete
description of the analyses underlying the Bear Stearns opinion and is
qualified in its entirety by reference to the full text of its opinion.
In performing its analysis, Bear Stearns made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Bear Stearns, Katy and Purchaser. Any estimates contained in the analysis
performed by Bear Stearns are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than
suggested by such analysis. In addition, as described above, the Bear Stearns
opinion was one among several factors taken into consideration by the Katy
Board of Directors in making its determination to approve the Amended Preferred
Stock Purchase.
Historical Stock Price Performance of Katy. Bear Stearns reviewed the
trading volume and price history of Katy's common stock on the New York Stock
Exchange for the period from June 1, 2000 through June 1, 2001 and for the
period from May 31, 1996 through June 1, 2001. Bear Stearns also reviewed the
relationship between movements in the closing prices of Katy's common stock,
the S&P 500 Index and an index of other selected industrial companies (see
Comparable Company Analysis below) for the period from June 1, 2000
18
through June 1, 2001 and for the period from May 31, 1996 through June 1, 2001.
Bear Stearns noted that Katy's common stock had underperformed the S&P 500
Index for the period from June 1, 2000 through June 1, 2001 and for the period
from May 31, 1996 through June 1, 2001. Additionally, Bear Stearns noted that
Katy's common stock had underperformed the index of other selected industrial
companies for the period from June 1, 2000 through June 1, 2001 and for the
period from May 31, 1996 through June 1, 2001.
Comparative Analysis of Amended Preferred Stock Purchase Versus Status
Quo. Bear Stearns reviewed certain operating and financial information,
including the Standalone Projections and the Pro Forma Projections.
Bear Stearns performed discounted cash flow analyses for Katy using the
Standalone Projections and the Pro Forma Projections in order to determine
ranges of equity values per share for Katy for comparative purposes. The
discounted cash flow analysis using the Standalone Projections assumes the
Amended Preferred Stock Purchase and the related transactions are not entered
into and no other comparable transaction is entered into by Katy. In performing
its theoretical discounted cash flow analysis, Bear Stearns calculated after-
tax cash flows for the six and one-half year period commencing July 1, 2001,
and ending on December 31, 2007. Katy's after-tax cash flows under the
Standalone Projections were discounted to present value using discount rates
ranging from 11.0% to 15.0%. Bear Stearns calculated a terminal value for Katy
by applying to Katy's projected earnings before interest, taxes, depreciation
and amortization, referred to as EBITDA, for 2007 a range of multiples of 5.0x
to 6.0x. This analysis resulted in an implied reference range for the equity
value of Katy of approximately ($2.96) per share to $3.25 per share with a
midpoint of ($0.11) per share. The discounted cash flow analysis using the Pro
Forma Projections assumes the Amended Preferred Stock Purchase and the related
transactions are consummated. The after-tax cash flows under the Pro Forma
Projections were similarly discounted to present value using discount rates
ranging from 11.0% to 15.0% and terminal EBITDA multiples of 5.0x to 6.0x. This
analysis resulted in an implied reference range for the equity value of Katy of
approximately $3.82 per share to $6.55 per share with a midpoint of $5.08 per
share.
Bear Stearns noted that the theoretical discounted cash flow analysis was
highly dependent on growth rates and margin assumptions relating to the
underlying projections and that such projections were difficult to forecast due
to the rapidly changing nature of Katy's business plan and the capital markets
climate. Consequently, Bear Stearns observed that the resulting discounted cash
flow valuation is inherently theoretical due to the difficulty in forecasting
projected operating results as well as assumptions relating to, among other
factors, the availability of sufficient capital, the cost of such capital and
assessing EBITDA multiples in the final year of the projection period.
Bear Stearns performed discounted future stock price analyses for Katy using
the Standalone Projections and the Pro Forma Projections in order to determine
ranges of equity values per share of Katy common stock for comparative
purposes. The discounted future stock price analysis using the Standalone
Projections assumes the Amended Preferred Stock Purchase and the related
transactions are not entered into and no other comparable transaction is
entered into by Katy. In performing its theoretical discounted future stock
price analysis using the Standalone Projections, Bear Stearns calculated a
range of projected stock prices by using Katy's estimated EBITDA figure ending
December 31, 2003 and applying a range of enterprise value/forward EBITDA
multiples. Bear Stearns used a range of enterprise value/forward EBITDA
multiples of 4.0x to 5.0x. Katy's projected stock prices were discounted to
present value using equity discount rates ranging from 15.0% to 19.0%. The
analysis resulted in an implied reference range for the equity value of
approximately ($1.55) per share to $2.11 per share with a midpoint of $0.23 per
share. The discounted future stock price analysis using the Pro Forma
Projections assumes the Amended Preferred Stock Purchase and the related
transactions are consummated. The estimated EBITDA figure ending December 31,
2003 under the Pro Forma Projections was similarly applied to a range of
enterprise value/forward EBITDA multiples of 4.0x to 5.0x and discounted to
present value using equity discount rates ranging from 15.0% to 19.0%. This
analysis resulted in an implied reference range for the equity value of
approximately $2.68 per share to $4.25 per share with a midpoint of $3.44 per
share.
Bear Stearns noted that the theoretical discounted future stock price
analysis was highly dependent on growth rates and margin assumptions relating
to the underlying projections and that such projections were
19
difficult to forecast due to the rapidly changing nature of Katy's business
plan and the capital markets climate. Consequently, Bear Stearns observed that
the resulting discounted future stock price valuation is inherently theoretical
due to the difficulty in forecasting projected operating results as well as
assumptions relating to, among other factors, Katy's required rate of return on
equity and enterprise value/forward EBITDA multiples.
Valuation of the Company's Unaffected Stock Price per Share Absent a
Transaction. As part of its review and analysis, Bear Stearns estimated the
potential effects on the common stock of Katy absent a transaction with
Purchaser or another comparable transaction in light of Katy's recent operating
performance. To calculate an estimated unaffected stock valuation absent a
transaction, Bear Stearns applied a range of multiples of enterprise
value/latest twelve month ("LTM") EBITDA and enterprise value/estimated Fiscal
2001 EBITDA. Bear Stearns selected a range of enterprise value/LTM EBITDA and
enterprise value/estimated Fiscal 2001 EBITDA multiples of 5.25x to 6.25x based
on its review of the following: (i) an analysis of Katy's historical enterprise
value/LTM EBITDA multiples, (ii) an analysis of certain publicly traded
companies deemed by Bear Stearns to be generally comparable to Katy (see
Comparable Company Analysis below) and (iii) an analysis of certain mergers and
acquisition transactions of comparable companies deemed by Bear Stearns to be
generally comparable to Katy (see Selected Mergers and Acquisition Transactions
of Comparable Companies below). This analysis resulted in an implied reference
range for the common stock of Katy of approximately $0.00 per share to
approximately $2.50 per share with a midpoint of $1.25.
In arriving at this conclusion, Bear Stearns considered the following
factors, among others: (i) Katy has posted a record of declining revenues and
operating cash flow and net losses during the past fiscal year and for the
first quarter of Fiscal 2001, (ii) Bear Stearns has been informed by Katy's
senior management that (a) Katy's financial prospects for full year Fiscal 2001
remain negative and (b) a substantial risk exists that Katy will be unable to
continue to obtain waivers of the default under its current credit facility in
the future and that Katy will be unable to obtain, on reasonable terms or at
all, financing necessary to replace its current credit facility, (iii) the US
stock market has tended to punish companies for lack of growth and negative
earnings surprises and (iv) the apparent lack of an alternative transaction,
given that no other potential investor or acquiror has made any investment or
acquisition proposal to Katy since November 6, 2000 (the date of the public
announcement by Katy that it was exploring its strategic alternatives,
including the possible sale of Katy, and that it was in discussions with a
potential purchaser relating to a possible purchase of Katy), March 2, 2001
(the date of the public announcement by Katy that it was engaged in discussions
with a potential purchaser of a substantial equity position in Katy) or May 8,
2001 (the date of the public announcement by Katy that Purchaser was re-
evaluating the prior transaction agreement between Katy and Purchaser).
Precedent Canceled Transactions. Bear Stearns analyzed and summarized three
transactions which were canceled due to lower than expected operating
performance. The three canceled transactions Bear Stearns reviewed were: (i)
Verizon Communication Inc.'s proposed merger of its high-speed internet
business with NorthPoint Communications Group, Inc., (ii) the Carlyle Group,
Madison Dearborn Partners, Bear Stearns Merchant Banking and members of Res-
Care, Inc. management's proposed acquisition of Res-Care, Inc. and (iii)
Blackstone Group, L.P.'s proposed acquisition of The Kroll-O'Gara Company
(collectively, the "Precedent Canceled Transactions").
Bear Stearns noted that none of the Precedent Canceled Transactions were
identical to the Amended Preferred Stock Purchase and that, accordingly, any
analysis of the Precedent Canceled Transactions necessarily involved complex
considerations and judgments concerning differences in transaction structures,
financial and operating characteristics of the issuing corporation and other
factors that would necessarily affect the terms of the Amended Preferred Stock
Purchase versus the terms of the Precedent Canceled Transactions.
Notwithstanding the numerous and significant differences between the Amended
Preferred Stock Purchase and the Precedent Canceled Transactions, this analysis
provided a useful illustration of the effects of canceled transactions due to
lower operating performance on a company's common stock price.
20
Calculation of Effective Change of Control Price per Share and
Multiples. Bear Stearns considered each aspect of the Amended Preferred Stock
Purchase in its calculation of the change of control price. The components of
the Amended Preferred Stock Purchase include: (i) Purchaser's $70.0 million
purchase ($67.0 million net of $3.0 million in transaction fees paid to
Purchaser at the closing of the Amended Preferred Stock Purchase) of newly-
issued convertible preferred stock and (ii) the newly-issued convertible
preferred stock is convertible at $6.00 per share and carries a payment-in-kind
divided at a rate of $15.0%, compounded annually, for a period of three years
and five months. Given these facts, the resulting effective conversion price
per share of convertible preferred stock is $3.55 per share (assuming Purchaser
holds the convertible preferred stock for the full three years and five months
and will, therefore, hold approximately 18.9 million as-converted fully diluted
common shares). Based on the terms of the Amended Preferred Stock Purchase,
Bear Stearns calculated an enterprise value/LTM EBITDA multiple of 6.5x at the
effective change of control value per share of $3.55 per share.
Comparable Company Analysis. Bear Stearns analyzed selected historical and
projected operating information, stock market performance data and valuation
multiples for Katy and compared this data to that of certain publicly traded
companies deemed by Bear Stearns to be generally comparable to Katy. Bear
Stearns compared, among other things, (i) enterprise value/LTM EBITDA, (ii)
enterprise value/LTM earnings before interest and taxes, referred to as EBIT,
(iii) market value/LTM net income and (iv) closing stock price/2001 estimated
earnings per share, referred to as EPS. All multiples were based on closing
stock prices for the comparable companies on June 1, 2001, and LTM is as of
March 31, 2001.
Comparable Trading Multiples
Enterprise
Value/LTM Market
----------- Value/LTM Price/2001
EBITDA EBIT Net Income Estimated EPS
------ ---- ---------- -------------
Chart Industries, Inc................... 7.3x 11.2x 35.5x 17.3x
The Middleby Corporation................ 3.9 5.0 11.6 10.0
Myers Industries, Inc................... 5.8 9.8 14.0 12.1
Park-Ohio Holdings Corporation.......... 6.5 9.5 7.4 NA
Standex International Corporation....... 6.0 7.4 10.3 NA
Harmonic Mean(1)........................ 5.6x 7.9x 12.0x 12.5x
Katy @ Effective Change of Control Price
per Share(2)........................... 6.5x 25.6x Neg Neg
--------
(1) Harmonic mean represents the reciprocal of the arithmetic mean of
reciprocals.
(2) Multiples represent the effective conversion price on the $70.0 million
convertible preferred investment (i.e., $6.00 per share conversion accretes
for three years and five months at a rate of 15.0% compounded annually)
less the $3.0 million transaction fee that Purchaser will receive when the
transaction closes (see Calculation of Effective Change of Control Price
per Share and Multiples above).
It should be noted that companies with financial challenges, similar to
Katy, would be expected to trade at multiples close to the bottom end of the
range of comparable companies. Additionally, Katy's LTM EBITDA margin of 5.9%
is lower than that of all of the comparable companies. Companies with LTM
EBITDA margins materially below the comparable companies would be expected to
trade at multiples close to the bottom end of the range.
No company utilized in the peer group comparison is identical to Katy, and,
accordingly, Bear Stearns' analysis of comparable companies necessarily
involved complex considerations and judgments concerning differences in
financial and operating characteristics and other factors which would
necessarily affect the relative trading values of Katy compared to the
companies to which Katy was compared.
Selected Mergers and Acquisition Transactions of Comparable Companies. Using
publicly available information, Bear Stearns reviewed the purchase prices and
implied transaction multiples paid or proposed to be paid in 24 selected
transactions. The following 14 transactions were selected because the target
company's businesses were deemed by Bear Stearns to be generally comparable to
one or more of Katy's businesses with respect to growth, profitability or
relevant transaction size:
21
Comparable Business Transactions
Announcement
Target Company Acquiring Company Date
-------------- ----------------- ------------
L.E. Mason Company Thomas & Betts Corporation 09/01/1999
Easco Inc. Caradon PLC 07/28/1999
Belden Inc. (Cord Products
Division) Volex Group PLC 04/22/1999
Noma Industries Limited General Chemical Group, Inc. 03/01/1999
American Safety Razor Company J.W. Childs Associates 02/15/1999
Contico International, Inc Katy Industries, Inc. 09/08/1998
Newell Plastics Home Products International Inc. 08/03/1998
Tenex Corporation (Consolidated
Storage Line) Home Products International Inc. 08/03/1998
Wilen Companies, Inc. Katy Industries, Inc. 06/03/1998
Sun Coast Industries, Inc. Kerr Group, Inc. 01/28/1998
PureTec Corporation Tekni-Plex Inc. 11/12/1997
Seymour Housewares Home Products International Inc. 11/11/1997
Tamor Corporation Home Products International Inc. 11/04/1996
GC Thorsen, Inc. Katy Industries, Inc. 03/14/1995
The following 10 transactions were selected because the target companies
were diversified industrial micro-cap companies that Bear Stearns deemed to be
generally comparable to Katy, given their size and diverse industrial profile
and because each was acquired by a financial sponsor, similar to Purchaser:
Diversified Industrial Micro-Cap Transactions
Announcement
Target Company Acquiring Company Date
-------------- ----------------- ------------
Cascade Corporation Lift Technologies, 10/19/2000
Inc./TD Capital Group
Ltd./Ontario Municipal
Employees Retirement
Board
Heartland Industrial
Simpson Industries, Inc. Partners, LP 09/29/2000
General Bearing Corporation Management Group 07/14/2000
U.S. Can Corporation Berkshire Partners 03/22/2000
Jason Inc. Saw Mill Capital, LLC 01/31/2000
Transportation Technologies Industries, Inc. Management Group 12/14/1999
Gleason Corporation Vestar Capital Partners 12/09/1999
Autocam Corporation Aurora Capital Group 11/06/1999
Synthetic Industries, Inc. Investcorp SA 11/05/1999
Citation Corporation Kelso & Company 06/24/1999
Bear Stearns compared, among other things, (i) enterprise value/LTM EBITDA,
(ii) enterprise value/LTM EBIT and (iii) equity value/LTM net income. All
multiples were based on implied enterprise values and implied equity values of
each proposed transaction and LTM is based upon the most recently available
financial statements as of the announcement date of each proposed transaction.
22
Selected Mergers and Acquisition Transactions
of Comparable Companies
Enterprise
Value/LTM
----------- Equity Value/LTM
EBITDA EBIT Net Income
------ ---- ----------------
Comparable Business Transactions:
Harmonic Mean(1).............................. 6.5x 9.7x 13.0x
Diversified Industrial Micro-Cap Transactions:
Harmonic Mean(1).............................. 5.9 9.0 13.0
All Selected Mergers and Acquisition
Transactions of Comparable Companies:
High.......................................... 9.0 16.2 25.3
Harmonic Mean(1).............................. 6.2 9.3 13.0
Low........................................... 5.2 6.2 6.8
Katy @ Effective Change of Control Price per
Share(2)....................................... 6.5x 25.6x Neg
--------
(1) Harmonic mean represents the reciprocal of the arithmetic mean of
reciprocals.
(2) Multiples represent the effective conversion price on the $70.0 million
convertible preferred investment (i.e., $6.00 per share conversion accretes
for three years and five months at a rate of 15.0% compounded annually)
less the $3.0 million transaction fee that Purchaser will receive when the
transaction closes (see Calculation of Effective Change of Control Price
per Share and Multiples above).
It should be noted that a number of the 14 transactions involving a target
company with a business deemed generally comparable to one or more of Katy's
businesses were consummated at multiples above the Katy transaction. This is
not unexpected for the following reasons: (i) all of these transactions were
strategic in nature, and strategic transactions typically yield synergistic
benefits to the acquirer, (ii) all of the transactions were consummated in
better economic environments than exist today and (iii) Katy is experiencing a
number of financial challenges that were not present in a majority of the
target companies. Additionally, a number of the 10 transactions involving
target companies that were diversified industrial micro-cap companies were
consummated at multiples above the Katy transaction. This is not unexpected for
the following reasons: (i) all of the transactions were consummated by
financial buyers in significantly better financing environments, (ii) all of
the transactions were consummated in better economic environments than exist
today and (iii) Katy is experiencing a number of financial challenges that were
not present in the majority of the target companies.
Bear Stearns noted that none of the transactions reviewed were identical to
the Amended Preferred Stock Purchase. Bear Stearns further noted that the
analysis of mergers and acquisition transactions of comparable companies
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics and other factors that
would necessarily affect the acquisition value of Katy as compared to the
acquisition value of any other comparable company in general and the
transactions above in particular.
Theoretical Discounted Cash Flow Analysis. Bear Stearns performed a
discounted cash flow analysis for Katy using the Standalone Projections in
order to determine a range of equity values per share for Katy. Projected
financial data for Katy was based on estimates provided to Bear Stearns by
Katy's management assuming the Amended Preferred Stock Purchase and the related
transactions are not entered into and no other comparable transaction is
entered into by Katy. In performing its theoretical discounted cash flow
analysis, Bear Stearns calculated after-tax cash flows for the six and one-half
year period commencing July 1, 2001, and ending on December 31, 2007. Katy's
cash flows were discounted to present value using discount rates ranging from
11.0% to 15.0%. Bear Stearns calculated a terminal value for Katy by applying
to Katy's projected EBITDA for 2007 a range of multiples of 5.0x to 6.0x. This
analysis resulted in an implied reference range for the equity value of
approximately ($2.96) per share to $3.25 per share with a midpoint of ($0.11)
per share.
23
Bear Stearns noted that the theoretical discounted cash flow analysis was
highly dependent on growth rates and margin assumptions relating to the
underlying projections and that such projections were difficult to forecast due
to the rapidly changing nature of Katy's business plan and the capital markets
climate. Consequently, Bear Stearns observed that the resulting discounted cash
flow valuation is inherently theoretical due to the difficulty in forecasting
projected operating results as well as assumptions relating to, among other
factors, the availability of sufficient capital, the cost of such capital and
assessing EBITDA multiples in the final year of the projection period.
Leveraged Buyout Analysis. Bear Stearns conducted two leveraged buyout
analyses for Katy using the Standalone Projections assuming a 100% acquisition
of Katy's common stock by a generic financial buyer using the following two
financing scenarios: (i) traditional cash flow financing and (ii) asset-based
financing. Projected financial data for Katy was based on estimates provided to
Bear Stearns by Katy's management. Bear Stearns noted that the proposed
transaction did not involve a 100% acquisition of the outstanding common stock
of Katy. Bear Stearns further considered Katy's recent financial performance,
the current state of the financing markets and the required rates of return for
participants in the financial buyer community. Bear Stearns noted that a
leveraged buyout under the traditional cash flow financing scenario was not a
viable alternative for Katy given Katy's recent financial performance and the
current state of the financing markets and that such theoretical alternative
would result in an implied value per share equal to approximately ($2.75) per
share. Bear Stearns further noted that a leveraged buyout under the asset-based
financing scenario was not a viable alternative for Katy given Katy's recent
financial performance and the current state of the financing markets and that
such theoretical alternative would result in an implied value per share equal
to approximately ($3.50) per share. Bear Stearns noted that the leveraged
buyout analysis was not material to its conclusion.
Theoretical Discounted Future Stock Price Analysis. Bear Stearns performed a
discounted future stock price analysis for Katy using the Standalone
Projections in order to determine a range of equity values per share of Katy
common stock. In calculating its theoretical discounted future stock price,
Bear Stearns calculated a range of projected stock prices by using Katy's
estimated EBITDA figure ending December 31, 2003 and applying a range of
enterprise value/forward EBITDA multiples. Bear Stearns used a range of
enterprise value/forward EBITDA multiples of 4.0x to 5.0x. Katy's projected
stock prices were discounted to present value using discount rates ranging from
15.0% to 19.0%. The analysis resulted in an implied reference range for the
equity value of approximately ($1.55) per share to $2.11 per share with a
midpoint of $0.23.
Bear Stearns noted that the theoretical discounted future stock price
analysis was highly dependent on growth rates and margin assumptions relating
to the underlying projections and that such projections were difficult to
forecast due to the rapidly changing nature of Katy's business plan and the
capital markets climate. Consequently, Bear Stearns observed that the resulting
discounted future stock price valuation is inherently theoretical due to the
difficulty in forecasting projected operating results as well as assumptions
relating to, among other factors, Katy's required rate of return on equity and
enterprise value/forward EBITDA multiples.
Other Considerations
The preparation of a fairness opinion is a complex process that involves
various judgments and determinations as to the most appropriate and relevant
methods of financial and valuation analysis and the application of those
methods to the particular circumstances. The opinion is, therefore, not
necessarily susceptible to partial analysis or summary description. Bear
Stearns believes that its analysis must be considered as a whole and that
selecting portions of its analyses and the factors considered, without
considering all of the analyses and factors, would create a misleading and
incomplete view of the processes underlying its opinion. Bear Stearns did not
form any opinions as to whether any individual analysis or factor, whether
positive or negative, considered in isolation, supported or failed to support
its opinion. In arriving at its opinion, Bear Stearns did not assign any
particular weight to any analysis or factor considered, but rather made
qualitative judgments based upon its experience in providing such opinions and
on then-existing economic, monetary, market and other conditions as to the
significance of each analysis and factor. In performing its
24
analyses, Bear Stearns, at Katy's direction and with Katy's consent, made
numerous assumptions with respect to industry performance, general business
conditions and other matters, many of which are beyond the control of Bear
Stearns, Katy and Purchaser. Any assumed estimates implicitly contained in Bear
Stearns' opinion or relied upon by Bear Stearns in rendering its opinion do not
necessarily reflect actual values or predict future results or values. Any
estimates relating to the value of a business or securities do not purport to
be appraisals or to necessarily reflect the prices at which companies or
securities may actually be sold.
Bear Stearns was retained by Katy based upon its qualifications, experience
and expertise. Bear Stearns is an internationally recognized investment banking
firm that regularly engages in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for estates, corporate and other purposes. In
the ordinary course of business, Bear Stearns may actively trade the equity
and/or debt securities of Katy for its own account and the account of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
Pursuant to an engagement letter, Katy agreed to pay to Bear Stearns a total
fee of $750,000 payable to Bear Stearns upon its rendering of its fairness
opinion to Katy's Board of Directors. In addition, Katy agreed to reimburse
Bear Stearns for all reasonable out-of-pocket expenses incurred by Bear Stearns
in connection with the Amended Preferred Stock Purchase including the
reasonable fees of and disbursements to its legal counsel. Katy has also agreed
to indemnify Bear Stearns against specific liabilities in connection with its
engagement, including liabilities under the federal securities laws.
Information about Purchaser
Kohlberg Investors IV, L.P., Kohlberg TE Investors IV, L.P., Kohlberg
Offshore Investors, IV, L.P. and Kohlberg Partners IV, L.P. have committed to
fund Purchaser with $70 million (rather than $60 million under the initial
terms) to enable it to complete the Amended Preferred Stock Purchase.
PROPOSAL 2--TO AUTHORIZE 1,200,000 SHARES OF CONVERTIBLE PREFERRED STOCK
The disclosure under the heading "To Authorize 600,000 Shares of Convertible
Preferred Stock" in the Proxy Statement is supplemented as follows:
General
On June 2, 2001, the Board of Directors approved an amendment to Katy's
Restated Certificate of Incorporation, subject to the stockholders'
authorization and adoption, to authorize 1,200,000 shares of convertible
preferred stock. The full text of the amendment is included as Annex C to this
Supplement.
No shares of preferred stock are currently authorized or outstanding. Katy
must authorize the convertible preferred stock in order to create the
convertible preferred stock, to consummate the Amended Preferred Stock Purchase
and to pay the payment-in-kind dividends contemplated under the revised terms
of the convertible preferred stock. The terms of the convertible preferred
stock are more fully described in the section entitled "Terms of the
Convertible Preferred Stock" in the Proxy Statement, as supplemented by the
disclosure under "Revised Terms of the Convertible Preferred Stock" in this
Supplement. We are asking Katy shareholders to authorize 1,200,000 shares of
convertible preferred stock at this time (rather than just (1,131,555), in
order to afford flexibility in the event that Katy needed to obtain additional
financing through the sale of additional convertible preferred stock. Katy is
not contemplating additional convertible preferred stock financing at this
time.
Required Vote
Under Delaware law, an amendment to Katy's Restated Certificate of
Incorporation requires the affirmative vote of the holders of a majority of
Katy's outstanding stock entitled to vote at the Annual Meeting. Approval of
this proposal is contingent on stockholders approving Proposal 1 (the Preferred
Stock Purchase), Proposal 3 (establishing a classified Board of Directors) and
Proposal 6 (increasing the number of shares of common stock that Katy is
authorized to issue).
25
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MATTERS SET FORTH IN
PROPOSAL 2 AND BELIEVES THAT THEY ARE ADVISABLE, FAIR TO AND IN THE BEST
INTERESTS OF KATY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF PROPOSAL 2.
PROPOSAL 3--ESTABLISHING A CLASSIFIED BOARD OF DIRECTORS
The section entitled "Required Vote" under the heading "Proposal 3--
Establishing a Classified Board of Directors" in the Proxy Statement is
supplemented as follows:
With the addition of Proposal 6, which is a new condition to the completion
of the transactions with Purchaser, approval of Proposal 3 will also be
contingent on the stockholders approving Proposal 6 (increasing the number of
shares of common stock Katy is authorized to issue).
PROPOSAL 4--ELECTION OF DIRECTORS
The section entitled "Nominees" under the heading "Proposal 4--Election of
Directors" is amended and restated in its entirety to reflect the addition of
Proposal 6, as follows:
"Katy's business is managed under the direction of its Board of Directors.
There are currently nine directors. Stockholders will elect nine directors at
the Annual Meeting to serve for a one year term ending at the time of the 2002
annual meeting or, if stockholders adopt Proposals 1, 2 ,3 and 6, for the
staggered terms specified below.
If stockholders approve Proposal 1, Proposal 2, Proposal 3 and Proposal 6,
the persons named in the accompanying proxy intend to vote the shares
represented by the proxy for the classification of the nine nominees identified
below into two classes and their election to serve as Katy directors for the
terms set forth below until their successors are elected and qualified.
Nominees for Election Whose Terms Will Expire 2002 (Class I):
C. Michael Jacobi
Robert M. Baratta
Daniel B. Carroll
Wallace E. Carroll, Jr.
Nominees for Election Whose Terms Will Expire 2003 (Class II):
Christopher Anderson
William F. Andrews
Samuel P. Frieder
James A. Kohlberg
Christopher Lacovara
If stockholders defeat Proposal 1, Proposal 2, Proposal 3 or Proposal 6, the
persons named in the accompanying proxy intend to vote in favor of the current
directors of Katy to serve for a term of one year and until their successors
are elected and qualified. Accordingly, a vote against Proposal 1, Proposal 2,
Proposal 3 or Proposal 6 should be considered a vote against the above nominees
and in favor of the current directors of Katy. The current directors of Katy
are: William F. Andrews, Robert M. Baratta, Amelia M. Carroll, Daniel B.
Carroll, Wallace E. Carroll, Jr., Arthur R. Miller, Charles W. Sahlman, Jacob
Saliba and Glenn W. Turcotte.
26
If a nominee who has expressed an intention to serve if elected fails to
stand for election, the persons named in the proxy intend to vote for a
substitute nominee designated by the Board of Directors. For information
concerning the nominees for director and the current directors, see
"Information Concerning Directors and Executive Officers," "Security Ownership
of Management" and "Security Ownership of Certain Beneficial Owners" in the
Proxy Statement. Nominations are made in order to provide that directors are
divided into two classes, as nearly equal in number as possible.
As described in the section entitled "Corporate Governance" on page 8 of the
Proxy Statement, under the Purchase Agreement Purchaser has the right to
nominate five directors for election at the Annual Meeting, subject to their
election by the holders of common stock present in person or by proxy and
voting at the Annual Meeting. Christopher Anderson, William F. Andrews, Samuel
P. Frieder, James A. Kohlberg and Christopher Lacovara are the Purchaser's
nominees. In addition, Purchaser has proposed C. Michael Jacobi, the
prospective Chief Executive Officer if the transactions with Purchaser are
completed, to serve as director as well. It is a condition of Purchaser's
obligations under the Amended Preferred Stock Purchase that stockholders elect
the Purchaser's nominees at the Annual Meeting.
Christopher Anderson, Samuel P. Frieder, James A. Kohlberg and Christopher
Lacovara, as well as C. Michael Jacobi, have indicated that they will not stand
for election if stockholders defeat any of Proposal 1, Proposal 2, Proposal 3
or Proposal 6. If stockholders defeat Proposal 1, Proposal 2, Proposal 3 or
Proposal 6, the persons named in the proxy intend to vote for the current
directors.
If stockholders approve Proposals 1, 2, 3 and 6, and the Kohlberg nominees
and Mr. Jacobi are elected to the Board of Directors in accordance with this
Proposal 4, but the Amended Preferred Stock Purchase does not close in
accordance with the terms of the Purchase Agreement as amended, the Kohlberg
nominees and Mr. Jacobi have indicated that they will immediately resign from
the Board of Directors. The remaining directors are expected to fill the
vacancies from the other members of the current Board of Directors.
It is anticipated that Mr. Jacobi will become the Chief Executive Officer of
Katy effective upon closing. While no employment contract has been entered into
with Mr. Jacobi, there is a written understanding between Purchaser and Mr.
Jacobi that his annual base salary would be $500,000 with an annual bonus of up
to $200,000. In addition, Mr. Jacobi would be entitled to severance benefits
providing for continuing salary payments for (i) a period of one year in the
event of an involuntary termination other than for cause or (ii) for a period
of two years in the event of an involuntary termination as a result of or
within six months following a change in control (which is defined as (i) a sale
of 100% of the Company's outstanding capital stock, (ii) a sale of all or
substantially all of Katy's operating assets, or (iii) a transaction or
transactions in which any third party acquires a stock ownership greater than
that held by Purchaser and in which persons nominated by Purchaser cease to
constitute a majority of Katy's Board). As Chief Executive Officer, Mr. Jacobi
would also be granted options to purchase 650,000 shares of Katy's common stock
which would have an estimated exercise price of $6.00. The options would vest
ratably over three years, subject to the achievement of annual performance
goals. All options would be subject to accelerated vesting in the event of a
sale of Katy or a change in control (as defined above). Mr. Jacobi would also
be paid a bonus of $50,000 on commencement of employment. Purchaser intends to
submit to Katy's Board for approval the employment of Mr. Jacobi, commencing on
the closing of the transactions with Purchaser, in accordance with these terms.
Purchaser has conditioned its understanding with Mr. Jacobi upon approval by
Katy's Board following approval of Proposals 1, 2, 3 and 6."
Information Concerning Directors and Executive Officers
The first paragraph in the section entitled "Information Concerning
Directors and Executive Officers--Nominees" under the heading "Proposal 4--
Election of Directors" in the Proxy Statement is revised to reflect the
addition of Proposal 6, as follows:
27
"The following table shows information about the nominees to Katy's Board of
Directors who are not currently Katy directors. Such persons, all of whom have
been proposed by Kohlberg, are the Board's nominees subject to stockholders
first approving Proposal 1, Proposal 2, Proposal 3 and Proposal 6. Kohlberg
also proposed Mr. Andrews, a current Katy director. Mr. Andrews is a nominee to
the Board irrespective of whether stockholders approve Proposal 1, Proposal 2,
Proposal 3 and Proposal 6. All the Kohlberg nominees have been nominated as
Class II directors. In addition, Robert M. Baratta, Daniel B. Carroll and
Wallace E. Carroll, Jr., each of whom are current directors, are also nominees
to the Board irrespective of whether stockholders approve Proposal 1, Proposal
2, Proposal 3 and Proposal 6. If stockholders do not approve Proposal 1,
Proposal 2, Proposal 3 and Proposal 6, the Board's nominees are the current
Katy directors, information on whom is set out below under "Current Directors",
and not the following nominees."
The first paragraph in the section entitled "Information Concerning
Directors and Executive Officers--Current Directors" under the heading
"Proposal 4--Election of Directors" is revised to reflect the addition of
Proposal 6, as follows:
"The following table shows information about the current Katy directors.
William F. Andrews, Robert M. Baratta, Daniel B. Carroll and Wallace E.
Carroll, Jr. are nominees to the Board irrespective of whether Proposal 1,
Proposal 2, Proposal 3 and Proposal 6 are approved. Amelia M. Carroll, Arthur
R. Miller, Charles W. Sahlman, Jacob Saliba and Glenn W. Turcotte are nominees
to the Board only if Proposal 1, Proposal 2, Proposal 3 or Proposal 6 have not
been approved."
The section entitled "Information Concerning Directors and Executive
Officers--Executive Officers" under the heading "Proposal 4--Election of
Directors" in the Proxy Statement is revised to delete references to Michael H.
Kane and William J. Wagner, who, effective May 11, 2001, are no longer officers
or employees of Katy.
PROPOSAL 5--RATIFICATION OF THE APPOINTMENT OF ARTHUR
ANDERSEN LLP AS THE INDEPENDENT AUDITORS OF KATY
The section entitled "Audit Fees" under the heading "Proposal 5--
Ratification of the Appointment of Arthur Andersen LLP as the Independent
Auditors of Katy" in the Proxy Statement is supplemented as follows:
Arthur Andersen LLP has billed Katy aggregate fees of $317,500 for
professional services rendered for the audit of Katy's annual financial
statements for the fiscal year 2000 and the review of the financial statements
included in Katy's Forms 10-Q filed during fiscal year 2000. There are no
additional amounts that remain to be billed in connection with these services.
PROPOSAL 6--TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
General
As a result of changes to the terms of the transactions with Purchaser, we
are asking Katy stockholders to consider an additional proposal at the Annual
Meeting.
On June 2, 2001, the Board of Directors approved an amendment to Katy's
Restated Certificate of Incorporation, subject to the stockholder's
authorization and adoption, to increase the number of shares of common stock
that Katy is authorized to issue from 25,000,000 to 35,000,000.
Katy must authorize the additional common stock so that the convertible
preferred stock to be issued to Purchaser on the closing of the transactions
with Purchaser and during the potential three year and five month life of the
payment-in-kind dividend right, may be converted. As of May 14, 2001, there
were 8,393,483 shares
28
of Katy common stock outstanding. The issuance of the shares of common stock
issuable on the conversion of the convertible preferred stock issued to
Purchaser at closing (11,666,666) and the issuance of the shares of common
stock issuable on the conversion of the convertible preferred stock issuable to
Purchaser through the payment-in-kind dividend right (7,192,598), would
increase the total number of shares of common stock outstanding to 27,252,747.
We are asking Katy shareholders to authorize an additional 10,000,000 shares of
common stock at this time (rather than just 2,252,747), in order to satisfy
existing commitments under stock options that Katy has granted and to afford
flexibility in the event that Katy needed to issue additional shares under its
employee stock option program or to provide incentive compensation to
consultants.
The complete text of the proposed amendment to Katy's Restated Certificate
of Incorporation is attached as Annex C. You should read Annex C in its
entirety.
Required Vote
Under Delaware law, an amendment to Katy's Restated Certificate of
Incorporation requires the affirmative vote of the holders of a majority of
Katy's outstanding stock entitled to vote at the Annual Meeting. Approval of
this proposal is contingent on stockholders approving Proposal 1 (the Preferred
Stock Purchase), Proposal 2 (the authorization of the convertible preferred
stock) and Proposal 3 (establishing a classified Board of Directors).
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MATTERS SET FORTH IN
PROPOSAL 6 AND BELIEVES THAT THEY ARE ADVISABLE, FAIR TO AND IN THE BEST
INTERESTS OF KATY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF PROPOSAL 6.
29
INFORMATION ABOUT KATY STOCK OWNERSHIP
The sections entitled "Outstanding Shares", "Security Ownership of Certain
Beneficial Owners", and "Security Ownership of Management" under the heading
"Information about Katy Stock Ownership" in the Proxy Statement are each
amended and restated in their entirety as follows, to provide information as of
May 14, 2001:
Outstanding Shares
The shares of common stock are the only outstanding class of Katy voting
securities. As of May 14, 2001, there were 8,393,483 shares of Katy common
stock outstanding and 397,325 options to acquire shares of common stock
exercisable within the next 60 days.
Security Ownership of Certain Beneficial Owners
The following table and notes show, as of May 14, 2001, information on the
beneficial ownership of those persons or entities (including certain members of
the family of Wallace E. Carroll, former Chairman of Katy's board, since
deceased (the "Carroll Family")), and related persons and entities, who are
known to Katy to be the beneficial owners of more than 5% of the shares of
common stock. The notes below the table describe the nature of that beneficial
ownership. Unless otherwise indicated, the nature of beneficial ownership is
that of sole voting power and sole investment power. In calculating percentages
for a given person, shares for which such person has the right to acquire
beneficial ownership within 60 days (e.g., through exercising options) are
deemed to be outstanding. The following table does not reflect the entering
into by the Agreement Shareholders and Purchaser of the Voting Agreement or New
Voting Agreement. The New Voting Agreement is described on page 8-9 of the
Supplement .
Amount and Nature of Percent
Name and Address Of Beneficial Owner Beneficial Ownership Notes of Class
------------------------------------ -------------------- ------ --------
Wallace E. Carroll, Jr. and the WEC Jr.
Trusts.................................. 3,126,767 (1)(2) 35.6%
c/o CRL, Inc.
6300 S. Syracuse Way, Suite 300
Englewood, CO 80111
Amelia M. Carroll and the WEC Jr.
Trusts.................................. 3,152,767 (1)(3) 35.9%
c/o CRL, Inc.
6300 S. Syracuse Way, Suite 300
Englewood, CO 80111
Dimensional Fund Advisors, Inc. ......... 590,800 (4) 6.7%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
GAMCO Purchasers, Inc. .................. 1,243,200 (5) 14.1%
One Corporate Center
Rye, NY 10580-1434
Gabelli Funds, LLC....................... 502,700 (6) 5.7%
One Corporate Center
Rye, NY 10580-1434
--------
(1) Wallace E. Carroll, Jr., Denis H. Carroll, Barry J. Carroll and Lelia
Carroll are the four children of Wallace E. Carroll and Lelia H. Carroll.
Wallace E. Carroll, Jr. is a Katy director. Daniel B. Carroll, who is also
a Katy director, is the first cousin of each of the four children of
Wallace E. Carroll and Lelia H. Carroll. Amelia M. Carroll is a Katy
director and the spouse of Wallace E. Carroll, Jr. In February 1996,
members
30
of the Carroll Family reorganized their jointly held family assets. The
reorganization resulted in, among other things, the individual reallocation
of shares they formerly held jointly. The amounts shown above for Carroll
Family members reflect the reorganization, and do not reflect multiple
counting of shares (except for Wallace E. Carroll, Jr. and Amelia M. Carroll
who are husband and wife).
(2) Wallace E. Carroll, Jr. directly holds 180,239 shares and options to
acquire 12,000 shares. He is a trustee of trusts for his and his
descendants' benefit (the "WEC Jr. Trusts") which collectively hold
805,215 shares. He and certain of the WEC Jr. Trusts own all the
outstanding shares of CRL, Inc. which holds 2,073,436 shares. He is also a
trustee of the Wallace Foundation which holds 32,910 shares. Wallace E.
Carroll, Jr. also reports that he beneficially owns 8,729 shares and
options to acquire 10,000 shares directly owned by his wife Amelia M.
Carroll, and 4,238 shares held by a "rabbi trust" for him and his wife in
connection with the Katy Industries, Inc. Directors' Deferred Compensation
Plan.
(3) Amelia M. Carroll directly holds 8,729 shares and options to acquire
10,000 shares. She is a trustee of the WEC Jr. Trusts which collectively
own 805,215 shares, and the Wallace Foundation which holds 32,910 shares.
Wallace E. Carroll, Jr. and certain of the WEC Jr. Trusts own all the
outstanding shares of CRL, Inc. which holds 2,073,436 shares. Amelia M.
Carroll is also trustee of trusts for Lelia Carroll and her descendants'
benefit holding 26,000 shares in the aggregate. Amelia M. Carroll also
reports that she beneficially owns 180,239 shares and options to acquire
12,000 shares directly owned by her husband Wallace E. Carroll, Jr., and
4,238 shares held by a "rabbi trust" for her and her husband in connection
with the Katy Industries, Inc. Directors' Deferred Compensation Plan.
(4) Information obtained from Schedule 13G dated February 2, 2001 filed by
Dimensional Fund Advisors, Inc. for the calendar year 2000.
(5) Information obtained from Schedule 13D/A dated September 28, 2000 filed by
Gabelli Asset Management, Inc. ("GAMI"). According to that Schedule 13D/A,
GAMCO Purchasers, Inc. ("GAMCO") holds these shares as agent, and Mario
Gabelli, Gabelli Group Capital Partners, Inc. ("Gabelli Partners") and
GAMI are deemed to beneficially own these shares. Also according to that
Schedule 13D/A, GAMCO has the sole power to vote (or direct the vote) and
sole power to dispose (or to direct the disposition) of these shares
except that (i) it does not have authority to vote 1,000 of the shares,
and (ii) the power of Mario Gabelli, GAMI and Gabelli Partners is indirect
with respect to these shares.
(6) Information obtained from Schedule 13D/A dated September 28, 2000 filed by
GAMI. According to that Schedule 13D/A, Gabelli Funds, LLC ("Gabelli
Funds") holds these shares as agent, and Mario Gabelli, Gabelli Partners
and GAMI are deemed to beneficially own these shares. Also according to
that Schedule 13D/A, Gabelli Funds has the sole power to vote (or direct
the vote) and sole power to dispose (or to direct the disposition) of
these shares, except that (i) Gabelli Funds has sole dispositive and
voting power with respect to shares held by the Funds so long as the
aggregate voting interest of all joint filers does not exceed 25% of their
total voting interest in Katy and, in that event, each Fund's Proxy Voting
Committee is to vote that Fund's shares, (ii) under special circumstances,
each Fund's Proxy Voting Committee may take and exercise in its sole
discretion the entire voting power with respect to the shares held by that
Fund, and (iii) the power of Mario Gabelli, GAMI and Gabelli Partners is
indirect with respect to these shares.
31
Security Ownership of Management
The following table shows, as of May 14, 2001, the number of shares of
common stock that directors and certain executive officers beneficially own,
and that directors and executive officers as a group own. Unless otherwise
indicated, the nature of beneficial ownership is that of sole voting power and
sole investment power. In calculating percentages, shares for which a person
has the right to acquire beneficial ownership within 60 days (e.g., through
exercising options) are deemed to be outstanding.
Amount and Nature of Percent
Name Beneficial Ownership Notes of Class
---- -------------------- --------------- --------
William F. Andrews.............. 17,000 (1) *
Robert M. Baratta............... 53,293 (4)(5) *
Amelia M. Carroll............... 3,152,767 (1)(2) 35.9%
Daniel B. Carroll............... 19,000 (1) *
Wallace E. Carroll, Jr. ........ 3,126,767 (1)(2) 35.6%
Michael H. Kane................. 4,336 (4)(5) *
Arthur R. Miller................ 95,923 (3) 1.1%
John R. Prann, Jr. ............. 91,228 (4)(5) *
Charles W. Sahlman.............. 31,145 (1)(5) *
Jacob Saliba.................... 24,649 (1)(5) *
Glenn W. Turcotte............... 84,985 (4)(5) *
Roger G. Engle.................. 23,095 (4)(5) *
Larry D. Hudson................. 16,128 (4)(5) *
Stephen P. Nicholson............ 40,424 (4)(5) *
All directors and executive
officers of Katy as a group
(15 persons)................... 3,653,974 (1)(2)(3)(4)(5) 41.6%
--------
* Indicates 1% or less
(1) Includes, for each individual, currently exercisable nonqualified stock
options to acquire shares granted to each non-employee director under the
Katy Industries, Inc. Non-employee Director Stock Option Plan:
William F. Andrews................................................ 12,000
Amelia M. Carroll................................................. 10,000
Daniel B. Carroll................................................. 12,000
Wallace E. Carroll, Jr. .......................................... 12,000
Charles W. Sahlman................................................ 12,000
Jacob Saliba...................................................... 12,000
(2) Includes shares deemed beneficially owned by Wallace E. Carroll, Jr. and
Amelia M. Carroll in their capacity as trustees of certain trusts for the
benefit of members of the Wallace E. Carroll, Jr. family. (See notes (2)
and (3) under "Security Ownership of Certain Beneficial Owners.") Amounts
shown for Amelia M. Carroll and Wallace E. Carroll, Jr., reflect multiple
counting of shares where more than one of them is a trustee of a
particular trust and is needed to report beneficial ownership of shares
that these trusts hold.
(3) Arthur R. Miller holds 31,031 shares directly and options to acquire
47,000 shares exercisable within 60 days, and 17,892 shares held in a
"rabbi trust" in connection with the Katy Industries, Inc. Supplemental
Retirement and Deferral Plan. Arthur R. Miller is a trustee of trusts for
the benefit of Denis H. Carroll and his descendants holding 360,620 shares
in the aggregate. He disclaims beneficial ownership of the shares that the
trusts beneficially own. Effective March 19, 2001 he resigned from his
position as a director of CRL, Inc. and as a trustee of trusts for the
benefit of Wallace E. Carroll, Jr. and his descendants.
32
(4) Includes, for each individual, options to acquire the following number of
shares within 60 days:
Glenn W. Turcotte................................................. 53,000
Robert M. Baratta................................................. 34,000
Roger G. Engle.................................................... 17,400
Larry D. Hudson................................................... 12,125
Michael H. Kane................................................... 3,875
Stephen P. Nicholson.............................................. 13,500
(5) Includes shares beneficially owned by each individual, which are held by a
"rabbi trust" in connection with either the Katy Industries, Inc.
Supplemental Retirement and Deferral Plan or the Directors' Deferred
Compensation Plan:
Robert M. Baratta................................................. 3,957
Michael H. Kane................................................... 86
John R. Prann..................................................... 31,832
Charles W. Sahlman................................................ 15,645
Jacob Saliba...................................................... 7,433
Glenn W. Turcotte................................................. 8,485
Roger C. Engle.................................................... 1,694
Larry D. Hudson................................................... 1,003
Stephen P. Nicholson.............................................. 8,660
EXECUTIVE COMPENSATION
The disclosure under the heading "Executive Compensation" in the Proxy
Statement is supplemented as follows:
Termination of Employment, Change of Control and Other Arrangements
In connection with his termination as Vice President, Maintenance--Retail as
of May 11, 2001, Katy has offered to pay Michael H. Kane one (1) year's base
salary of $275,000, which would be payable in accordance with Katy's otherwise
applicable payroll practices, provided that Mr. Kane enters into a separation
and release agreement with Katy (the "Separation Agreement") which would
provide for, among other things, a general release of claims, and customary
confidentiality and non-solicitation provisions. Under the Separation
Agreement, Mr. Kane would also receive a payment of $103,125 if the
transactions contemplated by the Purchase Agreement are consummated within 180
days of May 11, 2001, which would be payable in lump sum within 60 days of the
consummation of the transactions contemplated by the Purchase Agreement. Katy
has also offered to pay up to $15,000 for standard outplacement services and
the cost of health insurance continuation coverage for a period of up to 18
months. Under the terms of the Separation Agreement, Mr. Kane would also waive
his rights under the bonus program relating to his "in the money" options and
under the compensation and benefits assurance program approved and adopted by
the Board of Directors on January 17, 1996.
In connection with the Amended Preferred Stock Purchase, Katy currently
intends to enter into transition services agreements with each of Arthur R.
Miller and Stephen P. Nicholson. These agreements will generally provide for
Messrs. Miller and Nicholson to transition their respective duties and
responsibilities to certain individuals. The term of these agreements will
commence on the date of the consummation of the transactions contemplated by
the New Purchase Agreement and continue for no less than three months and no
more than six months following the consummation of such transactions or
December 14, 2001, whichever is earlier. During the term of these agreements,
Messrs. Miller and Nicholson will remain entitled to receive the compensation
and benefits that they currently are receiving pursuant to their employment
arrangements with Katy. Upon the expiration of the term of the transition
services agreement, Messrs. Miller and Nicholson shall be deemed to
33
have terminated their employment with Katy for Good Reason (as defined under
their respective severance agreements) and become entitled to receive the
compensation and benefits specified under their respective severance
agreements.
Directors' Compensation
Directors may also participate in the Directors' Deferred Compensation Plan
which became effective June 1, 1995 (the "Directors' Deferred Compensation
Plan"). Under this Plan, a director may defer directors' fees, retainers and
other compensation paid for services as a director until the later of the
director's attainment of age 62 or ceasing to be a director. However, if the
director's service terminates by reason of death or disability, or a "Change of
Control" of Katy, any unpaid deferred amounts and any earnings thereon will be
paid in lump sum within 30 days of such termination or change of control. Each
director has 30 days before the beginning of a Plan Year (as defined in the
Directors' Deferred Compensation Plan) in which to elect to participate in the
Directors' Deferred Compensation Plan. Directors may invest these amounts in
one or more investment alternatives offered by Katy. Directors may elect to
receive distributions of deferred amounts in a lump sum or five annual
installments.
It is expected that the Kohlberg nominees to Katy's Board of Directors will
not receive any director fees. Kohlberg has informed Katy that Kohlberg intends
to propose an annual monitoring fee of $500,000 for investment banking and
advisory services on an ongoing basis and in lieu of director fees for the
Kohlberg designees. The proposed annual monitoring fee is described in the
Proxy Statement in the section entitled "Information about the Purchase
Agreement--Transaction and Monitoring Fee".
SUPPLEMENTARY FINANCIAL INFORMATION
We are including in this Supplement unaudited Katy financial information for
the first quarter of 2001. The financial statements (including the notes
thereto) and the management's discussion and analysis of financial condition
and results are in the form filed by Katy on May 15, 2001 as part of its Form
10-Q for the quarter ended March 31, 2001, and do not reflect developments
since May 15, 2001, including developments relating to the New Purchase
Agreement.
34
Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
March 31, December 31,
2001 2000
--------- ------------
CURRENT ASSETS:
Cash and cash
equivalents.............. $ 5,520 $ 1,810
Accounts receivable, net.. 72,314 84,896
Inventories............... 99,162 103,068
Deferred income taxes..... 7,544 7,544
Other current assets...... 5,385 5,769
Net current assets of
operations to be disposed
of....................... 3,829 941
-------- --------
Total current assets.... 193,754 204,028
-------- --------
OTHER ASSETS:
Cost in excess of net
assets acquired.......... 37,997 39,500
Other intangibles......... 46,329 47,214
Miscellaneous............. 6,411 6,900
Net noncurrent assets of
operations to be disposed
of....................... 16,761 16,471
-------- --------
Total other assets...... 107,498 110,085
-------- --------
PROPERTIES:
Land and improvements..... 3,709 3,789
Buildings and
improvements............. 22,995 23,273
Machinery and equipment... 168,576 166,414
-------- --------
Accumulated depreciation.. (66,614) (61,922)
-------- --------
Net properties.......... 128,666 131,554
-------- --------
Total assets............ $429,918 $445,667
======== ========
See Notes to Condensed Consolidated Financial Statements.
35
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2001 2000
--------- ------------
CURRENT LIABILITIES:
Accounts payable...................................... $ 46,347 $ 53,553
Accrued compensation.................................. 5,847 6,038
Accrued expenses...................................... 30,499 35,483
Accrued interest and taxes............................ 2,102 3,523
Current maturities of indebtedness.................... 147,066 133,067
Dividends payable..................................... -- 629
-------- --------
Total current liabilities............................. 231,861 232,293
-------- --------
LONG TERM DEBT, less current maturities--Note 3......... 754 771
-------- --------
OTHER LIABILITIES....................................... 7,015 7,609
-------- --------
EXCESS OF ACQUIRED NET ASSETS OVER COST, Net............ 1,365 1,792
-------- --------
DEFERRED INCOME TAXES................................... 15,559 19,969
-------- --------
COMMITMENTS AND CONTINGENCIES--Note 4
PREFERRED INTEREST OF SUBSIDIARY........................ 32,900 32,900
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized 25,000,000
shares; issued 9,822,204 shares...................... 9,822 9,822
Additional paid-in capital............................ 51,127 51,127
Accumulated other comprehensive income................ (4,321) (2,757)
Other adjustments..................................... (444) (518)
Retained earnings..................................... 104,325 112,697
Treasury stock, at cost, 1,428,146 and 1,427,446
shares, respectively................................. (20,045) (20,038)
-------- --------
Total stockholders' equity.......................... 140,464 150,333
-------- --------
Total liabilities and stockholders' equity.......... $429,918 $445,667
======== ========
See Notes to Condensed Consolidated Financial Statements.
36
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
2001 2000
-------- --------
Net sales.................................................. $115,635 $134,008
Cost of goods sold......................................... 88,042 92,237
-------- --------
Gross profit............................................... 27,593 41,771
Selling, general and administrative expenses............... 34,791 36,234
-------- --------
Operating (loss) income.................................. (7,198) 5,537
Equity in loss of operations to be disposed of............. (1,620) (644)
Interest and other, net.................................... (3,402) (3,246)
(Loss) income before provision for income taxes and
distributions on preferred interest of subsidiary....... (12,220) 1,647
Benefit from (provision for) income taxes.................. 4,276 (577)
(Loss) income before distributions on preferred interest
of subsidiary........................................... (7,944) 1,070
Distributions on preferred interest of subsidiary (net of
tax)...................................................... (428) (425)
-------- --------
Net (loss) income.......................................... $ (8,372) $ 645
======== ========
Net (loss) income per share--Basic......................... $ (1.00) $ 0.08
Net (loss) income per share--Diluted....................... $ (1.00) $ 0.08
Weighted average shares outstanding
Basic.................................................... 8,394 8,416
======== ========
Diluted.................................................. 8,394 8,426
======== ========
Dividends paid per share--common stock..................... $ .0750 $ .0750
See Notes to Condensed Consolidated Financial Statements.
37
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
(Thousands of Dollars)
(Unaudited)
2001 2000
------- --------
Cash flows from operating activities:
Net (loss) income........................................ $(8,372) $ 645
Depreciation and amortization............................ 6,965 5,958
Other, net............................................... (4,842) (13,787)
------- --------
Net cash flows used in operating activities............ (6,249) (7,184)
------- --------
Cash flows from investing activities:
Payments for purchase of subsidiaries, net of cash
acquired................................................ (121)
Capital expenditures..................................... (3,360) (4,560)
Proceeds from sale of assets............................. 18 11
Collections of notes receivable.......................... 74 89
------- --------
Net cash flows used in investing activities............ (3,268) (4,581)
------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of
repayments.............................................. 13,982 4,982
Payment of dividends..................................... (629) (631)
Purchase of treasury shares.............................. -- (109)
Other.................................................... -- 181
------- --------
Net cash flows provided by financing activities........ 13,353 4,423
------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 7 (3)
Net decrease in cash and cash equivalents.................. 3,843 (7,345)
Cash and cash equivalents, beginning of period............. 2,459 10,643
------- --------
Cash and cash equivalents, end of period................... 6,302 3,298
Cash of discontinued operations and operations to be
disposed of............................................... 782 31
------- --------
Cash and cash equivalents of continuing operations......... $ 5,520 $ 3,267
======= ========
See Notes to Condensed Consolidated Financial Statements.
38
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(1) Significant Accounting Policies
Consolidation Policy
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% interest, collectively "Katy" or the "Company". All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority owned and where
the Company exercises significant influence are reported using the equity
method. The condensed consolidated financial statements at March 31, 2001 and
December 31, 2000 and for the three month periods ended March 31, 2001 and
March 31, 2000 are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of financial condition and results of
operations. Interim figures are subject to year end audit adjustments and may
not be indicative of results to be realized for the entire year. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Operations to be Disposed Of
The historical operating result for the Company's investments in Savannah
Energy Systems Company ("SESCO") and Sahlman Holding Company, Inc. ("Sahlman")
are "Operations to be Disposed of"and have been segregated as "Equity in loss
of operations to be disposed of" on the accompanying Condensed Consolidated
Statements of Operations for all periods presented. The related assets and
liabilities have been separately identified on the Condensed Consolidated
Balance Sheets as "Net current assets of operations to be disposed of" and "Net
noncurrent assets of operations to be disposed of." During the quarter ended
March 31, 2001, the Company determined that it would dispose of its investment
in the Thorsen Tools business. The Company completed the sale of the Thorsen
Tools business on May 3, 2001 and, accordingly, its operating results and
financial position for 2001 are reported in a manner consistent with the other
"Operations to be Disposed of." Operations to be disposed of have not been
segregated on the Condensed Consolidated Statements of Cash Flows.
Inventories
The components of inventories are as follows:
March 31, December 31,
2001 2000
--------- ------------
(Thousands of Dollars)
Raw materials......................................... $39,854 $ 38,736
Work in process....................................... 2,483 3,269
Finished goods (net of reserves)...................... 56,825 61,063
------- --------
$99,162 $103,068
======= ========
39
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 2001 and December 31, 2000, approximately 37% of the Company's
inventories are accounted for using the last-in, first-out ("LIFO") method of
costing, while the remaining inventories were accounted for using the first-in,
first-out ("FIFO") method. Current cost, as determined using the FIFO method,
exceeded LIFO cost by $3.0 million at March 31, 2001 and by $1.7 million at
December 31, 2000.
New Accounting Pronouncements--In February 2001, the Financial Accounting
Standards Board ("FASB") issued a limited revision exposure draft of proposed
Statement of Financial Accounting Standard ("SFAS") "Business Combinations and
Intangible Assets--Accounting for Goodwill." The proposed Statement would
establish a new accounting standard for goodwill acquired in a business
combination. It would continue to require recognition of goodwill as an asset
but would not permit amortization of goodwill as currently required by
Accounting Principles Board ("APB") Opinion No. 17, "Intangible Assets."
Furthermore, certain intangible assets that are not separable from goodwill
will also not be amortized.
This proposed Statement would establish a new method of testing goodwill for
impairment. It would require that goodwill be separately tested for impairment
using the fair-value-based approach. Entities would be required to initially
apply the provisions of this proposed Statement as of the beginning of the
first fiscal quarter following issuance of the final Statement. Those
provisions would apply not only to goodwill arising from acquisitions completed
after the issuance date of the final Statement but also to the unamortized
balance of goodwill at the date of adoption. The Company has not fully
evaluated the impact upon future operating results from the proposed standard.
However, the terms of the proposed recapitalization (see Note 2) and the
related offer price indicate that the fair value of the Company, and therefore
the fair values of certain underlying assets, may be less than their current
carrying values. Given these indications, it is likely that impairments of cost
in excess of net assets acquired currently carried on the Company's balance
sheet will be required following adoption of the proposed Statement.
Earnings Per Share
Basic and diluted earnings per share were arrived at using the calculations
outlined below. Potentially dilutive securities, in the form of stock options,
have been included in the calculation of weighted average shares outstanding
under the treasury stock method. Stock options were the only securities that
had a dilutive impact on earnings per share for the quarters ended March 31,
2001 and 2000.
Three Months Ended
March 31,
--------------------
2001 2000
--------- ---------
(Thousands of
Dollars, except
Per Share Data)
Net (loss) income................................... $ (8,372) $ 645
========= ========
Earnings Per Share--Basic
Weighted Average Shares............................... 8,394 8,416
Per share amount
Net (loss) income................................... $ (1.00) $ 0.08
========= ========
Effect of potentially dilutive securities
Options............................................... -- 10
Earnings Per Share--Diluted
Weighted Average Shares............................... 8,394 8,426
Per share amount
Net (loss) income................................... $ (1.00) $ 0.08
========= ========
40
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Proposed Recapitalization
On March 30, 2001, Katy announced that the Company had reached a definitive
agreement with KKTY Holding Company, LLC. ("KKTY"), an affiliate of Kohlberg
Investors IV, L.P. for the recapitalization of the Company (the
"Recapitalization"). To effectuate the Recapitalization, KKTY would purchase
from Katy not less than 400,000 shares of newly issued preferred stock, $100
par value per share (the "Convertible Preferred Stock"), convertible into not
less than 5,000,000 common shares, for an aggregate purchase price of $40.0
million.
Under the current terms of the Recapitalization, nominees for directors
designated by KKTY would, if elected by Katy's shareholders, represent a
majority of Katy's Board of Directors. Shareholder approval will be required to
complete the Recapitalization. Accordingly, a proxy statement has been mailed
to shareholders, with a vote planned at the annual meeting of shareholders.
The Convertible Preferred Stock would be convertible at the option of the
holder at any time after the earlier of 1) the fifth anniversary of the closing
date of the Recapitalization, 2) board approval of a merger, consolidation or
other business combination involving a change in control of the Company, or a
sale of all or substantially all of the assets or liquidation of the Company,
or 3) a contested election for directors of the Company nominated by KKTY. Each
preferred share would be convertible into 12.5 shares of common stock, and the
conversion price would be $8.00 for every share of common stock to be issued.
The preferred shares would be 1) non-voting, 2) non-redeemable, except in
whole, but not in part, at the Company's option not earlier than the 20th
anniversary of the closing date of the Recapitalization, 3) would not
participate in dividend distributions, 4) would have no preemptive rights with
respect to any other securities or instruments issued by the Company, and 5)
would have customary piggyback registration rights in the event of a
registration of common shares by Katy. The Convertible Preferred Stock would
have a liquidation preference of $100.00 per share before any distribution
could be made to common shareholders.
Under the Recapitalization, KKTY has commenced a tender offer (the "Offer")
to purchase 2,500,000 outstanding shares of Katy common stock, at $8.00 per
common share, inclusive of the associated common stock rights (the "Rights")
issued pursuant to the Rights Agreement, dated as of January 13, 1995, as
amended. KKTY will in no event acquire more than 29.9% of the outstanding
voting securities of Katy in the Offer. The obligation of KKTY to purchase
shares tendered under the Offer is subject to the conditions set forth in
KKTY's Offer to Purchase dated April 25, 2001, and is subject to pro rata
acceptance of common shares tendered if the total number exceeds 2,500,000. The
initial expiration of the Offer, terms of which are detailed in the Offer to
Purchase mailed to shareholders by KKTY, is 5:00 p.m., New York City time, on
Tuesday, June 5, 2001. KKTY can extend the Offer for an additional 20 days (and
must extend the Offer at Katy's request if certain conditions are satisfied).
However, in no event shall the Offer be extended beyond June 30, 2001.
Katy expects to utilize funds from three sources to refinance Katy's
existing obligations under its current revolving credit agreement (the "Credit
Agreement"): 1) $30.0 million of proceeds from the issuance of the Convertible
Preferred Stock, 2) a $150.0 million five year credit facility (the "New Credit
Facility"), which would include a Term Loan Facility (the "Term Loan") and a
Revolving Credit Facility, for which KKTY has entered into a commitment letter
with Bankers Trust Company, which is contingent upon, among other things,
closing the sale of the Convertible Preferred Stock, and 3) the sale of
Hamilton Metals, L.P. ("Hamilton"), a wholly owned subsidiary, for at least
$20.0 million, net of retained liabilities. Katy has entered into a non-binding
letter of intent with a potential buyer for a sale of substantially all of the
assets of Hamilton.
The Term Loan is expected to have a final maturity date of five years after
the closing of the transaction and be in an original principal amount of $40.0
million. Quarterly amortization is expected to be required in aggregate annual
amounts of $8.0 million. The Revolving Credit Facility is expected to have a
final maturity
41
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
date of five years after the closing date and be in an original amount of up to
$110.0 million (subject to certain borrowing base limits). All extensions of
credit to the Company would be secured by a first priority perfected security
interest in and lien upon the capital stock of each material domestic
subsidiary (66% of the capital stock of each material foreign subsidiary), and
all present and future material assets and properties of the Company.
Availability of loans and letters of credit under the Revolving Credit Facility
would be subject to a borrowing base determined by eligible inventory and
accounts receivable. Customary financial covenants would apply. The obligation
of Bankers Trust to provide such financing, which runs to KKTY and not to the
Company, is subject to a number of conditions precedent, including, without
limitation, the consummation of the sale of Hamilton, the approval by the
shareholders of the authorization and issuance of the convertible preferred
stock, and the absence of any material adverse change in the business of the
Company or in the financing and credit facility syndication markets. Bankers
Trust also reserves the right unilaterally to adjust the terms of the credit
facility, including the maturity, to the extent necessary to achieve
syndication. There can be no assurance that such financing will be available on
terms the Company finds attractive or at all.
In connection with the Recapitalization, the Company has entered into an
agreement with the holder of the preferred interest in its Contico
International, LLC subsidiary to redeem at a discount approximately half of
such interest, which in total has a stated value at December 31, 2000 of $32.9
million. Katy will utilize approximately $10.0 million of the proceeds from the
issuance of the Convertible Preferred Stock for this purpose. The holder will
retain approximately 50% of the preferred interest, or a stated value of $16.4
million. Consummation of this redemption is conditioned on consummation of the
Recapitalization.
Consummation of the Recapitalization is subject to a number of conditions,
including: absence of a material adverse change in financial markets that
results in KKTY not obtaining funding under the commitment letter with Bankers
Trust; the shareholders electing KKTY's designees to Katy's Board of Directors,
amending Katy's certificate of incorporation to authorize the issue of the
Convertible Preferred Stock and to classify Katy's Board of Directors, and
authorizing the issuance and sale of the Convertible Preferred Stock to KKTY;
and Katy consummating the sale of its Hamilton subsidiary for gross proceeds in
cash of at least $20.0 million, net of retained liabilities.
On May 8, 2001, Katy announced that KKTY had advised Katy that it was re-
evaluating its tender offer and proposed purchase of preferred stock in light
of Katy's operating results for the first quarter and Katy's interim operating
results for April 2001 (which indicated a continued shortfall from previously
projected earnings before interest, taxes, depreciation and amortization). KKTY
advised Katy that based on these developments, it believes one or more of the
conditions to the tender offer may not be satisfied at the expiration date of
the offer. Consequently, KKTY further advised the Company that it is
considering alternative courses of action to be negotiated with Katy, including
among other things, an increase of its proposed preferred stock investment in
Katy, a decrease in the preferred stock conversion price and a decrease in the
number of shares of Katy's common stock and price per share to be purchased
pursuant to the tender offer.
(3) Indebtedness
The Company's revolving credit agreement ("Credit Agreement") provides for
borrowings of up to $16.8 million under its Facility A commitment expiring June
30, 2001, and $161.0 million under its Facility B commitment expiring December
11, 2001. In accordance with terms outlined in the waiver and third amendment
to the Credit Agreement dated October 27, 2000, the Company, on March 30, 2001,
granted security interests on the assets of the Company and its subsidiaries to
its bank group. The security interests include liens on all tangible assets of
U.S. operations, including mortgages on owned real property and leaseholds, as
well as stock pledges from foreign subsidiaries. Concurrent with the granting
of security interests in Company assets, the bank group has agreed to waive
compliance with covenant ratio levels established in
42
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the third amendment for the quarter ended March 31, 2001, and which extend up
to, but do not include, June 30, 2001. This action is included in a Waiver and
Fourth Amendment to the Credit Agreement, dated as of March 30, 2001.
As discussed in Note 2, Katy has entered into an agreement for the
Recapitalization. If the Recapitalization occurs, the borrowings under the
Credit Agreement will be repaid, and Katy will incur new borrowings in the form
of a secured term loan and a revolving line of credit, agented by Bankers
Trust. The Term Loan is expected to have a final maturity date of five years
after the closing of the Recapitalization and to be in an original principal
amount of $40.0 million. Quarterly amortization is expected to be required in
aggregate annual amounts of $8.0 million. The Revolving Credit Facility is
expected to have a final maturity date of five years after the closing date and
be in an original amount of up to $110.0 million (subject to certain borrowing
base limits). All extensions of credit to the Company would be secured by a
first priority perfected security interest in and lien upon the capital stock
of each material domestic subsidiary (66% of the capital stock of each material
foreign subsidiary), and all present and future material assets and properties
of the Company. Availability of loans and letters of credit under the Revolving
Credit Facility would be subject to a borrowing base determined by eligible
inventory and accounts receivable. Customary financial covenants would apply.
The obligation of Bankers Trust to provide such financing, which runs to KKTY
and not to the Company, is subject to a number of conditions precedent,
including, without limitation, the consummation of the sale of Hamilton, the
approval by the shareholders of the authorization and issuance of the
convertible preferred stock, and the absence of any material adverse change in
the business of the Company or in the financing and credit facility syndication
markets. Bankers Trust also reserves the right unilaterally to adjust the terms
of the credit facility, including the maturity, to the extent necessary to
achieve syndication. There can be no assurance that such financing will be
available on terms the Company finds attractive or at all.
The infusion of $40.0 million of preferred equity capital under the
Recapitalization, along with proceeds from the sale of Hamilton, will
significantly de-leverage the Company. If the Recapitalization is not
completed, Katy could experience a number of negative consequences, including,
but not limited to, default on the Credit Agreement. In the event the
Recapitalization is not consummated, Katy intends to go forward with the sale
of Hamilton, and possibly other Company assets and operating divisions and seek
to refinance its existing credit agreement on a secured basis so as to provide
additional time in which to restructure its operations. Management believes
that, in the current market environment, a substantial risk exists that, if the
Recapitalization is not consummated on a timely basis, the Company will be
unable to obtain further waivers of defaults under its current credit facility
in the future and that the Company will be unable to obtain, on reasonable
terms or at all, financing necessary to replace its current credit facility.
(4) Commitments and Contingencies
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company,
and against certain past and then present officers and directors and former
owners of Woods, alleging that the defendants participated in a violation of
the Racketeer Influenced and Corrupt Organizations Act involving allegedly
fraudulently obtained loans from Mexican banks, including the plaintiff, and
"money laundering" of the proceeds of the illegal enterprise. All of the
foregoing is alleged to have occurred prior to the Company's purchase of Woods.
The plaintiff also alleges that it made loans to an entity controlled by
certain officers and directors based upon fraudulent representations. The
plaintiff seeks to hold Woods liable for its alleged damage under principles of
respondeat superior and successor liability. The plaintiff is claiming damages
in excess of $24.0 million and is requesting treble damages under the statutes.
The defendants have filed a motion, which has not been ruled on, to dismiss
this action on jurisdictional grounds. Because the litigation is in preliminary
stages, it is not possible at this time for the Company to determine an outcome
or reasonably estimate the range of potential exposure. The Company
43
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
may have recourse against the former owner of Woods and others for, among other
things, violations of covenants, representations and warranties under the
purchase agreement through which the Company acquired Woods, and under state,
federal and common law. In addition, the purchase price under the purchase
agreement may be subject to adjustment as a result of the claims made by Banco
del Atlantico. The extent or limit of any such recourse cannot be predicted at
this time.
(5) Industry Segment Information
The Company is a manufacturer and distributor of a variety of industrial and
consumer products, including sanitary maintenance supplies, coated abrasives,
stains, and electrical and electronic components. Principal markets are in the
United States, Canada and Europe, and include the sanitary maintenance,
restaurant supply, retail, electronic, automotive, and computer markets. These
activities are grouped into two industry segments: Electrical/Electronics and
Maintenance Products.
44
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below and the narrative, which follows, summarize the key factors
in the year-to-year changes in operating results.
Three Months Ended
March 31,
---------------------
2001 2000
--------- ---------
(Thousands of
Dollars)
Electrical/Electronics(b)
Net external sales................................. $ 32,696 $ 39,794
Net intercompany sales............................. 9,031 12,986
Income from operations(c).......................... (2,641) 1,394
Operating margin................................... (8.08%) 3.50%
Depreciation & amortization........................ 572 724
Identifiable assets................................ 97,105 124,603
Capital expenditures............................... 458 559
Maintenance Products
Net external sales................................. 82,939 94,214
Net intercompany sales............................. 3,704 2,417
Income from operations(c).......................... 503 6,278
Operating margin................................... 0.61% 6.67%
Depreciation & amortization........................ 5,452 5,213
Identifiable assets................................ 300,000 325,919
Capital expenditures............................... 2,449 3,938
Operations to be Disposed Of(b)
Net external sales................................. 3,257 830
Net intercompany sales............................. 2 --
Income from operations(c).......................... (1,517) (534)
Operating margin................................... (46.56%) (64.34%)
Depreciation & amortization........................ 901 5
Identifiable assets................................ 23,448 16,580
Equity investments................................. 6,793 6,845
Capital expenditures............................... 453 63
Corporate
Corporate expenses(c).............................. (5,060) (2,135)
Depreciation & amortization........................ 40 14
Identifiable assets................................ 12,223 15,445
Capital expenditures............................... -- --
Company
Net external sales(a).............................. 118,892 134,838
Net intercompany sales............................. 12,737 15,403
Income from operations(a).......................... (8,715) 5,003
Operating margin(a)................................ (7.33%) 3.71%
Depreciation & amortization(a)..................... 6,965 5956
Identifiable assets(a)............................. 432,776 482,547
Capital expenditures............................... 3,360 4,560
--------
(a) Company balances include amounts from "Operations to be Disposed of,"
whereas the Condensed Consolidated Financial Statements separately
classify such amounts as "Operations to be Disposed of."
(b) 2001 amounts include the Thorsen Tools business, which was sold by Katy on
May 3, 2001. Amounts for Thorsen Tool were included in
Electrical/Electronics in 2000.
(c) See the Results of Operations section of MD&A for a further discussion of
restructuring charges and unusual items.
45
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables reconcile the Company's total revenues, operating
income and assets to the Company's Condensed Consolidated Statements of
Operations and Condensed Consolidated Balance Sheets.
March 31, March 31,
2001 2000
--------- ---------
(Thousands of
Dollars)
Revenues
Total revenues for reportable segments............. $ 131,629 $ 150,241
Elimination of intersegment revenues............... (12,737) (15,403)
Revenues included in equity in loss of operations
to be disposed of................................. (3,257) (830)
--------- ---------
Total consolidated revenues........................ $ 115,635 $ 134,008
========= =========
Operating Income
Total operating income for reportable segments..... $ (8,715) $ 5,003
Operating loss included in equity in loss of
operations to be disposed of...................... 1,517 534
--------- ---------
Total consolidated operating income................ $ (7,198) $ 5,537
========= =========
Assets
Total assets for reportable segments............... $ 432,776 $ 482,547
Liabilities included in net assets from operations
to be disposed of................................. (2,858) (769)
--------- ---------
Total consolidated assets.......................... $ 429,918 $ 481,778
========= =========
(6) Comprehensive (loss) income
March 31, March 31,
2001 2000
--------- ---------
(Thousands of
Dollars)
Net (loss) income....................................... $ (8,372) $ 645
Foreign currency translation adjustments................ (1,564) (527)
-------- -----
Comprehensive income.................................... $ (9,936) $ 118
======== =====
(7) Restructuring Charge
During the first quarter of 2001, the Company's Woods Industries division
undertook a restructuring effort that involved reductions in senior management
headcount as well as facilities closings. The Company 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. Approximately 42% of
these costs were paid through the end of the first quarter.
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
Segment.
The workforce reduction included severance and related costs for certain
employees. Total severance and related costs were $2.5 million pre-tax, which
are included as selling, general and administrative expenses in the
consolidated statements of operations. Approximately 70% of these costs were
paid through the end of the first quarter of 2001.
46
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Severance expenses and exit costs are included in selling, general and
administrative expenses line item in the Consolidated Statements of Operations.
As of March 31, 2001, accrued severance and exit costs totaled $1.2 million,
which will be paid through the year 2009. The table on the following page
summarizes the future obligation for the programs described:
(Thousands of Dollars)
2001............................................................... 658
2002............................................................... 180
2003............................................................... 180
2004............................................................... 55
2005............................................................... 55
Thereafter......................................................... 22
-----
Total payments..................................................... 1,150
47
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended March 31, 2001
Following are summaries of sales and operating income for the three months
ended March 31, 2001 and 2000 by industry segment (In thousands):
Net sales
Increase
(Decrease)
------------------
2001 2000 Amount Percent
------- ------- -------- --------
Electrical/Electronics.................... $32,696 $39,794 $ (7,098) (17.84)%
Maintenance Products...................... 82,939 94,214 (11,275) (11.97)%
Operations to be Disposed Of.............. 3,257 830 2,427 292.4%
Operating income
Increase
(Decrease)
------------------
2001 2000 Amount Percent
------- ------- -------- --------
Electrical/Electronics.................... $(2,641) $ 1,394 $ (4,035) (289.45)%
Maintenance Products...................... 503 6,278 (5,775) (91.99)%
Operations to be Disposed Of.............. (1,517) (534) (983) (184.08)%
The Electrical/Electronics Group's sales decreased $7.1 million or 17.8%.
$2.4 million of this decrease is explained by the classification of the Thorsen
Tools business as Operations to be Disposed Of in 2001. Excluding this factor,
sales decreased $4.7 million, or 12%, primarily due to decreased volumes in the
consumer electric corded products and electrical and electronic parts and
accessories businesses, partially offset by increased volumes in the precision
metal business.
The Group's operating income decreased $4.0 million primarily as a result of
unusual charges related to losses on inventory associated with the exit from
branded product lines ($3.3 million) at Woods Industries and as a result of
costs associated with restructuring efforts ($0.7 million), also at Woods.
Aside from these factors, operating income in the Electrical/Electronics group
was lower by $0.4 million, driven by lower volume in the consumer electric
corded businesses, but offset by higher gross margins in the precision metals
business.
Sales in the Maintenance Products Group decreased $11.3 million or 12.0%.
The largest sales shortfalls were in the plastics, mop and broom, and exterior
stain businesses. Sales to both retail and institutional customers were
adversely affected, due in part to general economic conditions.
The Group's operating income decreased $5.8 million. The decrease is
primarily due to volume-related declines in operating margins in the plastics,
mop and broom, and exterior stain businesses, and price-driven margin decreases
in the abrasives business. The plastics business also recorded a charge of $1.3
million to increase its LIFO inventory reserve in the first quarter of 2001.
Sales from Operations to be Disposed Of increased due to the inclusion of
the Thorsen Tools business in this segment in 2001.
The Group's operating loss increased $983,000 primarily because of
impairments recorded on Thorsen Tools' assets in connection with the sale of
Thorsen Tools.
Selling, general and administrative expenses for the Company's continuing
segments increased as a percentage of sales to 30% in 2001 from 27.0% for the
same period in 2000. One-time costs incurred in the
48
corporate segment related to the Recapitalization ($2.5 million), as well as
severance to the former President and CEO ($0.5 million) contributed to this
increase.
Interest and other, net increased $156,000 for the first quarter of 2001
compared to the first quarter of 2000. Amortization of capitalized debt costs
was higher in 2001, while interest on outstanding borrowings was lower.
Liquidity and Capital Resources
Combined cash and cash equivalents increased to $5.52 million on March 31,
2001 compared to $1.81 million on December 31, 2000. Current ratios were 0.84
to 1 at March 31, 2001 compared to 0.88 to 1 at December 31, 2000. Working
capital decreased to $(38.1) million at March 31, 2001 from $(28.3) million on
December 31, 2000 primarily as a result of lower receivables and inventory.
Increases in borrowings outstanding were offset by decreases in accounts
payable and accrued expenses. The Company's 2001 budget called for capital
expenditures of approximately $20.6 million. Katy's management evaluates
capital requirements and priorities on an ongoing basis, and expects to reduce
the level of capital commitments given sales and operating performance.
At March 31, 2001, Katy had short-term indebtedness for money borrowed of
$147.1 million. Total debt was 46% of total capitalization at March 31, 2001.
The Company's revolving credit agreement ("Credit Agreement") provides for
borrowings of up to $16.8 million under its Facility A commitment expiring June
30, 2001, and $161.0 million under its Facility B commitment expiring December
11, 2001. In accordance with terms outlined in the Waiver and Third Amendment
to the Credit Agreement dated October 27, 2000, the Company, on March 30, 2001,
granted security interests on the assets of the Company and its subsidiaries to
its bank group. The security interests include liens on all tangible assets of
U.S. operations, including mortgages on owned real property and leaseholds, as
well as stock pledges from foreign subsidiaries. Concurrent with the granting
of security interests in Company assets, the bank group has agreed to waive
compliance with covenant ratio levels established in the third amendment for
the quarter ended March 31, 2001, and which extend up to, but do not include,
June 30, 2001. This action is included in a Waiver and Fourth Amendment to the
Credit Agreement, dated as of March 30, 2001.
As discussed in Note 2 to the condensed financial statements, Katy has
entered into an agreement for the Recapitalization. If the Recapitalization
occurs, the borrowings under the Credit Agreement will be repaid, and Katy will
incur new borrowings in the form of a secured term loan and a revolving line of
credit, agented by Bankers Trust. The Term Loan is expected to have a final
maturity date of five years after the closing of the Recapitalization and to be
in an original principal amount of $40.0 million. Quarterly amortization is
expected to be required in aggregate annual amounts of $8.0 million. The
Revolving Credit Facility is expected to have a final maturity date of five
years after the closing date and be in an original amount of up to $110.0
million (subject to certain borrowing base limits). All extensions of credit to
the Company would be secured by a first priority perfected security interest in
and lien upon the capital stock of each material domestic subsidiary (66% of
the capital stock of each material foreign subsidiary), and all present and
future material assets and properties of the Company. Availability of loans and
letters of credit under the Revolving Credit Facility would be subject to a
borrowing base determined by eligible inventory and accounts receivable.
Customary financial covenants would apply. The obligation of Bankers Trust to
provide such financing, which runs to KKTY and not to the Company, is subject
to a number of conditions precedent, including, without limitation, the
consummation of the sale of Hamilton, the approval by the shareholders of the
authorization and issuance of the convertible preferred stock, and the absence
of any material adverse change in the business of the Company or in the
financing and credit facility syndication markets. Bankers Trust also reserves
the right unilaterally to adjust the terms of the credit facility, including
the maturity, to the extent necessary to achieve syndication. There can be no
assurance that such financing will be available on terms the Company finds
attractive or at all.
The infusion of $40.0 million of preferred equity capital under the
Recapitalization, along with proceeds from the sale of Hamilton, will
significantly de-leverage the Company. If the Recapitalization is not
completed,
49
Katy could experience a number of negative consequences, including, but not
limited to, default on the Credit Agreement. In the event the Recapitalization
is not consummated, Katy intends to go forward with the sale of Hamilton, and
possibly other Company assets and operating divisions and seek to refinance its
existing credit agreement on a secured basis so as to provide additional time
in which to restructure its operations. Management believes that, in the
current market environment, a substantial risk exists that, if the
Recapitalization is not consummated on a timely basis, the Company will be
unable to obtain further waivers of defaults under its current credit facility
in the future and that the Company will be unable to obtain, on reasonable
terms or at all, financing necessary to replace its current credit facility.
On May 8, 2001, Katy announced that KKTY had advised Katy that it was re-
evaluating its tender offer and proposed purchase of preferred stock in light
of Katy's operating results for the first quarter and Katy's interim operating
results for April 2001 (which indicated a continued shortfall from previously
projected earnings before interest, taxes, depreciation and amortization). KKTY
advised Katy that based on these developments, it believes one or more of the
conditions to the tender offer may not be satisfied at the expiration date of
the offer. Consequently, KKTY further advised the Company that it is
considering alternative courses of action to be negotiated with Katy, including
among other things, an increase of its proposed preferred stock investment in
Katy, a decrease in the preferred stock conversion price and a decrease in the
number of shares of Katy's common stock and price per share to be purchased
pursuant to the tender offer.
Environmental and Other Contingencies
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies and
private parties as potentially responsible parties ("PRPs") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and
severally liable, thus subjecting them to potential individual liability for
the entire cost of cleanup at the site. Based on its estimate of allocation of
liability among PRPs, the probability that other PRPs, many of whom are large,
solvent, public companies, will fully pay the costs apportioned to them,
currently available information concerning the scope of contamination,
estimated remediation costs, estimated legal fees and other factors, the
Company has recorded and accrued for indicated environmental liabilities in the
aggregate amount of approximately $3.0 million at March 31, 2001. The ultimate
cost will depend on a number of factors and the amount currently accrued
represents management's best current estimate of the total cost to be incurred.
The Company expects this amount to be substantially paid over the next one to
four years.
Katy also has a number of product liability and workers' compensation claims
pending against it and its subsidiaries. Many of these claims are proceeding
through the litigation process and the final outcome will not be known until a
settlement is reached with the claimant or the case is adjudicated. It can take
up to 10 years from the date of the injury to reach a final outcome for such
claims. With respect to the product liability and workers' compensation claims,
Katy has provided for its share of expected losses beyond the applicable
insurance coverage, including those incurred but not reported, which are
developed using actuarial techniques. Such accruals are developed using
currently available claim information, and represent management's best
estimates. The ultimate cost of any individual claim can vary based upon, among
other factors, the nature of the injury, the duration of the disability period,
the length of the claim period, the jurisdiction of the claim and the nature of
the final outcome.
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of the Company, and against certain past
and then present officers and directors and former owners of Woods, alleging
that the defendants participated in a violation of the Racketeer Influenced and
Corrupt Organizations Act involving allegedly fraudulently obtained loans from
Mexican banks, including the plaintiff, and "money laundering" of the proceeds
of the illegal enterprise. All of the foregoing is alleged to have
50
occurred prior to the Company's purchase of Woods. The plaintiff also alleges
that it made loans to an entity controlled by certain officers and directors
based upon fraudulent representations. The plaintiff seeks to hold Woods liable
for its alleged damage under principles of respondeat superior and successor
liability. The plaintiff is claiming damages in excess of $24.0 million and is
requesting treble damages under the statutes. The defendants have filed a
motion, which has not been ruled on, to dismiss this action on jurisdictional
grounds. Because the litigation is in preliminary stages, it is not possible at
this time for the Company to determine an outcome or reasonably estimate the
range of potential exposure. The Company may have recourse against the former
owner of Woods and others for, among other things, violations of covenants,
representations and warranties under the purchase agreement through which the
Company acquired Woods, and under state, federal and common law. In addition,
the purchase price under the purchase agreement may be subject to adjustment as
a result of the claims made by Banco del Atlantico. The extent or limit of any
such recourse cannot be predicted at this time.
Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to its debt obligations and temporary cash investments.
The Company currently does not use derivative financial instruments relating to
either of these exposures. The Company's debt obligations are generally indexed
from short-term LIBOR rates, and its temporary cash investments earn rates of
interest available on securities with maturities of three months or less. The
holder of the preferred interest has a put option which allows, at certain
times beginning on January 8, 2001, or upon the occurrence of certain events,
the preferred interest to be exchangeable for Katy common stock.
The holder of the preferred interest also has a put option which allows the
holder to require the Company to purchase the preferred interest for cash upon
a Change in Control (as defined in the Agreement governing the option). The
holder of the preferred interest has acknowledged that consummation of the
Recapitalization will not constitute such a Change in Control and has agreed
with Katy to redeem at a discount approximately half of such interest. Katy
will utilize $9.9 million of the proceeds from the issuance of the Convertible
Preferred Stock for these purposes. The holder will retain approximately 50% of
the preferred interest, or a stated value of $16.4 million. Consummation of
this redemption is conditioned on consummation of the Recapitalization. Also,
subject to the Recapitalization occurring, the Agreement governing the put
option will be amended to, among other things, change the circumstances in
which the holder of the preferred interest can exercise its put option and the
consideration payable upon such exercise.
Recently Issued Accounting Pronouncements
In February 2001, the Financial Accounting Standards Board ("FASB") issued a
limited revision exposure draft of proposed Statement of Financial Accounting
Standard ("SFAS") "Business Combinations and Intangible Assets--Accounting for
Goodwill." The proposed Statement would establish a new accounting standard for
goodwill acquired in a business combination. It would continue to require
recognition of goodwill as an asset but would not permit amortization of
goodwill as currently required by Accounting Principles Board ("APB") Opinion
No. 17, "Intangible Assets." Furthermore, certain intangible assets that are
not separable from goodwill will also not be amortized.
This proposed Statement would establish a new method of testing goodwill for
impairment. It would require that goodwill be separately tested for impairment
using the fair-value-based approach. Entities would be required to initially
apply the provisions of this proposed Statement as of the beginning of the
first fiscal quarter following issuance of the final Statement. Those
provisions would apply not only to goodwill arising from acquisitions completed
after the issuance date of the final Statement but also to the unamortized
balance of goodwill at the date of adoption. The Company has not fully
evaluated the impact upon future operating results from the proposed standard.
However, the terms of the proposed recapitalization (see Note 2) and the
related offer price indicate that the fair value of the Company, and therefore
the fair values of certain underlying assets, may be less than their current
carrying values. Given these indications, it is likely that
51
impairments of cost in excess of net assets acquired currently carried on the
Company's balance sheet will be required following adoption of the proposed
statement.
Outlook for 2001
Net sales are expected to decrease in 2001 over 2000 (excluding the impact
of lost sales as a result of the possible sale of Hamilton and the sale of
Thorsen), due mainly to expected sales decreases in the consumer electric
corded businesses and the mop and broom business. The Company has a significant
concentration of customers in the mass-market retail, discount, and do-it-
yourself market channels. The Company's ability to maintain and increase its
sales levels depends in part on its ability to retain and improve relationships
with these customers. The Company faces the continuing challenge of recovering
costs increases for items such as raw materials given the market power of these
customers.
Cost of goods sold are expected to continue to be negatively impacted in
2001 by higher costs for polyethylene, polypropylene, and other thermoplastic
resins (based on price levels in early 2001) that are used in the Company's
production processes, especially at Contico. Given that Contico's resin use
approximates just over 100 million pounds annually, this commodity price risk
impacts gross margin by approximately $1.0 million annually for each $0.01
change in the price of plastic resins. It is anticipated that resin prices
affecting cost of goods sold will be consistent or slightly favorable in 2001
compared to 2000 levels. Katy has not employed any hedging techniques in the
past, and has no immediate plans to do so in the future, regarding this
commodity market risk. Prices for copper, a significant raw material in the
Electrical/Electronics Group, may also increase in 2001. The Company
anticipates mitigating these costs by creating efficiencies in and improvements
to its production processes.
Selling, general and administrative costs are expected to improve as a
percentage of sales from 2000 levels, excluding severance, restructuring, and
other unusual charges. Certain cost reduction efforts were implemented during
the first quarter of 2001 at Woods, including the closing of facilities and
reduction of administrative and executive staff. The Company is also pursuing
its strategy of developing the Katy Maintenance Group ("KMG"). This process
involves bundling certain products of Continental (janitorial/sanitation
business of Contico), Wilen and Glit for customers in the janitorial/sanitation
markets. The new organization would allow customers to order certain products
from the three companies using a single purchase order, and billing and
collection would be consolidated as well. Katy is beginning the process during
the first half of 2001 of transferring most back-office functions of Wilen from
Atlanta to St. Louis, the headquarters of Contico/Continental. In addition to
administrative efficiencies, the Company believes that combining sales and
marketing efforts of the three entities will allow Katy a unique marketing
opportunity to have improved delivery of both products and customer service.
Katy does not expect significant financial benefits from this project in 2001,
but believes it to be a key to future profitability and success of the Company.
It should be noted that the Company anticipates unusual charges during 2001 for
both the Woods and KMG efforts, including severance, other plant closure costs,
asset impairments, and systems development costs.
Interest expense will be affected by debt levels and current rates of
interest. Assuming the current Credit Agreement were to remain intact, interest
expense is expected to be lower in 2001 than in 2000, due mainly to lower
expected interest rates, with debt levels remaining at reasonable levels
through continued management of working capital and proceeds from the sale of
certain Company assets, including Hamilton Precision Metals. If the
recapitalization were to occur, interest expense would be significantly lower
as a result of lower debt levels due to infusions of cash, excluding the impact
of writing off previously capitalized costs associated with the Credit
Agreement.
The effective tax rate for 2001 is not expected to differ significantly from
the federal statutory rate.
52
FORWARD-LOOKING STATEMENTS
This Supplement contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking statements
include, among others, statements concerning Katy's outlook for 2001, the
consummation of the equity transaction contemplated by the New Purchase
Agreement with Purchaser, cost reduction strategies and their results, Katy's
expectations for funding its 2001 capital expenditures and operations and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. These forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The words "believe," "anticipate," "expect," "estimate," "intent" and similar
expressions identify forward-looking statements. Forward-looking statements
necessarily reflect numerous assumptions and involve risks and uncertainties,
and actual results could differ materially from those expressed in or implied
by the forward-looking statements.
To improve its financial performance, Katy must reduce its cost structure
and improve its production efficiency, improve its management of working
capital, and grow its existing base of retail and distribution customers. The
most important factors that could influence the achievement of these goals, and
cause actual results to differ materially from those expressed in the forward-
looking statements, include, but are not limited to the following:
. Katy's inability to consummate the proposed transaction with Purchaser,
which is subject to a number of conditions and contingencies, some of
which are not within Katy's control.
. Katy's inability to meet covenants associated with its current credit
agreement or to repay the debt thereunder becoming due June 30, 2001 when
a $16.8 million working line matures.
. Katy's inability to refinance its current credit agreement on attractive
terms or at all.
. Katy's inability to sell certain assets to raise cash and de-leverage its
financial condition.
. 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.
. Katy's inability to reduce manufacturing costs.
. The inability of Katy 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 Katy and its existing channels.
. Labor issues, including union activities that require an increase in
production costs or lead to a strike, thus impairing production and
decreasing sales.
. Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
These and other risks and uncertainties affecting Katy are discussed in
greater detail in this Supplement and in Katy's other filings with the SEC.
53
PROCEDURAL MATTERS
Whether or not you have returned the white proxy card previously solicited
and whether or not you expect to attend the Annual Meeting, we urge you to
complete, sign, date and return the enclosed blue proxy card which replaces the
white proxy card as soon as possible. Any proxy granted by executing the white
proxy card previously distributed with the Proxy Statement is hereby considered
revoked. The enclosed blue proxy card is and will be considered a replacement
for the white proxy card.
OTHER MATTERS
As of the date of this Supplement, the Board of Directors does not know of
any matters to be presented to the meeting other than the proposals noted in
the Proxy Statement, as supplemented by this Supplement. However, if other
matters come before the meeting, it is the intention of the persons named on
the accompanying proxy to vote on such matters in accordance with their best
judgment. On January 17, 1996, Katy's Board of Directors adopted an advance
notice bylaw provision requiring that stockholder proposals to be made at any
annual meeting be received by Katy not less than 50 days nor more than 90 days
prior to the annual meeting. No such stockholder proposals were received for
the 2001 Annual Meeting.
By Order of the Board of Directors
/S/ ARTHUR R. MILLER
Katy Industries, Inc.
Arthur R. Miller
Secretary
June 8, 2001
54
ANNEX A
[LOGO OF BEAR STEARNS LETTERHEAD]
June 2, 2001
The Board of Directors
Katy Industries, Inc.
6300 South Syracuse Way, Suite 300
Englewood, CO 80111-6723
Ladies and Gentlemen:
We understand that Katy Industries, Inc. ("Katy") and KKTY Holding Company,
L.L.C., an affiliate of Kohlberg Investors IV, L.P. ("Purchaser") will enter
into a Preferred Stock Purchase and Recapitalization Agreement (the
"Recapitalization Agreement") pursuant to which Purchaser will purchase from
Katy 700,000 shares of newly issued preferred stock (the "Convertible Preferred
Stock") at $100 per share (the "Preferred Stock Purchase"). We also understand
that, pursuant to the Recapitalization Agreement, the terms of the Convertible
Preferred Stock as set forth in the form of amendment to Katy's Certificate of
Incorporation attached to the Recapitalization Agreement as Exhibit C (the
"Charter Amendment") would provide that (i) each share of the Convertible
Preferred Stock would be convertible into common stock of Katy (the "Common
Stock") at a ratio of 16.67 shares of Common Stock per share of Convertible
Preferred Stock (equivalent to $6.00 per share of Common Stock), subject to
certain adjustments, (ii) shares of the Convertible Preferred Stock would be
entitled to receive payment-in-kind dividends at a rate of 15.0% per annum for
three years and five months following the issue date, and (iii) shares of the
Convertible Preferred Stock would be non-voting, subject to certain exceptions.
We further understand that certain holders of Common Stock (the "Participating
Shareholders") will enter into a Stock Voting Agreement with the Purchaser (the
"Voting Agreement") pursuant to which the Participating Shareholders will agree
to vote their shares of Common Stock with respect to certain matters relating
to the Preferred Stock Purchase and other matters.
We understand that Purchaser and its affiliates will hold approximately
58.2% of the outstanding Common Stock on a diluted basis, assuming conversion,
immediately following the consummation of the transactions contemplated by the
Preferred Stock Purchase, of the Convertible Preferred Stock received upon the
consummation of such transactions. We further understand that Purchaser and its
affiliates will hold approximately 69.2% of the outstanding Common Stock on a
diluted basis, assuming conversion of the Convertible Preferred Stock received
upon the consummation of the transactions contemplated by the Preferred Stock
Purchase and conversion of the Convertible Preferred Stock received as payment-
in-kind dividends. We also note certain governance arrangements contemplated by
the Recapitalization Agreement, including that, upon the consummation of the
transactions contemplated by the Preferred Stock Purchase, designees of
Purchaser will represent a majority of the Board of Directors of Katy.
In addition, we understand that, in connection with the Preferred Stock
Purchase, Purchaser will cause Katy to enter into senior secured credit
facilities with a syndicate of lenders pursuant to the commitment letter from
Bankers Trust Company to Purchaser dated May 29, 2001 (the "Commitment Letter")
and that the Commitment Letter will provide that, subject to certain
conditions, Katy could borrow up to $140.0 million under these credit
facilities (consisting of a term loan of up to $30.0 million and a revolving
loan of up to $110.0 million) on interest rates and other terms and conditions
set forth in the Commitment Letter (collectively, the "Refinancing"). We
understand that, upon consummation of the Preferred Stock Purchase and the
Refinancing, substantially all of the outstanding existing indebtedness of Katy
would be repaid in full and
[ART]
A-1
the only material outstanding indebtedness of Katy immediately thereafter would
be the indebtedness contemplated by the Commitment Letter and certain capital
leases of Katy. We further understand that, upon consummation of the Preferred
Stock Purchase and the Refinancing, 50.0% of the existing preferred stock of
Katy ($16.45 million of face amount) will be redeemed for approximately $9.9
million.
You have provided us with copies of the Recapitalization Agreement
(including the Charter Amendment), the Voting Agreement and the Commitment
Letter, and advised us that each of them is in substantially final form.
You have asked us to render our opinion as to whether the Preferred Stock
Purchase is fair, from a financial point of view, to Katy. In the course of
performing our review and analyses for rendering this opinion, we have:
. reviewed a draft of the Recapitalization Agreement dated May 31, 2001
(including the Charter Amendment);
. reviewed a draft of the Voting Agreement dated May 31, 2001;
. reviewed a commitment letter from Kohlberg Investors IV, L.P. to Katy
dated May 29, 2001, relating to the Preferred Stock Purchase;
. reviewed the Commitment Letter;
. reviewed Katy's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended December 31, 1998 through 2000, its Quarterly
Report on Form 10-Q for the period ended March 31, 2001, its Proxy
Statement on Schedule 14A dated March 31, 2000, its Report on Form 8-K
dated January 15, 1999 and its Report on Form 8-K/A dated March 22, 1999;
. reviewed the Amended and Restated Credit Agreement dated as of December
11, 1998, among Katy, Bank of America National Trust and Savings
Association, as Administrative Agent and Issuing Bank, La Salle National
Bank, as Managing Agent, and the other financial institutions party
thereto;
. reviewed certain operating and financial information, including (i) the
most up-to-date projections on a standalone basis provided to us by
Katy's management for the seven years ended December 31, 2007 relating to
Katy's business and prospects ("Standalone Projections") and (ii)
projections on a pro forma basis (after consummation of the transactions
contemplated by the preferred stock purchase) provided to us by Katy's
management for the seven years ended December 31, 2007 after discussions
with Purchaser and C. Michael Jacobi, Purchaser's senior management
designee, regarding their business plan for Katy ("Pro Forma
Projections");
. met with certain members of Katy's senior management to discuss Katy's
business, operations, historical and projected financial results and
future prospects;
. met, along with certain members of Katy's senior management, with certain
members of Purchaser and C. Michael Jacobi, Purchaser's senior management
designee, to discuss Katy's business, operations, historical and
projected financial results and future prospects;
. reviewed the historical prices, trading multiples and trading volumes of
the shares of Common Stock of Katy;
. reviewed publicly available financial data, stock market performance data
and trading multiples of companies which we deemed generally comparable
to Katy;
. reviewed the terms of selected precedent merger and acquisition
transactions of, and investment transactions involving, companies which
we deemed generally comparable to Katy and the Preferred Stock Purchase;
A-2
. performed discounted cash flow analyses based on the Standalone
Projections and Pro Forma Projections for Katy furnished to us by the
management of Katy;
. reviewed the pro forma financial results, financial condition and
capitalization of Katy giving effect to the Preferred Stock Purchase and
the Refinancing; and
. conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information, including
without limitation the Standalone Projections and the Pro Forma Projections,
provided to us by Katy. With respect to Katy's Standalone Projections and the
Pro Forma Projections, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
senior management of Katy (after discussions, in the case of the Pro Forma
Projections, with Purchaser and C. Michael Jacobi, as appropriate) as to the
expected future performance of Katy. We have not assumed any responsibility for
the independent verification of any such information, the Standalone
Projections or the Pro Forma Projections provided to us, and we have further
relied upon the assurances of the senior management of Katy (after discussions,
in the case of the Pro Forma Projections, with Purchaser and C. Michael Jacobi,
as appropriate) that they are unaware of any facts that would make the
information, the Standalone Projections or the Pro Forma Projections provided
to us incomplete or misleading.
In arriving at our opinion, we have taken into account, with your consent,
the risks inherent in Katy's current business plans, including the view of the
senior management of Katy that in the current capital markets environment there
exists a risk that Katy would be unable in the future to obtain continued
waivers of the defaults under its current credit facility and that Katy would
be unable to obtain, on reasonable terms or at all, financing necessary to
replace its current credit facility. We have also considered (i) that,
according to the senior management of Katy, (a) no other potential investor or
acquiror has made any investment or acquisition proposal to Katy since November
6, 2000 (the date of the public announcement by Katy that it was exploring its
strategic alternatives, including the possible sale of Katy, and that it was in
discussions with a potential purchaser relating to a possible purchase of
Katy), March 2, 2001 (the date of the public announcement by Katy that it was
engaged in discussions with a potential purchaser of a substantial equity
position in Katy) or May 8, 2001 (the date of the public announcement by Katy
that Purchaser was re-evaluating the prior transaction agreement between Katy
and Purchaser) and (b) the prospects for obtaining access to additional
financing in the public or private capital markets are limited, (ii) the
potential positive impact on the Common Stock of new senior management, (iii)
Katy's recent financial performance, current financial condition and future
prospects and (iv) the potential negative impact on the price of the Common
Stock in the absence of the Preferred Stock Purchase or another similar
extraordinary transaction in view of the Standalone Projections.
In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets or liabilities (contingent or otherwise) of
Katy, nor have we been furnished with any such appraisals. In connection with
our engagement, we were not requested to, and we did not, solicit third party
indications of interest involving an investment in, a recapitalization of, or
acquisition of all or part of, Katy. We have assumed that the Preferred Stock
Purchase and the Refinancing will be consummated in a timely manner and in
accordance with the terms of the Recapitalization Agreement and the Commitment
Letter without any limitations, restrictions, conditions, amendments or
modifications that collectively would have a material effect on Katy.
We do not express any opinion as to the price or range of prices at which
the shares of Common Stock of Katy may trade subsequent to the announcement of
the Preferred Stock Purchase and the Refinancing or as to the price or range of
prices at which the shares of Common Stock of Katy may trade subsequent to the
consummation of the Preferred Stock Purchase and the Refinancing.
In the ordinary course of business, Bear Stearns may actively trade the
equity and debt securities of Katy for our own account and for the account of
our customers and, accordingly, may at any time hold a long or short position
in such securities.
A-3
It is understood that this letter is intended for the benefit and use of the
Board of Directors of Katy and does not constitute a recommendation to the
Board of Directors of Katy or any holders of Common Stock as to how to vote
their shares of Common Stock of Katy in connection with the Preferred Stock
Purchase. This opinion does not address Katy's underlying business decision to
pursue the Preferred Stock Purchase and the Refinancing, the relative merits of
the Preferred Stock Purchase and the Refinancing as compared to any alternative
business strategies that might exist for Katy or the effects of any other
transaction (including the Refinancing) in which Katy might engage. This letter
is not to be used for any other purpose, or be reproduced, disseminated, quoted
from or referred to at any time, in whole or in part, without our prior written
consent; provided, however, that this letter may be included in its entirety in
any proxy statement to be distributed to the holders of shares of Common Stock
in connection with the Preferred Stock Purchase. Our opinion is subject to the
assumptions and conditions contained herein and is necessarily based on
economic, market and other conditions, and the information made available to
us, as of the date hereof. We assume no responsibility for updating or revising
our opinion based on circumstances or events occurring after the date hereof.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Preferred Stock Purchase is fair, from a financial point of
view, to Katy.
Very truly yours,
BEAR, STEARNS & CO. INC.
/s/ Marc R. Daniel
By: _________________________________
Senior Managing Director
A-4
ANNEX B
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PREFERRED STOCK PURCHASE AND RECAPITALIZATION AGREEMENT
by and among
KKTY HOLDING COMPANY, L.L.C.
and
KATY INDUSTRIES, INC.
Dated as of June 2, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
ARTICLE I Certain Actions................................................. 2
Section 1.1. Certain Actions........................................... 2
ARTICLE II Preferred Stock Purchase....................................... 3
Section 2.1. Purchase and Sale......................................... 3
Section 2.2. Closing................................................... 3
ARTICLE III Representations and Warranties of Katy........................ 4
Section 3.1. Organization, Qualification, Etc. ........................ 4
Section 3.2. Capitalization............................................ 4
Section 3.3. Corporate Authority Relative to this Agreement; No
Violation.............................................................. 5
Section 3.4. Reports and Financial Statements.......................... 6
Section 3.5. Accounts Receivable, Accounts Payable and Inventory....... 6
Section 3.6. Indebtedness; No Undisclosed Liabilities.................. 7
Section 3.7. [Reserved]................................................ 7
Section 3.8. Customers and Suppliers................................... 7
Section 3.9. No Violation of Law....................................... 7
Section 3.10. Transactions with Affiliates.............................. 7
Section 3.11. [Reserved]................................................ 8
Section 3.12. Environmental, Health and Safety Laws and Regulations..... 8
Section 3.13. Employee Benefit Matters.................................. 8
Section 3.14. Absence of Certain Changes or Events...................... 10
Section 3.15. Investigations; Litigation................................ 11
Section 3.16. Products.................................................. 11
Section 3.17. Securities Filings........................................ 11
Section 3.18. Tax Matters............................................... 11
Section 3.19. Intellectual Property..................................... 12
Section 3.20. Severance Payments........................................ 13
Section 3.21. Title to Properties....................................... 13
Section 3.22. Licenses.................................................. 13
Section 3.23. Insurance................................................. 14
Section 3.24. Material Contracts........................................ 14
Section 3.25. Rights Agreement.......................................... 15
ARTICLE IV Representations and Warranties of Purchaser.................... 15
Section 4.1. Organization, Qualification, Etc. ........................ 15
Section 4.2. Corporate Authority Relative to this Agreement; No
Violation.............................................................. 16
Section 4.3. Litigation................................................ 16
Section 4.4. Ownership of Katy Stock................................... 16
Section 4.5. No Required Vote of Purchaser Shareholders................ 16
Section 4.6. Securities Filings........................................ 16
Section 4.7. Commitments............................................... 17
Section 4.8. Purchase for Investment................................... 17
ARTICLE V Covenants and Agreements........................................ 17
Section 5.1. Conduct of Business by Katy and the Subsidiaries.......... 17
Section 5.2. Investigation............................................. 19
Section 5.3. Cooperation............................................... 19
Section 5.4. Employee Benefit Plans.................................... 19
Section 5.5. Filings; Other Action..................................... 19
Section 5.6. [Reserved]................................................ 20
i
Page
----
Section 5.7. Anti-takeover Statute..................................... 20
Section 5.8. No Solicitation by Katy................................... 20
Section 5.9. Rights Agreement.......................................... 21
Section 5.10. Public Announcements...................................... 21
Section 5.11. Indemnification of Directors and Officers................. 22
Section 5.12. Additional Reports........................................ 22
Section 5.13. Update Disclosure; Breaches............................... 22
Section 5.14. Corporate Governance...................................... 23
Section 5.15. Registration Rights....................................... 24
ARTICLE VI Conditions to Closing.......................................... 24
Section 6.1. Conditions to Each Party's Obligation to Close............ 24
Section 6.2. Conditions to Obligations of Katy to Close................ 24
Section 6.3. Conditions to Obligations of Purchaser to Close........... 25
ARTICLE VII Termination, Waiver, Amendment and Closing.................... 25
Section 7.1. Termination or Abandonment................................ 25
Section 7.2. Termination Fee........................................... 26
Section 7.3. Approval of Board of Directors Required................... 27
ARTICLE VIII Miscellaneous................................................ 27
Section 8.1. Non-Survival of Representations and Warranties; Specific
Enforcement; Limitation................................... 27
Section 8.2. Expenses.................................................. 27
Section 8.3. Counterparts; Effectiveness............................... 27
Section 8.4. Governing Law............................................. 28
Section 8.5. Notices................................................... 28
Section 8.6. Assignment; Binding Effect................................ 28
Section 8.7. Severability.............................................. 29
Section 8.8. Miscellaneous............................................. 29
Section 8.9. Headings.................................................. 29
Section 8.10. Finders or Brokers........................................ 29
Section 8.11. Amendment................................................. 29
Section 8.12. Waiver.................................................... 29
ANNEX I
ANNEX II
EXHIBIT A
EXHIBIT B
EXHIBIT C
Schedule 3.1 Schedule 3.8 Schedule 3.21
Schedule 3.2(a) Schedule 3.10 Schedule 3.22
Schedule 3.2(b) Schedule 3.12 Schedule 3.23
Schedule 3.2(c) Schedule 3.13(a) Schedule 3.24
Schedule 3.3 Schedule 3.13(c) Schedule 5.1
Schedule 3.5(a) Schedule 3.13(g) Schedule 6.2
Schedule 3.5(b) Schedule 3.14 Schedule 6.3
Schedule 3.5(c) Schedule 3.15
Schedule 3.5(d) Schedule 3.16
Schedule 3.6 Schedule 3.19
ii
PREFERRED STOCK PURCHASE AND RECAPITALIZATION AGREEMENT
THIS PREFERRED STOCK PURCHASE AND RECAPITALIZATION AGREEMENT, dated as of
June 2, 2001 (this "Agreement"), is among KKTY HOLDING COMPANY, L.L.C.
("Purchaser") and KATY INDUSTRIES, INC. ("Katy").
WHEREAS, Katy is a corporation duly organized and existing under the laws of
the State of Delaware, and Purchaser is a limited liability company duly
organized and existing under the laws of the State of Delaware;
WHEREAS, Purchaser and Katy entered into a Preferred Stock Purchase and
Recapitalization Agreement, dated as of March 29, 2001 (the "Purchase
Agreement") for a recapitalization of Katy.
WHEREAS, in connection with the Purchase Agreement, Katy mailed a definitive
proxy statement (the "Initial Proxy Statement") to the shareholders of Katy on
April 25, 2001 with respect to the election of directors and certain approvals
by the shareholders of Katy required in connection with the recapitalization
contemplated by the Purchase Agreement.
WHEREAS, on June 2, 2001, Purchaser and Katy mutually agreed to terminate
the Purchase Agreement pursuant to Section 7.1(a) thereof.
WHEREAS, Purchaser and Katy now desire to enter into this Agreement to
reflect the terms and conditions (including, without limitation, the
requirements of Bankers Trust Company in connection with its agreement to
refinance the existing loans of Katy (the "Refinancing")) under which the
parties have agreed to effect the recapitalization of Katy.
WHEREAS, in connection with entering into this Agreement, Purchaser and Katy
desire that Katy file a supplement to the Initial Proxy Statement (the "Proxy
Supplement") reflecting the terms and conditions of this Agreement.
WHEREAS, the Board of Directors of Katy and the Managers of Purchaser have
approved the transactions contemplated by this Agreement (the
"Recapitalization") on the terms and subject to the conditions set forth in
this Agreement, and the Board of Directors of Katy has determined that the
Preferred Stock Purchase (as defined below) is fair to and in the best
interests of Katy's shareholders;
WHEREAS, Purchaser has simultaneously entered into a binding term sheet
attached hereto as Exhibit B, with Bankers Trust Company with respect to the
Refinancing.
WHEREAS, at Purchaser's request, certain members of Katy's management,
directors, officers and other shareholders (collectively the "Agreement
Shareholders") are simultaneously entering into a stock voting agreement with
Purchaser (the "Voting Agreement") pursuant to which the Agreement Shareholders
have agreed to vote with respect to certain questions that may be put to such
Agreement Shareholders, in each case, in accordance with the terms and
conditions of the Voting Agreement;
WHEREAS, to effectuate the Recapitalization, Katy and Purchaser each desire
that Purchaser purchase from Katy 700,000 shares of newly issued preferred
stock, $100.00 par value per share (the "Convertible Preferred Stock"),
convertible based on a price of $6.00 per share of common stock, $1.00 par
value per share, of Katy (the "Katy Common Stock", inclusive of their
respective associated common stock purchase rights (the "Rights") issued
pursuant to the Rights Agreement, dated as of January 13, 1995, as amended (the
"Rights Agreement"), between Katy and LaSalle National Bank, as Rights Agent
(the shares of Katy Common Stock and the associated Rights are referred to
herein as "Common Shares")), into an aggregate of 11,666,666 Common Shares
(equivalent to a conversion ratio of approximately 16.67 Common Shares per
share of Convertible Preferred Stock), for a purchase price of $100.00 per
share (or an aggregate purchase price of $70,000,000) (the "Preferred Stock
Purchase"), on the terms and subject to the conditions set forth in this
Agreement, and the Board of Directors of Katy has approved such Preferred Stock
Purchase and has resolved to recommend to its shareholders that they authorize
the Convertible Preferred Stock and the issuance of Common Shares upon
conversion of the Convertible Preferred Stock and approve the terms of the
Preferred Stock Purchase at a meeting of the shareholders of Katy (the
"Shareholder Meeting");
WHEREAS, Exhibit A to this Agreement sets forth the pages hereof on which
the capitalized terms are defined;
WHEREAS, the parties desire to make certain representations, warranties,
covenants and agreements in connection with the Preferred Stock Purchase and
also to prescribe various conditions to the Preferred Stock Purchase; and
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereby agree as follows:
ARTICLE I
Certain Actions
Section 1.1. Certain Actions.
(a) Katy hereby approves of and consents to the Preferred Stock Purchase and
represents and warrants that Katy's Board of Directors (at a meeting duly
called and held) has (i) determined that each of this Agreement and the
transactions contemplated hereby, including the Preferred Stock Purchase, are
fair to and in the best interests of Katy and its shareholders, (ii)
Unanimously approved (with all references to the term "Unanimously" being
deemed to refer to actions taken by all current members of Katy's Board of
Directors, except for William F. Andrews) this Agreement and the transactions
contemplated hereby, including the Preferred Stock Purchase, so that section
203 of the General Corporation Law of Delaware ("DGCL") shall not prevent any
business combination (as defined in section 203 of the DGCL) between Katy and
any person that becomes an interested stockholder (as defined in section 203 of
DGCL) of Katy as a result of the Preferred Stock Purchase, or any other
transaction contemplated by the Agreement, (iii) taken all actions necessary or
appropriate so that the execution of this Agreement and the consummation of the
transactions contemplated hereby (including without limitation the Preferred
Stock Purchase, the conversion of the Convertible Preferred Stock and the
Voting Agreement) do not and will not result in the ability of any person to
exercise any rights under the Rights Agreement or enable or require the rights
to separate from the Common Shares to which they are attached or to be
triggered or become exercisable, (iv) Unanimously nominated and recommended for
election as directors of Katy the nominees designated by Purchaser (the
"Purchaser Designees"), who, if elected by the shareholders, will constitute a
majority of such Board of Directors, (v) Unanimously approved and recommended
that the holders of Common Shares approve and adopt an amendment to Katy's
Certificate of Incorporation substantially in the form attached hereto as
Exhibit C, authorizing (A) election of directors in two classes, with staggered
terms of office, (B) 1,200,000 shares of Convertible Preferred Stock, and (C)
an increase of the total number of Common Shares that Katy shall have the
authority to issue to 35,000,000 (vi) Unanimously recommended that the holders
of Common Shares approve the Preferred Stock Purchase and the issuance of
Common Shares upon the conversion of the Convertible Preferred Stock in
accordance with the terms of the Convertible Preferred Stock, (vii) authorized
Katy to prepare and file with the SEC within three (3) Business Days after the
date of this Agreement (and Katy shall use its reasonable best efforts to cause
such filing within three (3) Business Days) the Proxy Supplement with respect
to the election of directors and the approvals by the holders of Common Shares
referred to in clauses (v) and (vi) at the Shareholder Meeting, directed the
officers of Katy to use their reasonable best efforts to have the Proxy
Supplement cleared by the Securities and Exchange Commission ("the SEC") under
the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and
authorized and directed the distribution of the definitive form of such Proxy
Supplement to the holders of the Common Shares and the solicitation of proxies
from such holders (the Initial Proxy Statement as supplemented by such
definitive Proxy Supplement, the accompanying notice of the
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Shareholder Meeting and the form of proxy, and any documents, instruments or
other proxy materials used in the solicitation of proxies, including any
documents required to be filed with the SEC as part of or incorporated by
reference in such proxy materials, together with any supplements or amendments
thereto, the "Proxy Statement"), and (ix) Unanimously approved an amendment to
the By-Laws of Katy reducing the number of directors constituting the whole
board of Katy to nine (9). For purposes of this Agreement, the term "Business
Day" shall mean any day, other than Saturday, Sunday or a United States federal
holiday.
(b) Katy hereby consents to the inclusion in the Proxy Statement (unless the
Board of Directors, after consultation with outside legal counsel determines
that this would be inconsistent with the directors' fiduciary duties under
applicable law) of the recommendation of its Board of Directors referred to in
Section 1.1(a). Katy hereby agrees to use its reasonable best efforts to file
with the SEC, within three (3) Business Days of the date of this Agreement, the
Proxy Supplement. The Proxy Statement will contain (subject to the fiduciary
duties of the Board of Directors as advised by outside legal counsel) such
recommendation of the Board of Directors of Katy with respect to the election
of directors, the Recapitalization and the other transactions contemplated
hereby and otherwise comply with section 14(a) of the Exchange Act, the rules
and regulations thereunder and other applicable law. Katy covenants that the
Proxy Statement shall contain (or shall be amended in a timely manner to
contain) the information which is required to be included therein in accordance
with the Exchange Act and the rules and regulations thereunder and other
applicable law and shall otherwise comply in all material respects with the
Exchange Act and the rules and regulations thereunder and any other applicable
law. Katy and Purchaser each agree promptly to correct any information provided
by them for use in the Proxy Statement if and to the extent that such
information shall have become false or misleading in any material respect and
Katy further agrees to take all lawful action necessary to cause the Proxy
Statement as so corrected to be filed promptly with the SEC and disseminated to
the holders of Common Shares, in each case as and to the extent required by
applicable law. Purchaser and its counsel shall be given an opportunity to
review and comment upon the Proxy Statement and any amendments thereto prior to
the filing thereof with the SEC. In addition, Katy agrees to provide Purchaser
and its counsel in writing with any comments or other communications that Katy
or its counsel may receive from time to time from the SEC or its staff with
respect to the Proxy Statement promptly after the receipt of such comments or
other communications.
ARTICLE II
Preferred Stock Purchase
Section 2.1. Purchase and Sale.
Subject to the terms and conditions set forth in this Agreement, Katy agrees
to sell to Purchaser and Purchaser agrees to purchase from Katy, subject to the
conditions set forth in Annex I (the "Purchaser Closing Conditions"), 700,000
shares of Convertible Preferred Stock for a purchase price of $100 per share or
an aggregate of $70,000,000 in cash (the "Preferred Purchase Price"). The
Preferred Purchase Price shall be delivered on the Closing Date by wire
transfer of funds to the order of Katy. Katy will deliver the Convertible
Preferred Stock to Purchaser against payment of the Preferred Purchase Price on
the Closing Date. Delivery of the Convertible Preferred Stock shall be deemed
made upon delivery to Purchaser of a certificate or certificates representing
the Convertible Preferred Stock together with evidence that such issuance and
sale has been registered on the records of Katy.
Section 2.2. Closing.
The consummation of the Preferred Stock Purchase (the "Closing") will take
place on the later of June 26, 2001 or the first Business Day on which the
conditions set forth in Article VI are satisfied or waived (the "Closing
Date"), unless another time or date is agreed to by the parties hereto,
provided that in no event shall the Closing Date be later than June 30, 2001.
The Closing will be held at the offices of Hunton & Williams, 200 Park Avenue,
43rd Floor, New York, New York 10166-0136 or as otherwise agreed to by the
parties hereto.
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ARTICLE III
Representations and Warranties of Katy
Except as set forth in the schedules hereto, in a manner that identifies by
section number or by the content of the disclosure each provision of this
Agreement to which such disclosure relates, Katy represents and warrants to
Purchaser that:
Section 3.1. Organization, Qualification, Etc.
Katy is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the corporate power and
authority to own and lease its properties and assets and to carry on its
business as it is now being conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which the ownership of its
properties or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect (as hereinafter defined) on the Katy Group. Except as set forth on
Schedule 3.2(a), Katy owns, directly or indirectly, all of the capital stock of
each of the corporations and all of the equity interest of each of the other
entities set forth on Schedule 3.1 (each a "Subsidiary" and collectively, the
"Subsidiaries"). Except as set forth on Schedule 3.1, each Subsidiary is duly
and validly organized and in good standing under the laws of the jurisdiction
listed on Schedule 3.1, and each Subsidiary is duly qualified as a foreign
corporation or other entity in good standing in each jurisdiction where the
conduct of its business requires such qualification, except where the failure
to be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on the Katy Group. Except as set forth in Schedule 3.2(a), Katy
does not own, and does not have any obligation to acquire, any equity interest
in any business enterprise other than the Subsidiaries. As used in this
Agreement, any reference to any state of facts, event, change or effect having
a "Material Adverse Effect" on or with respect to the Katy Group or Purchaser
means such state of facts, event, change or effect that has had, or would
reasonably be expected to have, a material adverse effect on the financial
condition, businesses, operations, properties (including tangible properties),
results of operations, assets (including, without limitation, any Material
Contract) or prospects of Katy and the Subsidiaries (collectively, the "Katy
Group"), taken as a whole, or of Purchaser, as the case may be; provided,
however, that none of the following shall be deemed in themselves, either alone
or in combination, to constitute, and none of the following shall be taken into
account in determining whether there has been or will be, a Material Adverse
Effect on or with respect to the Katy Group: any adverse circumstance, change
in, or effect relating to (i) the announcement Preferred Stock Purchase, (ii)
compliance with the terms of, or the taking of any action required or
contemplated by, this Agreement or (iii) actions required to be taken under
applicable laws, rules or regulations, so long as any such action does not
disproportionately affect the Katy Group, taken as a whole; and provided,
further, that a change in the market price or trading volume of the Katy Common
Stock shall not, in itself, be deemed to constitute a Material Adverse Effect
on or with respect to the Katy Group.
Section 3.2. Capitalization.
(a) The authorized capital stock of Katy consists of Twenty-Five Million
(25,000,000) shares of Katy Common Stock, $1.00 par value per share. As of the
date of this Agreement 9,822,204 shares of Katy Common Stock (of which
1,428,721 are treasury shares) are issued and 8,393,483 shares are outstanding.
All the outstanding shares of Katy Common Stock have been validly issued and
are fully paid and non-assessable. The issued and outstanding capital stock of
each Subsidiary is set forth on Schedule 3.2(a) hereto and, except as set forth
on Schedule 3.2(a), Katy or a Subsidiary owns and holds all such capital stock.
(b) Except as set forth on Schedule 3.2(b), neither Katy nor any Subsidiary
is a party to, or is aware of, any voting agreement, voting trust or similar
agreement or arrangement relating to any class or series of its capital stock,
or any agreement or arrangement providing for registration rights with respect
to any capital stock or other securities thereof.
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(c) As of the date of this Agreement, there were outstanding options to
purchase an aggregate of 258,450 Common Shares under Katy's 1995 Long-Term
Incentive Plan, outstanding options to purchase an aggregate of 216,425 Common
Shares, stock appreciation rights covering 207,030 Common Shares and 25,225
Common Shares of unvested restricted stock outstanding under Katy's 1997 Long-
Term Incentive Plan, and outstanding options to purchase 88,000 Common Shares
under Katy's Nonemployee Director Stock Option Plan (such plans collectively
referred to as the "Katy Stock Option Plans", and each option under the Katy
Stock Option Plans referred to as an "Option"), as set forth on Schedule
3.2(c). Other than as set forth in this Section 3.2 or on Schedule 3.2(c) there
are not now, and on the Closing Date there will not be, any (i) shares of
capital stock or other equity securities of Katy issuable upon exercise of
Options other than Common Shares issuable pursuant to the exercise of the stock
options or stock appreciation rights described in this Section 3.2(c) (ii)
other outstanding awards under the Katy Stock Option Plans, or (iii)
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any class of capital stock of
Katy or any Subsidiary, or contracts, understandings or arrangements to which
Katy or any Subsidiary is a party, or by which any of them is or may be bound,
to issue additional shares of its capital stock or options, warrants, scrip or
rights to subscribe for, or securities or rights convertible into or
exchangeable for, any additional shares of its capital stock, other than the
Convertible Preferred Stock purchased by Purchaser under this Agreement.
(d) The authorized units of Contico International, L.L.C. a Delaware limited
liability company and a Subsidiary ("Contico"), consists solely of Ten Thousand
(10,000) common units (the "Contico Common Units"), all of which are issued,
outstanding and owned by Katy, and Three Hundred Twenty-Nine (329) preferred
units (the "Contico Preferred Units"), all of which are issued, outstanding and
owned by Newcastle Industries, Inc. All of the outstanding Contico Common Units
and Contico Preferred Units have been validly issued, are fully paid and non-
assessable.
(e) Upon approval by the vote of a majority of the holders of the
outstanding Common Shares entitled to vote at the Shareholder Meeting,
1,200,000 shares of Convertible Preferred Stock will be duly authorized. Upon
purchase of the Convertible Preferred Stock by Purchaser in accordance with the
terms of this Agreement, the shares of Convertible Preferred Stock to be issued
to Purchaser will be validly issued, fully paid and non-assessable.
Section 3.3. Corporate Authority Relative to this Agreement; No Violation.
Katy has the corporate power and authority to enter into this Agreement, to
carry out its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Katy and, except for the approval by
Katy's shareholders, no other corporate proceedings on the part of Katy or any
Subsidiary are necessary to authorize this Agreement and the transactions
contemplated hereby. The Board of Directors of Katy has determined that the
Recapitalization is in the best interest of Katy and its shareholders. This
Agreement has been duly and validly executed and delivered by Katy and,
assuming this Agreement constitutes a valid and binding agreement of the other
party hereto, this Agreement constitutes a valid and binding agreement of Katy,
enforceable against Katy in accordance with its terms, except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally or by general equitable principles, whether applied in a proceeding
at law or in equity. Except as set forth on Schedule 3.3, neither Katy nor any
Subsidiary is subject to or obligated under any charter, by-law or contract
provision or any license, franchise or permit, or subject to any law, order or
decree, that would be breached or violated by Katy's execution or performance
of this Agreement or the consummation of the transactions contemplated hereby.
Other than in connection with or in compliance with the provisions of Delaware
law, the Securities Act of 1933, as amended (the "Securities Act"), and the
Exchange Act (collectively, the "Katy Required Approvals"), no authorization,
consent or approval of, or filing with, any governmental body or authority in
the United States of America is necessary for the consummation by Katy of the
Recapitalization.
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Section 3.4. Reports and Financial Statements.
Since January 1, 1998, Katy has timely filed all reports, registration
statements and other filings, together with any amendments required to be made
with respect thereto, that it has been required to file with the SEC under the
Securities Act and the Exchange Act. All such reports, registration statements
and other filings (including all notes, exhibits and schedules thereto and
documents incorporated by reference therein) filed by Katy with the SEC,
together with any amendments thereto, are collectively referred to as the "Katy
SEC Reports". As of the respective dates of their filing (and, in the case of
registration statements and proxy statements, on the dates of effectiveness and
the dates of mailing, respectively) with the SEC, the Katy SEC Reports complied
in all material respects with the Securities Act, the Exchange Act and the
rules and regulations of the SEC thereunder, and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading. Each of the
consolidated financial statements (including any related notes or schedules)
included in the Katy SEC Reports was prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis (except
as may be noted therein or in the notes or schedules thereto) and complied in
all material respects with the rules and regulations of the SEC, and such
consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Katy Group as of the dates thereof and
the results of operations, cash flows and changes in shareholders' equity for
the periods then ended (subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments on a basis consistent with
past periods).
Section 3.5. Accounts Receivable, Accounts Payable and Inventory.
For the purposes of this Agreement, the term "Accounts Receivable" shall
mean all trade accounts receivable and all notes, bonds and other evidences of
indebtedness relating to, and rights to receive payments arising out of, sales
made in the conduct of the business by Katy or any Subsidiary, and the security
agreements related thereto, including any rights of Katy or any Subsidiary with
respect to any third party collection proceedings or any other action, suit,
proceeding or arbitration by any person or any investigation by any government
body. The term "Accounts Payable" shall mean all accounts payable of Katy or
any Subsidiary as such would be construed under GAAP. The term "Inventory"
shall mean inventory, raw materials, work-in-progress, finished goods,
consigned goods, merchandise, products under research and development,
demonstration equipment, packaging materials and other accessories related
thereto which are held at, or are in transit from or to, the locations at which
the business of Katy or any Subsidiary is conducted, or located at supplier's
premises or customer's premises on consignment, in each case, which are used or
held for use in the conduct of the business of Katy or any Subsidiary,
including any of the foregoing purchased subject to any conditioned sales or
title retention agreement in favor of any other person, together with all
rights against suppliers of such inventories. All Accounts Receivable (net of
allowances for doubtful accounts) reflected on the September 30, 2000 balance
sheet attached hereto as Schedule 3.5(a) (the "Reference Balance Sheet"), and
all Accounts Receivable arising subsequent to September 30, 2000 (net of
allowances for doubtful accounts), (a) have arisen from bona fide sales
transactions in the ordinary course of business on ordinary trade terms, (b)
represent valid and binding obligations due to Katy, enforceable in accordance
with their terms, and (c) have been collected or are collectible in the
ordinary course of business in the aggregate recorded amounts thereof in
accordance with their terms, except to the extent reserved against and except
for such lack of enforceability or collectibility, individually or in the
aggregate, as would not have a Material Adverse Effect on the Katy Group.
Schedule 3.5(b) lists any obligor which together with all of its affiliates
owed uncollected amounts to Katy or any Subsidiary in an aggregate amount of
$100,000 or more as of September 30, 2000. All Accounts Payable which are due
and owing have been or will be paid in full in the ordinary course and, to the
knowledge of any executive officer (within the meaning of Rule 3b-7 under the
Exchange Act) of Katy ("Katy's Knowledge"), no third party has claimed
otherwise, except for such claims as would not have a Material Adverse Effect
on the Katy Group. Schedule 3.5(c) sets forth all Accounts Payable which were
individually in excess of $50,000 as of December 31, 2000 and which were also
more than thirty (30) days past due under their payment terms as of December
31, 2000. Except as set forth on Schedule 3.5(d), all Inventory consists of a
quality and quantity
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usable and salable in the ordinary course of business consistent with past
practice, subject to normal and customary allowances in the industry for
spoilage, damage and outdated items. Except as set forth on Schedule 3.5(d),
all items included in the Inventory are the property of Katy or a Subsidiary,
as the case may be, free and clear of any lien, have not been pledged as
collateral, are not held on consignment from others and conform in all material
respects to all standards applicable to such Inventory or its use or sale
imposed by any law.
Section 3.6. Indebtedness; No Undisclosed Liabilities.
Schedule 3.6 lists all indebtedness of the Katy Group as of September 30,
2000 for borrowed money or for the deferred purchase price of property or
services, directly or indirectly created, incurred or assumed or guaranteed by
Katy and its Subsidiaries or with respect to which Katy or any Subsidiary has
otherwise become directly or indirectly liable, including, without limitation,
all capital lease obligations. Neither Katy nor any Subsidiary has any
liabilities or obligations of any nature, whether or not accrued, contingent or
otherwise, except (a) liabilities or obligations reflected (i) in any of the
Katy SEC Reports, or (ii) on Schedule 3.6, (b) liabilities incurred after
September 30, 2000 in the ordinary course of business consistent with past
practice, (c) the obligation to pay fees and expenses of Katy's attorneys and
accountants and of Bear Stearns & Co. Inc. in accordance with its agreements
with Katy dated January 8, 2001 and May 31, 2001 relating to the provision of a
fairness opinion and (d) liabilities or obligations which would not have a
Material Adverse Effect on the Katy Group.
Section 3.7. [Reserved].
Section 3.8. Customers and Suppliers.
Schedule 3.8 lists the top 25 customers and the top 25 suppliers of the Katy
Group based on aggregate sales and purchases for each of (i) the twelve months
ended December 31, 1999 and (ii) the nine months ended September 30, 2000.
Except as set forth on Schedule 3.8, to Katy's Knowledge, as of the date of
this Agreement, no such customer or supplier of Katy or any Subsidiary is in
the process of or intends to terminate its business relationship or pricing
scheme with Katy or such Subsidiary, nor has any such customer or supplier
during the past twelve months substantially decreased, or threatened to
substantially decrease, its usage of Katy's or such Subsidiary's production or
its services or supplies to Katy or such Subsidiary, other than normal seasonal
variances in the ordinary course of business, and other than any such decreases
as would not, individually or in the aggregate, materially and adversely affect
the operating income of the Katy Group.
Section 3.9. No Violation of Law.
None of the business or operations of Katy or any Subsidiary is being
conducted in violation of any law, ordinance or regulation of any governmental
body or authority except (a) as specifically disclosed in the schedules hereto
or in any of the Katy SEC Reports and (b) for violations or possible violations
which would not have, individually or in the aggregate, a Material Adverse
Effect on the Katy Group.
Section 3.10. Transactions with Affiliates.
For purposes of this Section 3.10, the term "Affiliate" shall mean (a) any
person who is the beneficial owner of 5% or more of the voting securities of
Katy, (b) any director or officer of Katy or any Subsidiary, (c) any person,
firm or corporation that directly or indirectly controls, is controlled by or
is under common control with, Katy or any Subsidiary (other than any other
member of the Katy Group) and (d) any member of the immediate family of any of
the foregoing persons. Except as set forth on Schedule 3.10, or in the Katy SEC
Reports, since January 1, 1998 neither Katy nor any Subsidiary has in the
ordinary course of business or otherwise (a) purchased, leased or otherwise
acquired any property or assets or obtained any services (except with respect
to services rendered in the ordinary course of business as a director, officer
or employee of Katy or any Subsidiary) in return for consideration of more than
$60,000 in any 12 month period from any Affiliate, (b)
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sold, leased or otherwise disposed of any property or assets or provided
services (except with respect to remuneration for services rendered in the
ordinary course of business as a director, officer or employee of Katy or any
Subsidiary) in return for consideration of more than $60,000 in any 12 month
period to any Affiliate, (c) entered into or modified in any manner any
Contract with any Affiliate, or (d) borrowed any money from, or made or
forgiven any loan or advance to, any Affiliate. Except as set forth in Schedule
3.10 or in the Katy SEC Reports, (i) the Contracts of the Katy Group do not
include any obligation or commitment in excess of $60,000 in any 12 month
period with any Affiliate (except with respect to remuneration for services
rendered in the ordinary course of business as a director, officer or employee
of Katy or any Subsidiary), (ii) the assets of the Katy Group do not include
any receivable or other obligation or commitment in excess of $60,000 in any 12
month period from any Affiliate and (iii) the liabilities of the Katy Group do
not include any payable or other obligation or commitment in excess of $60,000
in any 12 month period to or for any Affiliate (except with respect to
remuneration for services rendered in the ordinary course of business as a
director, officer or employee of Katy or any Subsidiary). Except as set forth
in Schedule 3.10, no officer or director of Katy or any Subsidiary has any
ownership interest in any property, real or personal, tangible or intangible,
including without limitation, inventions, patents, trademarks or trade names,
used in or pertaining to the businesses of the Katy Group.
Section 3.11. [Reserved].
Section 3.12. Environmental, Health and Safety Laws and Regulations.
Except as set forth on Schedule 3.12, the Katy SEC Reports, or as would not
have a Material Adverse Effect on the Katy Group, Katy and its Subsidiaries (i)
have obtained or are in the process of obtaining (as specifically set forth in
Schedule 3.12) all applicable permits, licenses and other authorizations which
are required under foreign, federal, state or local laws relating to pollution
or protection of the environment or to human health and safety, including laws
relating to emissions, discharges, releases or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes into
ambient air, surface water, ground water or land or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes by such entity (or, to the extent Katy is so obligated, its
agents) ("Environmental, Health and Safety Laws"); (ii) are in compliance with
all terms and conditions of such required permits, licenses and authorizations,
and also are in compliance with all other applicable limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables required pursuant to applicable Environmental, Health and Safety
Laws or contained in any regulation, code, order, decree, judgment, notice or
demand letter issued, entered, promulgated or approved thereunder, and to
Katy's Knowledge, no proposed or scheduled changes in law will require
expenditures in excess of $500,000 to maintain compliance with the
Environmental, Health and Safety Laws at the Katy facilities in the next 12
months; (iii) have no liability of any kind whatsoever, whether known or
unknown, under any Environmental, Health and Safety Laws, individually or in
the aggregate, that would have a Material Adverse Effect on the Katy Group; and
(iv) represent that no event, condition, circumstance, activity, practice,
incident, action or plan is reasonably likely to interfere with or prevent
continued compliance with the Environmental Health and Safety Laws or would
give rise to any common law or statutory liability, or otherwise form the basis
of any claim, action, suit or proceeding, based on or resulting from the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling or Katy's emission, discharge or release into the
environment, of any pollutant, contaminant, or hazardous or toxic material or
waste, which liability, claim, action, suit or proceeding, individually or in
the aggregate, would have a Material Adverse Effect on the Katy Group.
Notwithstanding any of the representations and warranties contained elsewhere
in Article III, environmental and health and safety matters shall be governed
exclusively by this Section 3.12 and by Section 3.22 with respect to Licenses
required by Environmental, Health and Safety Laws.
Section 3.13. Employee Benefit Matters.
(a) Schedule 3.13(a) sets forth and Katy has made available to Purchaser
copies of the governing documents, summary plan descriptions, returns, reports,
financial statements, actuarial reports and related
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employee communications of the following kinds of employee benefit plans
(individually, a "Katy Benefit Plan," and collectively, the "Katy Benefit
Plans") which are sponsored, maintained or contributed to by Katy or any
Subsidiary or any corporation, trade, business or entity under common control
with Katy within the meaning of sections 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended ("the Code") (each, an "ERISA
Affiliate") for the benefit of the employees of Katy or any Subsidiary:
(i) each "employee benefit plan", as such term is defined in section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (including, but not limited to, employee benefit plans which are
not subject to the provisions of ERISA); and
(ii) each policy or practice described in an employee handbook, stock
option plan, restricted stock plan, collective bargaining agreement, cash
or stock bonus plan or arrangement, incentive award plan or arrangement,
severance pay plan, policy, or agreement, deferred compensation agreement
or arrangement, executive compensation or supplemental income arrangement,
consulting agreement, employment agreement, and each other employee benefit
plan, agreement, arrangement, program, practice, or understanding which is
not described in Section 3.13(a)(i).
(b) There has been made available to Purchaser, with respect to each Katy
Benefit Plan required to file such report and description, the most recent
report on Form 5500 and the summary plan description. There has been made
available to Purchaser with respect to each Katy Benefit Plan which is a
defined benefit plan subject to the minimum funding requirements of ERISA the
most recent actuarial valuation prepared by the actuaries for the plan.
(c) Except for the Katy Benefit Plans disclosed in Schedule 3.13(c), Katy
and the Subsidiaries do not contribute to or have an obligation to contribute
to any employee benefit plan that is subject to section 302 of ERISA, section
412 of the Code, or Title IV of ERISA (including, without limitation, a
multiemployer plan within the meaning of section 3(37) of ERISA). Except as set
forth on Schedule 3.13(c), assets of any single-employer qualified plan listed
in Schedule 3.13(c) are at least equal to liabilities accrued to the Closing
Date as of the date of the most recently audited financial statements of Katy
and its Subsidiaries.
(d) No complete or partial withdrawal liability (within the meaning of
section 4201 of ERISA) with respect to any multiemployer plan (within the
meaning of section 3(37) of ERISA) has been incurred, which withdrawal
liability has not been satisfied and, to Katy's Knowledge, no liability is
expected to be incurred.
(e) Except as would not have, individually or in the aggregate, a Material
Adverse Effect on the Katy Group (excluding for purposes of applying the
foregoing standard of materiality the representation in clauses (A) and (B) of
subparagraph (vi) below, which shall not be subject to any standard of
materiality):
(i) Each Katy Benefit Plan conforms to and has been administered and
operated in compliance with its governing documents and applicable laws and
regulations whether domestic or foreign, including, where applicable, ERISA
and the Code, and neither Katy nor any of its Subsidiaries is in default of
its respective obligations under any Katy Benefit Plan, and, to Katy's
Knowledge, there have been no defaults or violations by any other party to
the Katy Benefit Plans;
(ii) Each Katy Benefit Plan intended to be qualified under section 401
of the Code (A) satisfies in form the requirements of such section except
to the extent amendments are not required by law to be made until a date
after the Closing Date, (B) has received a favorable determination letter
from the Internal Revenue Service regarding such qualified status, (C) has
not, since receipt of the most recent favorable determination letter, been
amended, except for amendments for which the period for requesting a
favorable determination letter has not expired, and (D) has not been
operated in a way that would adversely affect its qualified status;
(iii) There are no actions, suits, or claims pending (other than routine
claims for benefits) or, to Katy's Knowledge, threatened against, or with
respect to, any of the Katy Benefit Plans or their assets;
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(iv) No act, omission or transaction has occurred which would result in
imposition on Katy or any Subsidiary of (A) breach of fiduciary duty
liability damages under section 409 of ERISA; (B) a civil penalty assessed
pursuant to subsections (c), (i) or (1) of section 502 of ERISA; (C) a tax
imposed pursuant to Chapter 43 of Subtitle D of the Code; (D) a lien upon
property or rights under section 302 (f)(l)(A)and (B) of ERISA for failure
to make a required payment to a plan; or (E) the Pension Benefit Guaranty
Corporation instituting proceedings to terminate the plan;
(v) There is no matter pending (other than routine qualification
determination filings) with respect to any of the Katy Benefit Plans before
any governmental authority;
(vi) With respect to each Katy Benefit Plan, (A) no liability to the
Pension Benefit Guaranty Corporation has been incurred, which liability has
not been satisfied (other than for premiums not yet due), (B) no
accumulated funding deficiency, whether or not waived, within the meaning
of section 302 of ERISA or section 412 of the Code has been incurred, and
(C) no event has occurred, and, to Katy's Knowledge, there exists no
condition or set of circumstances in connection with which Katy or any
Subsidiary would reasonably, directly or indirectly, be expected to become
subject to any liability under ERISA, the Code or any applicable law except
liability for benefit claims and payments in the ordinary course; and
(vii) Except for the conversion of the Convertible Preferred Stock into
Common Shares, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not (A) require
Katy or any Subsidiary to make payments of money or other property to, make
a larger contribution to, or pay greater, more accelerated or supplementary
benefits or provide other rights under, including, without limitation,
funding liabilities that are currently unfunded, any Katy Benefit Plan than
it otherwise would, whether or not some other subsequent action or event
(together with the Recapitalization) would be required to cause such
payment or provision to be triggered, or (B) create or give rise to any
additional vested rights or service credits under any Katy Benefit Plan.
(f) Except for the conversion of the Convertible Preferred Stock into Common
Shares, in connection with the consummation of the Recapitalization no payments
of money or other property, acceleration of benefits, or provisions of other
rights have or will be made hereunder, under any agreement contemplated herein,
or under the Katy Benefit Plans that would be reasonably likely to result in
imposition of sanctions or taxes imposed under sections 280G and 4999 of the
Code, whether or not some other subsequent action or event would be required to
cause such payment, acceleration, or provision to be triggered.
(g) Except for the Katy Benefit Plans disclosed in Schedule 3.13(g), no Katy
Benefit Plan which is an employee welfare plan provides benefits (whether or
not insured) with respect to any current or former employee of Katy or its
Subsidiaries, which continue beyond their retirement or other termination of
service other than coverage mandated by section 4980 of the Code or sections
601-609 of ERISA or comparable provisions of state law.
Section 3.14. Absence of Certain Changes or Events.
Since September 30, 2000, except as contemplated by this Agreement or except
as disclosed in the Katy SEC Reports or in this Agreement (including the
schedules hereto) and except as permitted pursuant to Section 5.1, Katy and the
Subsidiaries have conducted their businesses only in the ordinary and usual
course, and there has not been (i) any material change by Katy or any
Subsidiary in its accounting methods, principles or practices other than as
required by GAAP or applicable law; (ii) any revaluation by Katy or any
Subsidiary of any of their respective assets, including, without limitation,
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business; (iii) any entry by Katy or any
Subsidiary into any material commitment or transaction, other than in the
ordinary course of business; (it being understood that there exists no binding
obligation on Katy to complete the sale of Hamilton Metals L.P. ("Hamilton") as
set forth in the letter of intent entered into by Katy on March 6, 2001); (iv)
any declaration, setting aside or payment of any dividends or distributions in
respect of Common Shares or any redemption,
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purchase or other acquisition of any of its securities or any securities of
Katy or any Subsidiary, except for regular dividends not in excess of $0.075
per Common Share per quarter; (v) any damage, destruction or loss (whether or
not covered by insurance) materially adversely affecting the properties or
business of Katy or any Subsidiary; (vi) any increase in indebtedness for
borrowed money other than an increase as a result of indebtedness for
borrowings incurred in the ordinary course of business; (vii) any granting of a
security interest in or lien on any material property or assets of Katy or any
Subsidiary, other than any such security interest or lien permitted by the
Amended and Restated Credit Agreement dated as of December 11, 1998 among Katy,
Bank of America National Trust and Savings Association, La Salle National Bank,
and the other parties named therein (including, without limitation, such
security interests or liens contemplated by the definitions of "Perfection
Date" and "Permitted Liens" under that Agreement); or (ix) except as disclosed
in Schedule 3.14, any increase in or establishment of any bonus, insurance,
severance, deferred compensation, pension, retirement, profit sharing, stock
option (including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan or any other increase in the
compensation payable or to become payable to any officers or key employees of
Katy or any Subsidiary other than those that are required under existing
contractual arrangements and other than increases in base salaries in the
ordinary course of business.
Section 3.15. Investigations; Litigation.
Except as described in any of the Katy SEC Reports or as set forth in
Schedule 3.15, as of the date of this Agreement:
(a) to Katy's Knowledge, no investigation or review by any governmental
body or authority with respect to Katy or any Subsidiary is pending nor has
any governmental body or authority notified Katy or any Subsidiary in
writing of an intention to conduct the same; and
(b) there are no actions, suits or proceedings pending (or, to Katy's
Knowledge, threatened) against or affecting Katy or any Subsidiary, or any
of their respective properties, at law or in equity, before any federal,
state, local or foreign governmental body or authority.
With respect to each matter set forth on Schedule 3.15, such Schedule sets
forth a summary of the subject matter together with a description of action
taken by Katy or its Subsidiaries with respect thereto.
Section 3.16. Products.
Except as set forth on Schedule 3.16, neither Katy nor any Subsidiary has
experienced product recall or warranty claims in excess of 2% of the aggregate
gross sales for such company in any of the past five years. Except as set forth
on Schedule 3.16, with regard to products and goods manufactured by Katy or any
Subsidiary prior to the Closing Date, there is no liability with regard to the
sale, purchase or consumption of such products or goods which will have a
Material Adverse Effect on the Katy Group and, to Katy's Knowledge, there are
no circumstances or events which are likely to give rise to such a liability.
Section 3.17. Securities Filings.
None of the information with respect to the Katy Group to be included in the
Proxy Statement or any other filings made with the SEC in connection with the
Recapitalization (collectively, the "Securities Filings") contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, except that no
representation is made hereby with respect to information supplied in writing
by or on behalf of Purchaser or any of the Purchaser Designees specifically for
inclusion in the Securities Filings.
Section 3.18. Tax Matters.
(a) (i) All Tax Returns required to be filed by or on behalf of Katy or any
of its Subsidiaries, and each affiliated, combined, consolidated or unitary
group of which Katy or any of its Subsidiaries is a member (a
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"Current Katy Group"), or (ii) to Katy's Knowledge, all Tax Returns required to
be filed on behalf of each combined, consolidated or unitary tax group of which
Katy or any of its Subsidiaries has been a member within ten years prior to the
date hereof but is not currently a member, but only insofar as any such Tax
Return relates to a taxable period which includes Katy or any of its
Subsidiaries and which ends on a date within the last ten years (a "Past Katy
Group", together with Current Katy Groups, a "Katy Affiliated Group") have been
timely filed and are complete and accurate except to the extent any failure to
file or any inaccuracies in such filed Tax Returns would not, individually or
in the aggregate, have a Material Adverse Effect on the Katy Group. All Taxes
due and owing by Katy or any of its Subsidiaries, any Current Katy Group or, to
Katy's Knowledge, any Past Katy Group have been accurately and timely paid, or
are being contested in good faith, and appropriate reserves therefor,
determined in accordance with GAAP, have been included in the financial
statements referred to in Section 3.4, except to the extent any failure to pay
or reserve would not, individually or in the aggregate, have a Material Adverse
Effect on the Katy Group. There is no audit examination, deficiency, refund
litigation, proposed adjustment or matter in controversy with respect to any
Taxes due and owing by Katy, any Current Katy Group or, to Katy's Knowledge,
any Past Katy Group which would, individually or in the aggregate, have a
Material Adverse Effect on the Katy Group. All assessments for Taxes due and
owing by Katy, any Current Katy Group or, to Katy's Knowledge, any Past Katy
Group with respect to completed and settled examinations or concluded
litigation have been paid. As soon as practicable after the public announcement
of this Agreement, Katy will provide Purchaser with written schedules of (i)
the taxable years of Katy for which the statutes of limitations with respect to
federal income Taxes have not expired, and (ii) with respect to federal income
Taxes those years for which examinations have been completed, those years for
which examinations are presently being conducted, and those years for which
examinations have not yet been initiated. Katy and each Subsidiary has complied
with all rules and regulations relating to the withholding of Taxes, except to
the extent any such failure to comply would not, individually or in the
aggregate, have a Material Adverse Effect on the Katy Group.
For purposes of this Agreement: (i) "Taxes" means any and all federal,
state, local, foreign or other taxes of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any taxing authority, including, without
limitation, taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use, capital stock,
payroll, employment, social security, workers' compensation, unemployment
compensation, or net worth, and taxes or other charges in the nature of excise,
withholding, ad valorem or value added, and (ii) "Tax Return" means any return,
filing, report or similar statement (including the attached schedules) required
to be filed with respect to any Tax, including, without limitation, any
information return, claim for refund, amended return or declaration of
estimated Tax.
Section 3.19. Intellectual Property.
"Intellectual Property" means foreign and domestic patents, patent
applications, designs, utility models, and all improvements and developments
relating thereto, trademarks (common law and registered), trademark
registration applications, service marks (common law and registered), service
mark registration applications, trade names, copyrights, copyright
registrations, copyright applications, domain names, domain registrations,
trade secrets, know-how, and other proprietary information. Katy or a
Subsidiary owns, or holds licenses or sublicenses for, or otherwise has the
right to use, all of the Intellectual Property used by Katy or such Subsidiary
in the conduct of its respective business as currently conducted, except where
such failure to do so would not, individually or in the aggregate, have a
Material Adverse Effect on the Katy Group. Except as set forth on Schedule
3.19, Schedule 3.19 includes all of the owned, issued, registered, licensed or
sublicensed Intellectual Property used by Katy or a Subsidiary in the conduct
of their respective businesses as currently conducted, except for such
Intellectual Property that is not, individually or in the aggregate, material
to the Katy Group. Except as set forth on Schedule 3.19, to Katy's Knowledge,
neither Katy nor any Subsidiary is currently in receipt of any written notice
of infringement or written notice of conflict with the asserted Intellectual
Property rights of other persons in connection with or relating to any
Intellectual Property owned or held by such persons, except, in each case, for
matters that would not, individually or in the aggregate, have a
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Material Adverse Effect on the Katy Group. Except as set forth in Schedule
3.19, to Katy's Knowledge, no third party has infringed or violated the
Intellectual Property as to which Katy or a Subsidiary has rights as listed on
Schedule 3.19, except, in each case, for matters that would not, individually
or in the aggregate, have a Material Adverse Effect on the Katy Group. Except
as set forth on Schedule 3.19, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
cause any cancellation of or material change in any material license or
sublicense. held by Katy or any Subsidiary in connection with any Intellectual
Property.
Section 3.20. Severance Payments.
Except for the conversion of the Convertible Preferred Stock into Common
Shares, neither Katy nor any Subsidiary will owe a severance payment, change of
control payment, parachute payment or similar obligation to any of their
respective employees, officers or directors as a result of the Preferred Stock
Purchase or the other transactions contemplated by this Agreement, nor will any
of such persons be entitled to severance payments or other benefits (including
without limitation any additional payments or benefits supplementary to their
regular compensation and benefits in effect immediately prior to the date
hereof) as a result of the Preferred Stock Purchase or the other transactions
contemplated by this Agreement in the event of the subsequent termination of
their employment.
Section 3.21. Title to Properties.
Schedule 3.21 lists all real property owned by the Katy Group with a value
of $500,000 or more and each lease of real property to which Katy or any
Subsidiary is a party with $500,000 or more still payable. Katy and its
Subsidiaries have good and marketable title to all of the assets and properties
reflected in the Reference Balance Sheet as being owned by the Katy Group
(other than any assets or properties (i) specified in the Reference Balance
Sheet that have been sold or otherwise disposed of since September 30, 2000 in
the ordinary course of business consistent with past practice or (ii) that are
not, individually or in the aggregate, material to Katy) free and clear of
encumbrances, security interests or liens, other than liens the existence of
which is set forth in Schedule 3.21 or is specifically reflected in the
Reference Balance Sheet, and other than any other encumbrances, security
interests or liens that do not exceed $100,000 in the aggregate. Katy and its
Subsidiaries hold under valid lease agreements all real and personal properties
reflected in the Reference Balance Sheet as being held under capitalized
leases, and all real and personal property that is subject to operating leases,
and enjoys peaceful and undisturbed possession of such properties under such
leases, other than (i) any properties as to which such leases have expired in
accordance with their terms without any liability of any party thereto since
September 30, 2000 and (ii) any properties that, individually or in the
aggregate, are not material to Katy. Katy and the Subsidiaries have not
received any written notice of any adverse claim to the title (both fee and any
leasehold) to any properties owned or leased by them, other than any claims
that, individually or in the aggregate, would not have a Material Adverse
Effect on the Katy Group.
Section 3.22. Licenses.
Except as set forth in Schedule 3.22, all permits, licenses and other
authorizations issued by the federal government and any applicable state
agencies (the "Licenses") required for the operation of the businesses of Katy
and the Subsidiaries are in full force and effect, and there are no pending
modifications, amendments or revocation proceedings, except for such failure to
be so in effect and such modifications, amendments or proceedings as would not,
individually or in the aggregate, have a Material Adverse Effect on the Katy
Group. All fees due and payable to governmental authorities pursuant to the
rules governing the Licenses have been paid, and no event has occurred with
respect to the Licenses held by Katy and the Subsidiaries which, with the
giving of notice or the lapse of time or both, would constitute grounds for
revocation thereof, except for any such revocation as would not, individually
or in the aggregate, have a Material Adverse Effect on the Katy Group. Katy and
the Subsidiaries are in compliance in all material respects with the terms of
their respective Licenses, as applicable (except where any such failure so to
comply would not, individually or in the aggregate,
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have a Material Adverse Effect on the Katy Group), and there is no condition,
event or occurrence existing, nor is there any proceeding being conducted of
which Katy or any Subsidiary has received notice, nor, to Katy's Knowledge, is
there any proceeding threatened by any governmental authority, which would
cause the termination, suspension, cancellation or nonrenewal of any of the
Licenses, or the imposition of any penalty or fine by any regulatory authority,
except for such as would not, individually or in the aggregate, have a Material
Adverse Effect on the Katy Group. No capital expenditures in excess of $500,000
are anticipated or foreseen by Katy or its Subsidiaries in order to maintain
compliance with any Licenses. Katy and its Subsidiaries reasonably expect that
all Licenses are fully renewable, except for any such nonrenewal as would not,
individually or in the aggregate, have a Material Adverse Effect on the Katy
Group.
Section 3.23. Insurance.
The insurance coverage maintained by Katy and any of its Subsidiaries is
reasonably adequate for the operation of the business of Katy and the
Subsidiaries, and, except as set forth in Schedule 3.23, the transactions
contemplated hereby will not adversely affect such coverage.
Section 3.24. Material Contracts.
Schedule 3.24 sets forth in reasonable detail a list of all written and a
description of all oral contracts, agreements, leases, instruments or legally
binding contractual commitments ("Contracts") as of March 29, 2001 that are of
a type described below (collectively, the "Material Contracts"), other than
Contracts set forth on Schedules 3.10, 3.13 or 3.21 and Contracts entered into
after the date hereof not in violation of Section 5.1 hereof:
(i) Any Contract with a customer of Katy or any Subsidiary, or with any
entity that purchases goods or services from Katy or any Subsidiary, for
consideration payable in excess of $250,000 (other than standard inventory
purchase orders executed in the ordinary course of business);
(ii) any Contract for capital expenditures or the acquisition or
construction of fixed assets in excess of $250,000;
(iii) any Contract for the purchase or lease of goods or services
(including, without limitation, equipment, materials, software, hardware,
supplies, merchandise, parts or other property, assets or services)
requiring aggregate future payments in excess of $250,000, other than
standard inventory purchase orders executed in the ordinary course of
business;
(iv) any Contract relating to the borrowing of money or guaranty of
indebtedness (other than any Contracts that do not, individually or in the
aggregate, relate to the borrowing of money or guaranty of indebtedness
totaling more than $250,000);
(v) any collective bargaining or other arrangement with any labor union;
(vi) any Contract granting a first refusal, first offer or similar
preferential right to purchase or acquire any of the capital stock or
assets of Katy or any Subsidiary;
(vii) any Contract limiting, restricting or prohibiting Katy or any
Subsidiary from conducting business anywhere in the United States or
elsewhere in the world or any Contract limiting the freedom of Katy or any
Subsidiary to engage in any line of business or to compete with any other
person;
(viii) any joint venture or partnership Contract;
(ix) Contracts requiring, or reasonably likely to require, future
payments of an amount greater than $250,000; and
(x) any employment Contract, severance agreement or other similar
binding agreement or policy with any employee of Katy or any Subsidiary
other than any such employment contracts providing for a base salary of
less than $100,000 or any such severance agreements or other such binding
agreements or policies providing for payments of less than $100,000 in the
aggregate.
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Katy has made available to Purchaser a true and complete copy of each
written Material Contract (and a written description of each oral Material
Contract), including all amendments or other modifications thereto. Except as
set forth on Schedule 3.24, each Material Contract is, assuming it is a valid
and binding contract of the other parties to it, a valid and legally binding
obligation of Katy or a Subsidiary, as the case may be, enforceable against
such entity in accordance with its terms, except insofar as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally or by general equitable
principles, whether applied in a proceeding at law or in equity. Except as set
forth on Schedule 3.24, Katy has performed in all material respects obligations
required to be performed by it under the Material Contracts and, as of the date
of this Agreement, is not in breach or default thereunder. Except as set forth
on Schedule 3.24, neither Katy nor any Subsidiary has received notice of
termination with respect to any Material Contract. Except as set forth on
Schedule 3.24, from March 29, 2001 through the date of this Agreement, Katy did
not enter into any Material Contracts except as permitted under the terms and
conditions of the Purchase Agreement (including the schedules thereto).
Section 3.25. Rights Agreement.
Katy and the Board of Directors of Katy have taken all necessary action
including, without limitation, all action required to be taken by Katy to amend
the Rights Agreement with respect to all outstanding Rights issued pursuant to
the Rights Agreement, if necessary, to (a) render the Rights Agreement
inapplicable with respect to the Voting Agreement, the Preferred Stock
Purchase, any conversion of the Convertible Preferred Stock, this Agreement and
the other transactions contemplated hereby and ensure that they thereby do not
trigger Rights exercisable under the Rights Agreement, (b) ensure that (i)
Purchaser shall not be deemed an Acquiring Person (as defined in the Rights
Agreement) and (ii) the provisions of the Rights Agreement, including the
occurrence of a Distribution Date (as defined in the Rights Agreement) or the
Stock Acquisition Date (as defined in the Rights Agreement), are not and shall
not be triggered by reason of the execution and delivery of this Agreement, the
conversion of the Convertible Preferred Stock, the authorization and
consummation of the Preferred Stock Purchase or the consummation of any of the
other transactions contemplated by this Agreement and the Voting Agreement, and
(c) ensure that Katy will have no obligations under the Rights or the Rights
Agreement in connection with the Preferred Stock Purchase and the conversion of
the Convertible Preferred Stock, and the holders of Katy Common Stock will have
no rights under the Rights or the Rights Agreement in connection with the
Preferred Stock Purchase and the conversion of the Convertible Preferred Stock.
Katy has made available to Purchaser a complete and correct copy of the Rights
Agreement as amended and supplemented to the date of this Agreement.
ARTICLE IV
Representations and Warranties of Purchaser
Purchaser represents and warrants to Katy that:
Section 4.1. Organization, Qualification, Etc.
Purchaser is a limited liability company duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the
limited liability company power and authority to own its properties and assets
and to carry on its business as it is now being conducted and is duly qualified
to do business and is in good standing in each jurisdiction in which the
ownership of its properties or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so
qualified or to be in good standing would not, individually or in the
aggregate, have a Material Adverse Effect on Purchaser. The copy of Purchaser's
Certificate of Formation, which has been delivered to Katy is complete and
correct and in full force and effect as of the date hereof. A complete and
correct copy of the Limited Liability Company Agreement will be delivered to
Katy promptly after the date hereof. Purchaser was formed solely for the
purpose of engaging in the Recapitalization, and, except for obligations or
liabilities and activities contemplated by this Agreement, Purchaser has, and
through the closing of the Preferred Stock Purchase shall not have, incurred
any obligation or liability or engaged in any business activity of any kind.
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Section 4.2. Corporate Authority Relative to this Agreement; No Violation.
Purchaser has the limited liability company power and authority to enter
into this Agreement, to carry out its obligations hereunder and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Managers of Purchaser, and no other
limited liability company proceedings on the part of Purchaser are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Purchaser and,
assuming this Agreement constitutes a valid and binding Agreement of the other
party hereto, this Agreement constitutes a valid and binding agreement of
Purchaser, enforceable against Purchaser in accordance with its terms, except
insofar as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by general equitable principles, whether applied in a proceeding
at law or in equity. Purchaser is not subject to or obligated under any
provision of its Certificate of Formation or Limited Liability Company
Agreement or any contract provision or any license, franchise or permit, or
subject to any law, order or decree, that would be breached or violated by its
execution or performance of this Agreement or the consummation of the
transactions contemplated hereby, except for any breaches or violations which
would not, individually or in the aggregate, have a Material Adverse Effect on
Purchaser. Other than in connection with or in compliance with the provisions
of Delaware law, the Exchange Act and the securities or blue sky laws of the
various states (collectively, the "Purchaser Required Approvals"), no
authorization, consent or approval of, or filing with, any governmental body or
authority in the United States of America is necessary for the consummation by
Purchaser of the Recapitalization.
Section 4.3. Litigation.
There are no claims, suits, actions or proceedings pending, or, to the
knowledge of Purchaser, threatened against, relating to or affecting Purchaser
or any of its subsidiaries before any court, governmental department,
commission, agency, instrumentality or authority or any arbitrator that seek to
restrain or enjoin the consummation of the Preferred Stock Purchase. Neither
Purchaser nor any of its subsidiaries is subject to any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or authority, or any arbitrator, which prohibits or
restricts the consummation of the Recapitalization.
Section 4.4. Ownership of Katy Stock.
Except as contemplated by this Agreement, as of the date of this Agreement
neither Purchaser nor any affiliate or associate (as such terms are defined
under the Exchange Act) of Purchaser, other than William F. Andrews, a director
of Katy, beneficially owns, directly or indirectly, or is party to any
agreement, arrangement or understanding with respect to acquiring, holding,
voting or disposing of, any Common Shares or other capital stock of Katy.
Section 4.5. No Required Vote of Purchaser Shareholders.
No vote of the members of Purchaser is required by law or the Certificate of
Formation of Purchaser or otherwise in order for Purchaser to consummate the
Preferred Stock Purchase and the transactions contemplated hereby.
Section 4.6. Securities Filings.
None of the information with respect to the Purchaser to be included in any
filings made with the SEC in connection with the transactions contemplated by
this Agreement (collectively, the "Purchaser Securities Filings") contains or
will contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representation is made hereby with respect to
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information supplied in writing by Katy or any affiliate of Katy specifically
for inclusion in Purchaser Securities Filings.
Section 4.7. Commitments.
The Purchaser has received a letter dated May , 2001 from Kohlberg
Investors IV, L.P. addressed to Purchaser and Katy and a letter dated May 29,
2001 from Bankers Trust Company addressed to Purchaser and Katy, true and
complete copies of which have been provided to Katy, committing to provide to
Purchaser or to Katy, upon the terms and subject to the conditions set forth in
those letters, up to an aggregate of two hundred ten million dollars
($210,000,000) in financing for the Recapitalization and for ongoing general
corporate purposes of Katy. Such commitment letters are in full force and
effect subject to the terms and conditions set forth therein and have not been
amended or terminated as of the date of this Agreement.
Section 4.8. Purchase for Investment.
The Purchaser is acquiring the Convertible Preferred Stock for investment
and not with a view toward any resale or distribution thereof except in
compliance with the Securities Act.
ARTICLE V
Covenants and Agreements
It is further agreed as follows:
Section 5.1. Conduct of Business by Katy and the Subsidiaries.
During the period from the date of this Agreement and continuing until the
earlier of the Closing Date or the date, if any, on which this Agreement is
earlier terminated pursuant to Section 7.1 (the "Termination Date"), and except
as set forth in Schedule 5.1 or as may be agreed to by the other party hereto
in writing or as may be expressly permitted pursuant to this Agreement, Katy
and each Subsidiary:
(i) shall conduct its operations according to the ordinary and usual
course of business in substantially the same manner as heretofore
conducted;
(ii) shall use commercially reasonable efforts to preserve intact its
business organization and goodwill, keep available the services of its
officers and employees as a group, subject to changes in the ordinary
course, and maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with the
Katy Group;
(iii) shall confer at such times as Purchaser may reasonably request
with one or more representatives of Purchaser to report operational matters
and the status of ongoing operations;
(iv) shall notify Purchaser of any emergency or other change in the
normal course of any of the respective businesses of Katy and the
Subsidiaries or in the operation of the respective properties of Katy and
the Subsidiaries and of any complaints, investigations or hearings (or
communications indicating that the same may be contemplated) of any
governmental body or authority if such emergency, change, complaint,
investigation or hearing would have a Material Adverse Effect on the Katy
Group, except with the approval of Purchaser, such approval not to be
unreasonably withheld;
(v) shall not authorize or pay any dividends on or make any distribution
with respect to its Common Shares, except for regular dividends not in
excess of $0.075 per Common Share per quarter;
(vi) shall not enter into or amend any employment, severance or similar
agreements or arrangements with its respective directors or executive
officers, except with the approval of Purchaser, such approval not to be
unreasonably withheld;
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(vii) shall not, except as otherwise permitted hereunder, authorize,
propose or announce an intention to authorize or propose, or enter into an
agreement with respect to, any merger, consolidation or business
combination, or, other than in the ordinary course of business, any
acquisition of any material assets or securities, any disposition of any
material amount of assets (including, without limitation, an agreement with
respect to the sale of Hamilton) or securities (other than the Preferred
Stock Purchase) or any release or relinquishment of any contract rights;
(viii) shall not propose or adopt any amendments to its Certificate of
Incorporation, By-laws or the Rights Agreement (other than the amendment to
its Certificate of Incorporation substantially in the form attached hereto
as Exhibit C or as otherwise contemplated by this Agreement);
(ix) shall not issue any Common Shares (other than Common Shares issued
pursuant to the exercise of Options previously granted under the Katy Stock
Option Plans), or effect any stock split or otherwise change its
capitalization (other than the authorization of the Convertible Preferred
Stock and the Common Shares in accordance with Section 5.1 (viii)) as it
existed on the date hereof, other than as specifically permitted by this
Agreement;
(x) shall not, except as specifically permitted by this Agreement,
grant, confer or award (A) any options, warrants, conversion rights or
other rights, not existing on the date hereof, to acquire any Common Shares
(other than in connection with the issuance of the Convertible Preferred
Stock) or (B) any other awards under the Katy Stock Option Plans;
(xi) shall not purchase or redeem any Common Shares;
(xii) shall not materially amend the terms of its respective employee
benefit plans, programs or arrangements or any severance or similar
agreements or arrangements in existence on the date hereof, except as may
be required by applicable law, or adopt any new employee benefit plans,
programs or arrangements or any severance or similar agreements or
arrangements except as contemplated by this Section 5.1 or Section 5.4;
(xiii) shall not enter into any collective bargaining agreement which
contains terms and conditions which cause, or with the passage of time
would cause, a Material Adverse Effect on the Katy Group including, without
limitation, entering into any collective bargaining agreement which
contains a successorship provision or any provision which requires a
purchaser to assume the collective bargaining agreement;
(xiv) shall not enter into any material loan agreement except for
letters of credit in the ordinary course of business;
(xv) shall not make any Tax election or settle or compromise any
material Tax liability other than in the ordinary and usual course of
business consistent with past practice;
(xvi) shall not agree, in writing or otherwise, to take any of the
foregoing actions or take any action which would make any representation or
warranty in Article III hereof untrue or incorrect;
(xvii) shall not grant, confer or award any monetary or non-monetary
bonus;
(xviii) shall not settle, compromise or otherwise terminate any material
litigation, claim or other settlement negotiation except with the approval
of Purchaser, such approval not to be unreasonably withheld; and
(xix) shall not fail to maintain insurance under substantially the same
terms and conditions as it currently maintains.
If Katy wishes to seek Purchaser's consent to take action otherwise
prohibited by this Section 5.1, Katy shall give notice to Purchaser pursuant to
Section 8.5 and Purchaser shall notify Katy within three (3) Business Days
whether it will grant such consent. Failure so to notify Katy shall be deemed
to be consent by Purchaser, but such consent shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other action Katy proposes to
take that is governed by this Section 5.1.
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Section 5.2. Investigation.
Subject to appropriate confidentiality agreements and reasonable notice
provided to Katy in advance, Katy shall, and shall cause the Subsidiaries to,
afford to Purchaser and to Purchaser's officers, employees, accountants,
counsel and other authorized representatives reasonable access, throughout the
period prior to the earlier of the Closing Date or the Termination Date, to
their respective plants, properties, contracts, commitments, books, and records
(including but not limited to Tax Returns) and any report, schedule or other
document filed or received pursuant to the requirements of federal or state
securities laws and shall use its reasonable best efforts to cause their
respective representatives to furnish promptly to one another such additional
financial and operating data and other information as Purchaser or its duly
authorized representatives may from time to time reasonably request, subject to
compliance with third party confidentiality obligations and as may be required
to maintain any material attorney-client privilege. The terms and conditions of
the Confidentiality Agreement, dated October 10, 2000, between Katy and
Kohlberg & Company, LLC (the "Confidentiality Agreement") shall apply to
information obtained pursuant to this Section 5.2 with references to Kohlberg &
Company, LLC being deemed to be references to Purchaser.
Section 5.3. Cooperation.
Katy and Purchaser shall together, or pursuant to an allocation of
responsibility to be agreed upon between them:
(a) prepare and file with the SEC as soon as is reasonably practicable a
Proxy Supplement, and shall use their reasonable best efforts to have the
Proxy Supplement cleared by the SEC under the Exchange Act;
(b) as soon as is reasonably practicable take all such action as may be
required under state blue sky or federal or state securities laws in
connection with the transactions contemplated by this Agreement; and
(c) cooperate with one another in order to lift any injunctions or
remove any other impediment to the consummation of the transactions
contemplated herein.
Section 5.4. Employee Benefit Plans.
Subject to applicable law and obligations under collective bargaining
agreements, for a period of not less than twelve months immediately following
the Closing Date, the compensation, benefits and coverage provided to those
individuals who continue to be employees of Katy or its Subsidiaries (the
"Continuing Katy Employees") pursuant to employee benefit plans or arrangements
maintained by Katy or its Subsidiaries shall be substantially comparable in the
aggregate to those provided to such employees immediately prior to the Closing
Date (it being understood that, after the Closing Date, (i) Options need not be
granted under any Katy Benefit Plan, (ii) Katy and its Subsidiaries may enforce
the employment agreements by which Katy or any Subsidiary is a party in
accordance with their respective terms, including, without limitation, any
right to amend, modify, suspend, revoke or terminate such employment
agreements, and (iii) this Section 5.4 shall not give any employee a right to
continued employment with Katy or its Subsidiaries). Notwithstanding the
foregoing (i) any Katy Benefit Plan that provides as of the date hereof for a
continuation period longer than twelve months shall be honored by Katy or any
of its Subsidiaries; and (ii) Purchaser and Katy shall use their reasonable
best efforts to implement the adjustments to the employment arrangements
reflected in the management term sheet agreed to between the parties prior to
the date hereof, effective as of the Closing.
Section 5.5. Filings; Other Action.
Subject to the terms and conditions provided herein and subject to the
fiduciary duties of the directors of Katy (as determined by such directors in
good faith after consultation with counsel), Katy and Purchaser shall use
reasonable efforts to (i) cooperate with one another in (A) determining whether
any filings are required to be made with, or consents, permits, authorizations
or approvals are required to be obtained from, any third
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party, the United States government or any agencies, departments or
instrumentalities thereof or other governmental or regulatory bodies or
authorities of federal, state, local and foreign jurisdictions in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and (B) timely making all such filings and
timely seeking all such consents, permits, authorizations or approvals, and
(ii) take, or cause to be taken all other actions and do, or cause to be done,
all other things necessary, proper or advisable to consummate and make
effective the transactions contemplated hereby, including, without limitation,
taking all such further action as reasonably may be necessary to resolve such
objections, if any, as the Federal Trade Commission, the Antitrust Division of
the Department of Justice, state antitrust enforcement authorities or
competition authorities of any other nation or other jurisdiction or any other
person may assert under relevant antitrust or competition laws with respect to
the transactions contemplated hereby.
Section 5.6. [Reserved].
Section 5.7. Anti-takeover Statute.
If any "fair price", "moratorium", "control share acquisition" or other form
of anti-takeover statute or regulation shall become applicable to the
transactions contemplated hereby, each of Katy and Purchaser and the members of
their respective Boards of Directors shall grant such approvals and take such
actions as are reasonably necessary so that the transactions contemplated
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of such statute
or regulation on the transactions contemplated hereby.
Section 5.8. No Solicitation by Katy.
(a) Katy shall not, nor shall it permit any of the Subsidiaries to, nor
shall it authorize or permit any of its directors, officers or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its Subsidiaries to, directly or
indirectly through another person, (i) solicit, initiate or encourage
(including, without limitation, by way of furnishing information or by taking
any action which would make the Rights Agreement inapplicable to any Katy
Takeover Proposal (as defined below) other than the Preferred Stock Purchase),
or take any other action designed to facilitate, any inquiries or the making of
any proposal which constitutes any Katy Takeover Proposal or (ii) participate
in any discussions or negotiations regarding any Katy Takeover Proposal, in
each case without the prior written consent of Purchaser; provided that prior
to Closing, in response to an unsolicited Katy Takeover Proposal that did not
result from the breach of this Section 5.8, following delivery to Purchaser of
notice of the Katy Takeover Proposal in compliance with its obligations under
Section 5.8(c) hereof, Katy may participate in discussions or negotiations with
or furnish information (pursuant to a confidentiality agreement with customary
terms) to any third party which makes a bona fide written Katy Takeover
Proposal if (A) a majority of Katy's Board of Directors determines in good
faith (after consultation with an independent, nationally recognized investment
bank) that taking such action would be reasonably likely to lead to the
delivery to Katy of a Superior Proposal and (B) a majority of Katy's Board of
Directors determines in good faith (after consultation with outside legal
counsel) that failure to take such actions would not be consistent with the
fiduciary duties of the directors under applicable law. For purposes of this
Agreement, "Katy Takeover Proposal" means any inquiry, proposal or offer from
any person relating to any direct or indirect acquisition or purchase of a
business that constitutes 25% or more of the net revenues, net income or assets
of Katy and its Subsidiaries, taken as a whole, or 25% or more of any class of
equity securities of Katy (other than purchases made without the prior
authorization or approval of Katy), any tender offer or exchange offer that if
consummated would result in any person beneficially owning 25% or more of any
class of equity securities of Katy, or any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving Katy, other than the Recapitalization. "Superior Proposal" means a
bona fide written Katy Takeover Proposal made by a third party to purchase or
otherwise acquire more than 50% of the outstanding equity securities of Katy
pursuant to a tender offer, exchange offer, merger, recapitalization or other
business combination or similar transaction on
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terms which a majority of Katy's Board of Directors determines in good faith
(after consultation with an independent, nationally recognized investment bank)
to be superior to Katy's shareholders (in their capacity as shareholders) from
a financial point of view (taking into account, among other things, the length
of time necessary to complete the proposed transaction, the risk of non-
completion, all legal, financial, regulatory and other aspects of the proposal,
and the identity of the offeror) as compared to the transactions contemplated
hereby (including any alternative proposed by Purchaser pursuant to Section
7.1(h) in response to such Katy Takeover Proposal), which is reasonably capable
of being consummated.
(b) Neither the Board of Directors of Katy nor any committee thereof shall
(i) withdraw or modify, or propose publicly to withdraw or modify, in a manner
adverse to Purchaser, the approval or recommendation by such Board of Directors
or such committee of or with respect to the Preferred Stock Purchase or this
Agreement, (ii) approve or recommend, or propose publicly to approve or
recommend, any Katy Takeover Proposal, or (iii) cause Katy to enter into any
letter of intent, agreement in principle, acquisition agreement or other
similar agreement (each, a "Katy Acquisition Agreement") related to any Katy
Takeover Proposal. Nothing in the foregoing sentence shall prevent Katy, its
Board of Directors, or a committee, from (A) complying with the requirements of
rule 14e-2 and rule 14d-9 under the Exchange Act, (B) making such disclosure to
stockholders or otherwise which the Board of Directors after consultation with
counsel, concludes is necessary under applicable law or the rules of the New
York Stock Exchange or (C) withdrawing or modifying an approval or
recommendation of or with respect to the Preferred Stock Purchase or this
Agreement, or approving or recommending a Katy Takeover Proposal from a third
party or causing Katy to enter into a Katy Acquisition Agreement, if the Board
of Directors of Katy after consultation with outside legal counsel, determines
that not doing so would not be consistent with the fiduciary obligations of the
directors under applicable law.
(c) In addition to the obligations of Katy set forth in paragraphs (a) and
(b) of this Section 5.8, Katy shall promptly advise Purchaser orally and in
writing of any request for information or of any Katy Takeover Proposal, the
material terms and conditions of such request or Katy Takeover Proposal and the
identity of the person making such request or Katy Takeover Proposal. Katy will
keep Purchaser reasonably informed of the status and details (including
amendments or proposed amendments) of any such request or Katy Takeover
Proposal on a daily basis or more frequently as may be reasonably requested by
Purchaser.
(d) In addition to the obligations set forth in paragraphs (a), (b) and (c)
above, Katy shall not continue any discussions or negotiations regarding the
sale of Hamilton without the express written consent of Purchaser.
Section 5.9. Rights Agreement.
Katy shall not, unless required to do so by a court of competent
jurisdiction, (i) redeem the Rights, (ii) amend (other than to delay the
Distribution Date and the Stock Acquisition Date (as such terms are defined
therein) or as required to comply with Section 1.1(a)(iii) hereof) or terminate
the Rights Agreement prior to the Closing Date without the consent of
Purchaser, or (iii) take any action which would allow any Person (as such term
is defined in the Rights Agreement) other than Purchaser and the Agreement
Shareholders to be the Beneficial Owner (as such term is defined in the Rights
Agreement) of 15% or more of the Katy Common Stock without causing a
Distribution Date (as such term is defined in the Rights Agreement) or a
Triggering Event (as such term is defined in the Rights Agreement) to occur.
Section 5.10. Public Announcements.
Except as may be required by applicable law, no party hereto shall make any
public announcements or otherwise communicate with any news media or any other
party with respect to this Agreement or any of the transactions contemplated
hereby without prior consultation with the other party as to the timing and
contents of any such announcement or communications; provided, however, that
nothing contained herein shall prevent any party from (i) promptly making all
filings with governmental authorities or disclosures by the stock exchange on
which such party's capital stock is listed, as may, in its judgment, be
required or advisable in
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connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby or (ii) disclosing the
terms of this Agreement to such party's legal counsel, financial advisors or
accountants in furtherance of the Recapitalization.
Section 5.11. Indemnification of Directors and Officers.
(a) Purchaser agrees that the indemnification obligations set forth in
Katy's Certificate of Incorporation or By-laws, in each case as of the date of
this Agreement, shall survive the consummation of the Recapitalization and
shall not be amended, repealed or otherwise modified for a period of six years
after the Closing Date in any manner that would adversely affect the rights
thereunder of the individuals who on or prior to the Closing Date were
directors, officers, employees or agents of Katy or its Subsidiaries.
(b) For six years from the Closing Date, Purchaser agrees that Katy will
provide to the directors and officers of Katy as of the date of this Agreement
liability insurance protection of the same kind and scope as that provided by
Katy's directors' and officers' liability insurance policies (copies of which
have been made available to Purchaser), with respect to claims arising from
facts or events that occurred prior to the Closing Date; provided, however,
that in no event shall Katy be required to expend more than 225% of the amount
currently expended by Katy (the "Insurance Amount") to maintain or procure its
current directors and officers liability insurance coverage; provided, further,
that if Katy is unable to maintain or obtain the insurance called for by this
Section 5.11, Katy shall use its best efforts to obtain as much comparable
insurance as available for the Insurance Amount.
(c) In the event Purchaser or Katy or any of their respective successors or
assigns (i) consolidates with or merges into any other person or shall not be
the continuing or surviving corporation or entity in such consolidation or
merger or (ii) transfers all or substantially all its properties and assets to
any person, then, and in each case, proper provision shall be made so that the
successors and assigns of Purchaser or Katy, as the case may be, honor the
indemnification obligations set forth in this Section 5.11.
(d) Purchaser agrees that the obligations of Katy under this Section 5.11
shall not be terminated or modified in such a manner as to adversely affect any
director, officer, employee, agent or other person to whom this Section 5.11
applies without the consent of such affected director, officer, employee, agent
or other person (it being expressly agreed that each such director, officer,
employee, agent or other person to whom this Section 5.11 applies shall be
third-party beneficiaries of this Section 5.11).
Section 5.12. Additional Reports.
Katy shall furnish to Purchaser copies of any reports of the type referred
to in Section 3.4 which it files with the SEC on or after the date hereof. Katy
represents and warrants that as of the respective dates thereof, such reports
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statement
therein, in light of the circumstances under which they were made, not
misleading. Any unaudited consolidated interim financial statements included in
such reports (including any related notes and schedules) will fairly present
the financial position of Katy as of the dates thereof and the results of
operations and changes in financial position or other information included
therein for the periods or as of the date then ended (subject, where
appropriate, to normal year-end adjustments), in each case in accordance with
past practice and GAAP consistently applied during the periods involved (except
as otherwise disclosed in the notes thereto).
Section 5.13. Update Disclosure; Breaches.
From and after the date of this Agreement until the Closing Date, each party
hereto shall promptly notify the other party hereto in writing of (i) the
occurrence, or non-occurrence, of any event that would be likely to cause any
condition to the obligations of any party to effect the Preferred Stock
Purchase and the other transactions contemplated by this Agreement not to be
satisfied, or (ii) the failure of Katy or Purchaser, as the
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case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it pursuant to this Agreement which would be
likely to result in any condition to the obligations of any party to effect the
Preferred Stock Purchase and the other transactions contemplated by this
Agreement not to be satisfied; provided, however, that the delivery of any
notice pursuant to this Section 5.13 shall not cure any breach of any
representations or warranty requiring disclosure of such matter prior to the
date of this Agreement or otherwise limit or affect the remedies available
hereunder to the party receiving such notice.
Section 5.14. Corporate Governance.
(a) Purchaser shall have the right to nominate for election at the
Shareholder Meeting, and, so long as Purchaser owns Convertible Preferred
Stock, at any subsequent annual or special meeting of the shareholders of Katy
at which an election for members of Katy's Board of Directors is held, a number
of Purchaser Designees such that, after the election, Purchaser Designees
represent a simple majority of Katy's Board of Directors, subject to approval
by a vote of a majority of the holders of Common Shares present in person or by
proxy and voting at such meeting.
(b) All directors elected at the Shareholder Meeting shall be classified,
with respect to the time for which they severally hold office, into two
classes, one class comprising the four (4) directors who are not Purchaser
Designees to be initially elected for a one-year term expiring at the annual
meeting of Katy's shareholders to be held in 2002, and a second class
comprising the five (5) Purchaser Designees to be elected initially for a two-
year term expiring at the annual meeting of Katy's shareholders to be held in
2003, with the directors in each class to hold office until their respective
successors are duly elected and qualified. At each succeeding annual meeting of
Katy's shareholders, directors elected to succeed those directors whose terms
then expire shall be elected for a term of office to expire at the second
succeeding annual meeting of shareholders after such election. Katy shall have
amended its By Laws on or prior to the date of the Shareholder Meeting to
reduce the number of directors constituting the whole board of Katy to nine
(9). So long as Purchaser owns Convertible Preferred Stock, Katy shall not
increase the size of its Board of Directors in excess of nine (9), unless at
the time of such increase Purchaser has been afforded the opportunity to
nominate the number of additional directors necessary, together with incumbent
directors nominated by Purchaser, to constitute a simple majority of Katy's
Board of Directors. In the event of the resignation, removal or death of one or
more of the Other Directors, such vacancy shall be filled by a person elected
by a majority vote of the remaining Other Directors and such person shall hold
office for the remaining term of the predecessor director and until such
person's successor director has been elected and qualified or until such
person's earlier resignation, removal or death.
(c) Purchaser agrees that, for a period of five years after the Closing
Date, in respect of any annual or special meeting of the shareholders of Katy,
however called, at which an election is held for the class of Directors who
shall have been elected at the 2001 annual meeting of Katy's shareholders to
serve until the annual meeting of Katy's shareholders to be held in 2002,
Purchaser shall nominate for election (or re-election) the three (3) persons
designated by a majority of the current Other Directors as nominees to serve as
Other Directors and Purchaser shall (and shall cause any Affiliate of Purchaser
owning Common Stock to) vote (or cause to be voted) all Common Shares owned by
Purchaser (or its Affiliates) in favor of such designee or designees. The
directors so chosen shall hold office until the next election of the class for
which such director shall have been chosen and until such person's successor
director has been elected and qualified or until such person's earlier
resignation, removal or death.
(d) Purchaser shall not, directly or indirectly (including through any
Person who is an "affiliate" of Purchaser within the meaning of Rule 405 under
the Securities Act ("Purchaser Affiliate")), in any transaction or series of
related transactions, sell, transfer or otherwise dispose of more than 20% of
the Katy Common Stock (on a fully diluted basis, including for such purpose the
Common Shares issuable upon the conversion of Convertible Preferred Stock),
unless all holders of Katy Common Stock other than Purchaser and any Purchaser
Affiliate (the "Other Holders") have the right to participate in such sale,
transfer or other disposition on the same terms and conditions and for the same
consideration per Common Share or Common Share equivalent on a pro rata basis.
In connection with any merger, consolidation or other business combination
involving Katy in
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which Katy is not the surviving corporation, the Other Holders shall receive
the same consideration per Common Share or Common Share equivalent as that
received by Purchaser.
(e) All fees paid by Katy to Purchaser or to any Purchaser Affiliate and any
transactions between Katy and Purchaser or any Purchaser Affiliate shall be
subject to approval of the Other Directors.
(f) Prior to the Closing, the By-Laws of Katy shall be amended to reflect
the matters set forth in paragraphs (b), (d), (e) and (g) of this Section 5.14
and to require that any amendment to the By-Laws of Katy modifying the terms
set forth in paragraphs (b), (d), (e), (f) or (g) of this Section 5.14 shall be
subject to approval by a majority of the Other Directors and by a majority of
the Other Holders.
(g) For purposes of this Agreement, "Other Directors" means (i) the persons
(other than Mr. Jacobi) who shall have been elected at the 2001 annual meeting
of Katy's shareholders to serve until the annual meeting of Katy's shareholders
to be held in 2002 and (ii) their successors whose nomination for election or
whose appointment to the board shall have been recommended or approved by a
majority of such persons or their successors who shall have been so elected or
appointed.
Section 5.15. Registration Rights.
Purchaser shall have registration rights with respect to the Common Shares
issued upon conversion of the Convertible Preferred Stock (the "Registrable
Securities") on the terms and conditions set forth in Annex II.
ARTICLE VI
Conditions to Closing
Section 6.1. Conditions to Each Party's Obligation to Close.
The respective obligations of each party to consummate the Recapitalization
shall be subject to the fulfillment on or prior to the Closing Date of the
following conditions:
(a) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
court or other tribunal or governmental body or authority which prohibits
the consummation of the Recapitalization substantially on the terms
contemplated hereby. In the event any order, decree or injunction shall
have been issued, each party shall use its reasonable efforts to remove any
such order, decree or injunction.
(b) All Katy Required Approvals and Purchaser Required Approvals shall
have been obtained, except where the failure to obtain such other Katy
Required Approvals and Purchaser Required Approvals would not have a
Material Adverse Effect on the Katy Group or Purchaser, as the case may be.
Section 6.2. Conditions to Obligations of Katy to Close.
The obligation of Katy to consummate the Recapitalization is further subject
to the conditions that (a) the representations and warranties of Purchaser
contained herein shall be true and correct as of the Closing Date with the same
effect as though made as of the Closing Date except (i) for changes
specifically permitted by the terms of this Agreement, (ii) for the accuracy of
representations and warranties that by their terms speak as of the date of this
Agreement or some other date, which will be determined as of such date and
(iii) where any such failure of the representations and warranties in the
aggregate to be true and correct in all respects would not have a Material
Adverse Effect on Purchaser or on the Katy Group, (b) Purchaser shall have
performed in all material respects all obligations and complied with all
covenants required by this Agreement to be performed or complied with by it
prior to the Closing Date, (c) Purchaser shall have delivered to Katy the
Preferred Purchase Price for the Convertible Preferred Stock as set forth in
Section 2.1, (d) Purchaser shall have
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delivered to Katy a certificate, dated the Closing Date and signed by an
executive officer, certifying to the effects set forth in clauses (a) and (b)
above and (e) Purchaser's counsel shall have delivered to Katy a legal opinion
in the form set forth on Schedule 6.2.
Section 6.3. Conditions to Obligations of Purchaser to Close.
The obligation of Purchaser to consummate the Recapitalization is further
subject to the conditions that (a) the Purchaser Closing Conditions have been
satisfied or, to the extent not satisfied, waived by Purchaser, (b) Katy shall
have delivered to Purchaser a certificate signed by its respective Chairman of
the Board, Chief Executive Officer and President or any Senior Vice President
(an "Officer's Certificate"), dated the Closing Date, certifying to the effect
that the representations and warranties of Katy contained herein shall be true
and correct as of the Closing Date with the same effect as though made as of
the Closing Date, except (i) for changes specifically permitted by the terms
of this Agreement, (ii) for the accuracy of representations and warranties
which by their terms speak as of a specific date, which will be determined as
of such date, and (iii) where the failure of any such representation or
warranty to be true and correct as of the Closing Date, or as of such other
specific date, as the case may be, individually or in the aggregate, would not
have a Material Adverse Effect on the Katy Group, (c) Katy shall have
delivered to Purchaser an Officer's Certificate, dated the Closing Date,
certifying to the effect that Katy shall have performed, or shall have caused
a Subsidiary to perform, all obligations and complied with all covenants
required by this Agreement to be performed or complied with by any of them
prior to the Closing Date, except where the failure so to perform,
individually or taken as a whole, would not adversely affect the ability of
Katy to consummate the Recapitalization, (d) Katy shall have delivered a
certificate of the Registrar of the Katy Common Stock as to the number of
shares outstanding as of the close of business on the day preceding the
Closing Date, and (e) Katy's outside legal counsel shall have delivered to
Purchaser a legal opinion in the form set forth on Schedule 6.3.
ARTICLE VII
Termination, Waiver, Amendment and Closing
Section 7.1. Termination or Abandonment.
Notwithstanding anything contained in this Agreement to the contrary, this
Agreement may be terminated and abandoned at any time prior to the Closing
Date, whether before or after any approval of the matters presented in
connection with the Recapitalization by the shareholders of Katy:
(a) by the mutual written consent of Katy and Purchaser;
(b) by either Katy or Purchaser if the Closing Date shall not have
occurred on or before June 30, 2001; provided, that the party seeking to
terminate this Agreement pursuant to this Section 7.1(b) shall not have
breached in any material respect its obligations under this Agreement in
any manner that shall have substantially contributed to the failure to
consummate the Recapitalization on or before such date;
(c) by either Katy or Purchaser if (i) a statute, rule, regulation or
executive order shall have been enacted, entered or promulgated prohibiting
the consummation of the Recapitalization substantially on the terms
contemplated hereby or (ii) an order, decree, ruling or injunction shall
have been entered permanently restraining, enjoining or otherwise
prohibiting the consummation of the Recapitalization substantially on the
terms contemplated hereby and such order, decree, ruling or injunction
shall have become final and non-appealable; provided that the party seeking
to terminate this Agreement pursuant to this clause (ii) of Section 7.1(c)
shall have used its reasonable best efforts to remove such order, decree,
ruling or injunction;
(d) by Purchaser if the Purchaser Closing Conditions are not satisfied
on or prior to the Closing Date;
(e) [reserved];
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(f) by Katy, if Purchaser shall have breached or failed to perform in
any material respect any of its representations, warranties, covenants or
other agreements contained in this Agreement, which breach or failure to
perform (i) would give rise to the failure of a condition set forth in
Section 6.2(a) or (b), and (ii) is incapable of being cured by Purchaser or
is not cured within 30 days of notice of such breach or failure;
(g) by Purchaser, if Katy shall have breached or failed to perform, or
shall have failed to cause any Subsidiary to perform, in any material
respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
(i) would give rise to the failure of a condition set forth in Section
6.3(a), and (ii) is incapable of being cured by Katy or is not cured within
30 days of notice of such breach or failure;
(h) by Katy, if at any time prior to the Closing Date, a Superior
Proposal is received by Katy and Katy's Board of Directors determines in
good faith (after consultation with outside legal counsel) that failure to
terminate this Agreement and enter into an agreement to effect the Superior
Proposal would be inconsistent with its fiduciary duties under applicable
law; provided that Katy may not terminate this Agreement pursuant to this
Section 7.1(h) unless and until (i) three (3) Business Days have elapsed
following delivery to Purchaser of a written notice of such good faith
determination by Katy's Board of Directors and during such three (3)
Business Day period Katy has fully cooperated with Purchaser, including
without limitation, informing Purchaser of the terms and conditions of such
Superior Proposal, and the identity of the person making such Superior
Proposal, with the intent of enabling both parties to agree to a
modification of the terms and conditions of this Agreement so that the
transactions contemplated hereby may be effected; (ii) at the end of such
three (3) Business Day period the Katy Takeover Proposal continues to
constitute a Superior Proposal and Katy's Board of Directors confirms its
good faith determination (after consultation with outside legal counsel)
that failure to terminate this Agreement and enter into an agreement to
effect the Superior Proposal would be inconsistent with its fiduciary
duties under applicable law; and (iii) (A) at or prior to such termination,
Purchaser has received payment of any amounts required by Section 7.2 to be
paid at or prior to termination, but only if and when such amounts are
payable under Section 7.2, by wire transfer in same day funds, and (B) as
soon as practicable following such termination Katy enters into a
definitive acquisition, merger or similar agreement to effect the Superior
Proposal.
(i) Except as provided in Sections 7.2 and 8.2 hereof, in the event of
the termination of this Agreement pursuant to Section 7.1, this Agreement
shall forthwith become void, there shall be no liability on the part of
Purchaser or Katy or any of their respective officers or directors to the
other and all rights and obligations of any party hereto shall cease,
except that nothing herein shall relieve any party from liability for any
misrepresentation or breach of any covenant or agreement under this
Agreement or from the confidentiality obligations in Section 5.2 hereof.
Section 7.2. Termination Fee.
(a) If this Agreement is terminated by Purchaser or Katy, as the case may
be, pursuant to Sections 7.1(b), 7.1(c), 7.1(d) or 7.1(g), or by Katy pursuant
to Section 7.1(h), then Katy shall promptly reimburse Purchaser for Purchaser's
documented expenses (including, without limitation, fees and expenses of or
associated with Purchaser's lenders and their counsel in this transaction) up
to $1,000,000, payable by wire transfer of same day funds within five Business
Days of the receipt by Katy of a statement itemizing and reasonably documenting
such expenses.
(b) In the event that a Katy Takeover Proposal shall have been made known to
Katy or has been made directly to its shareholders generally or any person
shall have publicly announced an intention (whether or not conditional) to make
a Katy Takeover Proposal and thereafter this Agreement is terminated by
Purchaser pursuant to Sections 7.1(d) (insofar as it relates to failure to
satisfy the conditions set forth in clause (b), (c), (d), (g), (h), (i), (j),
(k), (m), (n), (o) or (p) as the case may be, of Annex I), 7.1(g) or 7.1(h),
then Katy shall promptly pay Purchaser a fee equal to $2,000,000 (the
"Termination Fee") payable by wire transfer of same
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day funds; provided, however, that no Termination Fee shall be payable to
Purchaser pursuant to this Section 7.2 unless and until within 12 months of
such termination, Katy or any of its Subsidiaries enters into any Katy
Acquisition Agreement or a Katy Takeover Proposal is made, and, within 18
months of such termination, Katy or any of its Subsidiaries consummates any
Katy Takeover Proposal (for the purposes of the foregoing proviso the terms
"Katy Acquisition Agreement" and "Katy Takeover Proposal" shall have the
meanings assigned to such terms in Section 5.8, except that the references to
25% in the definition of "Katy Takeover Proposal" in Section 5.8(a) shall be
deemed to be references to 40%, in which event the Termination Fee shall be
payable within two Business Days of the consummation of the Katy Takeover
Proposal). Katy acknowledges that the agreements contained in this Section 7.2
are an integral part of the transactions contemplated by this Agreement, and
that, without these agreements, Purchaser would not enter into this Agreement;
accordingly, if Katy fails promptly to pay the amount due pursuant to this
Section 7.2, and, in order to obtain such payment, Purchaser commences a suit
which results in a judgment against Katy for the fee set forth in this Section
7.2, Katy shall pay to Purchaser its costs and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit, together with
interest on the amount of the fee at the prime rate of Citibank N.A. in effect
on the date such payment was required to be made.
Section 7.3. Approval of Board of Directors Required.
Subject to Sections 5.11 and 5.14, the approval of the Board of Directors of
Katy shall be required for any amendment or modification of the Agreement, any
waiver of any condition to the obligations of Katy under this Agreement, any
waiver of any of Katy's rights under this Agreement and any extension by Katy
of the time for performance of any acts by Purchaser under this Agreement.
ARTICLE VIII
Miscellaneous
Section 8.1. Non-Survival of Representations and Warranties; Specific
Enforcement; Limitation.
None of the representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Closing Date.
The parties agree that an award of money damages would be inadequate for any
breach of this Agreement by any party and that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity. In the event that any party to
this Agreement should be entitled to damages for breach of any representation,
warranty or covenant, the parties hereby agree that the party alleging any such
breach shall be entitled to damages only to the extent that such breach
(without regard to any materiality exceptions or provisions in such
representation or warranty) is determined, individually or in the aggregate, to
have or to have had a Material Adverse Effect on the Katy Group or Purchaser,
as the case may be.
Section 8.2. Expenses.
Except as set forth in Section 7.1 and 7.2, whether or not the
Recapitalization is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expenses, except that all transfer taxes shall be paid
by Katy.
Section 8.3. Counterparts; Effectiveness.
This Agreement may be executed in two or more consecutive counterparts, each
of which shall be an original, with the same effect as if the signatures
thereto were upon the same instrument, and shall become
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effective when one or more counterparts have been signed by each of the parties
and delivered (by telecopy or otherwise) to the other party.
Section 8.4. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware without regard to the principles of conflicts of
laws thereof.
Section 8.5. Notices.
All notices and other communications hereunder shall be in writing
(including telecopy or similar writing) and shall be effective (a) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified in
this Section 8.5 and the appropriate telecopy confirmation is received or (b)
if given by any other means, when delivered at the address specified in this
Section 8.5:
To Katy:
Katy Industries, Inc.
6300 S. Syracuse Way, Suite 300
Englewood, Colorado 80111
Telecopy: (303) 290-9344
Attention: Chief Executive Officer
with a copy (which shall not constitute notice) to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Telecopy: (212) 909-6836
Attention: Meredith M. Brown, Esq.
To Purchaser:
KKTY Holding Company, L.L.C.
c/o Kohlberg & Company, L.L.C.
111 Radio Circle
Mt. Kisco, New York 10549
Telecopy: (914) 244-0689
Attention: Mr. Christopher Lacovara
with a copy (which shall not constitute notice) to:
Hunton & Williams
200 Park Avenue
New York, New York 10166
Telecopy: (212) 309-1100
Attention: Raul Grable, Esq.
Section 8.6. Assignment; Binding Effect.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by either of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
party. Subject to the preceding sentence, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
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Section 8.7. Severability.
Any term or provision of this Agreement which is invalid or unenforceable in
any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the terms and provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as is
enforceable.
Section 8.8. Miscellaneous.
This Agreement (including, for the avoidance of doubt, the exhibits and
annexes to it):
(a) and the disclosure schedules to this Agreement, and the
Confidentiality Agreement constitute the entire agreement, and supersede
all other prior agreements and understandings, both written and oral,
between the parties or their affiliates with respect to the subject matter
hereof and thereof; and
(b) is not intended to and shall not confer upon any person other than
the parties hereto any rights or remedies hereunder, except for the rights
to indemnification and insurance provided for in Section 5.11 for the
benefit of Katy's directors, officers, employees, agents and other persons,
and the rights provided in Section 5.4 for the benefit of Continuing Katy
Employees.
Section 8.9. Headings.
Headings of the Articles and Sections of this Agreement are for convenience
of the parties only, and shall be given no substantive or interpretive effect
whatsoever.
Section 8.10. Finders or Brokers.
Except for the engagement of Bear, Stearns & Co. Inc. by Katy pursuant to
the agreements dated January 8, 2001 and May 31, 2001, previously provided to
Purchaser, neither Katy nor any of its Subsidiaries, nor Purchaser, has
employed any investment banker, broker, finder or intermediary in connection
with the transactions contemplated hereby who might be entitled to any fee or
any commission in connection with or upon consummation of the Recapitalization
payable by Katy or any of its Subsidiaries or Purchaser, as the case may be.
Section 8.11. Amendment.
This Agreement may be amended by the parties hereto by action taken by or on
behalf of the Board of Directors of Katy and the Managers of the Purchaser at
any time prior to the Closing Date. This Agreement may not be amended except by
an instrument in writing signed by the parties hereto.
Section 8.12. Waiver.
Subject to Section 7.3, at any time prior to the Closing Date, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein. Any such extension
or waiver shall be valid only if set forth in an instrument in writing signed
by the party to be bound thereby, but such extension or waiver or failure to
insist on strict compliance with an obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
[The Next Following Page is the Signature Page]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the date first above written.
KATY Industries, Inc.
/s/ Robert M. Baratta
By: _________________________________
Name: Robert M. Baratta
Title: President
KKTY Holding Company, L.L.C.
/s/ Christopher Lacovara
By: _________________________________
Name: Christopher Lacovara
Title: Authorized Manager
B-30
ANNEX I
PURCHASER CLOSING CONDITIONS
Notwithstanding any other provision of this Agreement, Purchaser shall not
be required to consummate the Preferred Stock Purchase unless none of the
following events shall have occurred and be continuing at the time of the
Closing:
(a) any governmental authority shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order which is in effect and which (1) materially
restricts, prevents or prohibits the consummation of the Recapitalization or
results in the obligation to pay damages as a result of or in connection with
the Recapitalization in amounts that would have an adverse effect on Katy or
Katy's business, (2) prohibits or limits the ownership or operation by Katy,
Purchaser or any of their subsidiaries of all or any material portion of the
business or assets of Katy and the Subsidiaries taken as a whole or compels
Katy, Purchaser, or any of their subsidiaries to dispose of or hold separate
all or any material portion of their business or assets, (3) imposes
limitations on the ability of Purchaser or any subsidiary of Purchaser to
acquire or hold, or to exercise effectively full rights of ownership of any
Common Shares, including, without limitation, the right to vote any Common
Shares issuable upon conversion of the Convertible Preferred Stock, other than
limitations that do not materially restrict or otherwise materially affect the
consummation of the Preferred Stock Purchase, or (4) requires divestitures by
Purchaser or any other affiliate thereof of any Common Shares;
(b) any of the representations and warranties of Katy or any Subsidiary set
forth in the Agreement (without regard to any materiality exceptions or
provisions thereof) shall not be true and correct in all material respects as
if such representations and warranties were made at the time of such
determination except (i) for changes specifically permitted by the terms of the
Agreement, (ii) for the accuracy of representations or warranties which by
their terms speak as of a specific date, which representations and warranties
shall be deemed to speak, and must not be untrue or incorrect, as of such
specific date, (iii) where the failure of any such representation or warranty
to be true and correct, individually or in the aggregate, would not have a
Material Adverse Effect on the Katy Group;
(c) Katy shall not have performed, or shall not have caused a Subsidiary to
perform, in all material respects, all obligations and complied in all material
respects with all covenants necessary to be performed or complied with by any
of them under the Agreement;
(d) any change shall have occurred after the date of this Agreement (or any
development shall have occurred involving prospective changes) in the financial
condition, businesses, operations, properties (including tangible properties),
results of operations, assets (including, without limitation, any Material
Contract) or prospects of the Katy Group, taken as a whole, that has a Material
Adverse Effect on the Katy Group;
(e) (i) any material adverse change after May 29, 2001 in the syndication
markets for credit facilities similar in nature to the credit facilities to be
furnished to Purchaser by Bankers Trust Company, (ii) a material disruption of
or a material adverse change in the financial, banking or capital markets after
May 29, 2001 that would have an adverse effect on such syndication market, or
(iii) any material adverse change since December 31, 2000, in the business,
operations, properties, assets, liabilities, condition (financial or otherwise)
or prospects of Katy and its Subsidiaries, taken as a whole, or in the facts
and information relating to Katy and its Subsidiaries and the Recapitalization
as presented to Bankers Trust Company as of May 29, 2001, such that in the case
of any one or more of (i), (ii) or (iii) above, Bankers Trust Company
determines not to fund such credit facilities in accordance with the commitment
letter dated May 29, 2001;
(f) the Agreement shall have been terminated in accordance with its terms;
(g) the Board of Directors of Katy shall have (i) withdrawn or materially
modified or changed in a manner adverse to Purchaser its recommendation with
respect to the Agreement or the Preferred Stock Purchase, (ii) Katy shall have
entered into an agreement (other than a confidentiality agreement) to
consummate a Katy
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Takeover Proposal other than the Preferred Stock Purchase, or (iii) the Board
of Directors of Katy shall have approved or recommended a Katy Takeover
Proposal or resolved to do any of the foregoing;
(h) fewer than all of the licenses, permits, authorizations, consents,
orders, qualifications or approvals of, or declarations or filings with, or
expirations of waiting periods imposed by, any United States or foreign
governmental body or authority that are necessary for the consummation of the
Preferred Stock Purchase and the transactions contemplated thereby shall have
been filed, occurred or been obtained, as the case may be, except for any such
failure of any of the foregoing so to have been filed, occurred or been
obtained, individually or in the aggregate, as would not result in a Material
Adverse Effect on the Katy Group;
(i) Katy shall not have received an opinion of Bear, Stearns & Co. Inc., in
a form and substance satisfactory to Katy and dated the date of this Agreement,
to the effect that, as of such date, the Preferred Stock Purchase is fair to
Katy from a financial point of view, or such opinion shall have been withdrawn,
or Bear, Stearns & Co. Inc. shall not have consented to the dissemination of
such opinion in connection with the Preferred Stock Purchase;
(j) holders of Common Shares present in person or by proxy at the
Shareholder Meeting shall not have duly (i) elected the directors of Katy's
Board of Directors, including the Purchaser Designees and (ii) authorized and
approved the issuance and sale of the Convertible Preferred Stock upon
substantially the terms and conditions set forth in Exhibit C, and holders of a
majority of the outstanding Common Shares shall not have approved and adopted
an amendment of Katy's Certificate of Incorporation, substantially in the form
attached hereto as Exhibit C, authorizing (A) the classification of the Board
of Directors into two classes, (B) 1,200,000 shares of Convertible Preferred
Stock, and (C) an increase of the total number of Common Shares that Katy shall
have the authority to issue to 35,000,000.
(k) it shall have been publicly disclosed or Purchaser shall have otherwise
learned that any person or "group" (as described in section 13(d)(3) of the
Exchange Act), other than Purchaser or Purchaser Affiliates or any group of
which any of them is a member, shall have, following the date of this Agreement
(1) acquired beneficial ownership (determined pursuant to Rule 13d-3
promulgated under the Exchange Act) of more than 20% of Katy Common Stock or
shall have been granted an option, right or warrant, conditional or otherwise,
to obtain more than 20% of any class or series of capital stock of Katy
(including, without limitation, Katy Common Stock); or (2) without the prior
consent of Purchaser, entered into any binding agreement or understanding
(other than a confidentiality agreement) with the Katy Group with respect to
(A) a merger, consolidation or other business combination with, or acquisition
of a material portion of the assets of, Katy, or (B) a tender or exchange offer
for Common Shares;
(l) there shall have occurred and be continuing (i) any general suspension
of trading in securities on any national securities exchange or in the over-
the-counter market, (ii) the declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States (whether or not
mandatory), (iii) any indirect limitation (whether or not mandatory) by a
United States governmental authority or agency on the extension of credit by
banks or other financial institutions, (iv) a declaration of war by the
Congress of the United States or the commencement of military hostilities
involving the United States, in each case, having had or that will have a
Material Adverse Effect on the Katy Group, or (v) in the case of any of the
foregoing occurrences existing as of the date of this Agreement, a material
acceleration or worsening thereof;
(m) the Board of Directors of Katy shall not have Unanimously approved (i)
the nomination for election by the shareholders of Katy of the Purchaser
Designees (subject to the Closing taking place) and (ii) an amendment to the
By-Laws of Katy reducing the number of directors constituting the whole board
of Katy to nine (9);
(n) Katy shall not have received on or prior to the Closing Date (as the
same may be extended in accordance with Section 1.1(a)) an unqualified audit
opinion from Arthur Andersen with respect to the consolidated financial
statements of the Katy Group for the fiscal year ended December 31, 2000;
(o) the amendment to Katy's Certificate of Incorporation substantially in
the form of Exhibit C attached hereto shall not have been filed with the
Secretary of State of the State of Delaware; or
B-32
(p) Katy shall not have entered into the definitive documentation with
respect to the credit facilities to be established under the terms and
conditions of the Refinancing with Bankers Trust Company (including any
modification of the terms of the Refinancing that are inconsistent with the
initial terms of the Refinancing if such modifications have been approved by
Purchaser);
The foregoing conditions are for the sole benefit of Purchaser and its
affiliates and, subject to the terms of the Agreement, may be asserted by
Purchaser regardless of the circumstances (including, without limitation, any
action or inaction by Purchaser or any of its affiliates) giving rise to any
such condition or may be waived by Purchaser, in whole or in part, from time to
time in its reasonable discretion, except as otherwise provided in the
Agreement. The failure by Purchaser at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right and may be asserted at any time and from
time to time. Unless otherwise defined herein, capitalized terms used herein
shall have the meaning ascribed to them in the Agreement to which this Annex I
is attached.
B-33
ANNEX II
REGISTRATION RIGHTS
(a) In connection with any conversion of the Convertible Preferred Stock
into Common Shares, the holders (the "Converting Holders") of any Registrable
Securities shall have the right to request that Katy file a registration
statement (on Form S-3 ("Form S-3"), if available to Katy at the time) pursuant
to the Securities Act (the "Registration Statement"), provided that the
Converting Holders shall not be entitled to demand a registration on more than
three (3) occasions. Katy shall (i) within 10 days after receiving notice from
any Converting Holder requesting a demand for registration give notice thereof
to all other Converting Holders known to Katy and (ii) promptly and in any
event within 45 days of receipt of such request file a Registration Statement
to effect a registration under the Securities Act covering all Registrable
Securities for which Katy receives a request from the Converting Holders within
30 days of the delivery of the notice by Katy as required in clause (i) above;
(b) In connection with any registration effected pursuant to paragraph (a)
of this Annex II, if the majority of the Converting Holders elect to offer and
sell Registrable Securities in an underwritten offering, they shall be entitled
to select the underwriter, subject to Katy's consent (such consent not to be
unreasonably withheld), and Katy shall enter into an underwriting agreement
(together with the Converting Holders electing to sell their Registrable
Securities in an underwritten offering) with such underwriter. In the event the
underwriter has not limited the number of Registrable Securities or other
securities to be underwritten, Katy may include its securities for its own
account in such registration and underwriting if the underwriter so agrees and
if the number of Registrable Securities included in such underwriting will not
be limited;
(c) In the event Katy registers Common Shares pursuant to a Registration
Statement (other than registrations on Form S-4 or Form S-8), the Converting
Holders shall have the right to include all or part of the Registrable
Securities owned by them at the time in such registration. Katy shall promptly
(i) give each Converting Holder written notice of such registration and (ii)
include in such registration, and in any underwriting involved therein, all the
Registrable Securities specified in a written request delivered to Katy by any
such Converting Holder within 20 days after delivery of such written notice by
Katy;
(d) If Katy elects to offer and sell the Common Shares registered pursuant
to paragraph (c) in an underwritten offering, Katy shall so advise the
Converting Holders as part of the notice given to the Converting Holders. In
such event the right of the Converting Holders to such registration of their
Registrable Securities shall be conditioned upon such underwriting being
effected and the inclusion of any Converting Holder's Registrable Securities in
such underwriting shall be subject to paragraph (e) hereof. All Converting
Holders proposing to distribute their Registrable Securities through such
underwriting shall (together with Katy) enter into an underwriting agreement
with the underwriter for such offering. The Converting Holders shall have no
right to participate in the selection of the underwriters for an offering
pursuant to this paragraph (d), provided that the underwriter is of recognized
national standing;
(e) In the event the underwriter limits the number of Common Shares to be
offered and sold in connection with a registration pursuant to paragraph (c),
the number of Registrable Securities to be included in the registration and the
underwriting shall be reduced on a pro rata basis among the Converting Holders
requesting registration. If any Converting Holder disapproves of the terms of
such underwriting, such Holder may elect to withdraw therefrom by written
notice to Katy and the underwriter delivered at least five days prior to the
effective date of the registration statement. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration;
(f) In the event any Registrable Securities are included in a Registration
Statement pursuant to this Agreement, Katy will indemnify and hold harmless
each Converting Holder whose Registrable Securities are so included, each
person, if any, who "controls" such Converting Holder (within the meaning of
the Securities Act or the Exchange Act) and their respective directors,
officers, employees and agents against all losses,
B-34
claims, damages, or liabilities, joint or several, or actions in respect
thereof to which such Converting Holder or other person entitled to
indemnification hereunder may become subject under the Securities Act, the
Exchange Act, state securities or blue sky law, common law or otherwise,
insofar as such losses, claims, damages, liabilities or actions in respect
thereof arise out of, or are based upon, any untrue statement or alleged untrue
statement of any material fact contained in such Registration Statement, any
related preliminary prospectus, or any related prospectus or any amendment or
supplement thereto, offering circular or other document (including any related
notification or the like) incident to any such registration, qualification or
compliance, or arise out of, or are based upon, any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
Katy of the Securities Act, the Exchange Act, state securities or blue sky law,
common law or otherwise and relating to action or inaction required of Katy in
connection with any such registration, qualification or compliance, and Katy
will reimburse each such Converting Holder or other person entitled to
indemnification hereunder for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that Katy will not be so liable
to the extent that any such loss, claim, damage, liability or action arises out
of, or is based upon, an untrue statement or alleged untrue statement of a
material fact or an omission or alleged omission to state a material fact in
such Registration Statement, such preliminary prospectus, or such prospectus,
or any such amendment or supplement thereto, offering circular or other
document (including any related notification or the like) incident to any
registration, qualification or compliance, in reliance upon, and in conformity
with, written information furnished to Katy by any Converting Holder
specifically for use therein. Katy will also indemnify underwriters and dealer
managers participating in the distribution, each person who "controls" such
persons (within the meaning of the Securities Act or the Exchange Act), and
their respective officers, directors, employees and agents to the same extent
as provided above with respect to the indemnification of the Converting
Holders, if so requested, except (i) with respect to information furnished in
writing specifically for use in any prospectus or Registration Statement by any
selling Converting Holders or any such underwriters, or (ii) to the extent that
any such loss, claim, damage, liability or action is solely attributable to
such underwriter's failure to deliver a final prospectus (or amendment or
supplement thereto) that corrects an actual or alleged material misstatement or
omission contained in the preliminary prospectus (or final prospectus);
(g) With respect to written information furnished to Katy by a Converting
Holder specifically for use in a Registration Statement, any related
preliminary prospectus, or any related prospectus or any supplement or
amendment thereto, offering circular or other document (including any related
notification or the like) incident to any registration, qualification or
compliance, if Registrable Securities held by it are included in the securities
as to which such registration, qualification or compliance is being effected,
such Converting Holder will severally indemnify and hold harmless Katy and its
directors, officers, employees, agents and each person, if any, who "controls"
Katy (within the meaning of the Securities Act or the Exchange Act) and any
other Converting Holder against any losses, claims, damages or liabilities,
joint or several, or actions in respect thereof, to which Katy or such other
person entitled to indemnification hereunder may become subject under the
Securities Act, the Exchange Act, state securities or blue sky laws, common law
or otherwise, insofar as such losses, claims, damages, liabilities or actions
in respect thereof arise out of, or are based upon, any untrue statement or
alleged untrue statement of any material fact contained in such Registration
Statement, such preliminary prospectus, or such prospectus, or any such
amendment or supplement thereto, offering circular or other document (including
any related notification or the like) incident to any registration,
qualification or compliance, or arise out of, or are based upon, the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; and such
Converting Holder will reimburse Katy and such other persons for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, in each case to
the extent, but only to the extent, that the same arises out of, or is based
upon, an untrue statement or alleged untrue statement of material fact or an
omission or alleged omission to state a material fact in such Registration
Statement, such preliminary prospectus, or such prospectus or any such
amendment or supplement thereto, offering circular or other document (including
any related notification or the like) incident to any registration,
qualification or compliance, in reliance upon, and in conformity with, such
written information; provided,
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however, that the obligations of each of the Converting Holders hereunder shall
be limited to an amount equal to the net proceeds to such Converting Holder of
Registrable Securities sold as contemplated herein. Katy shall be entitled to
receive indemnities from underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution, to
the same extent as provided above with respect to the information so furnished
in writing by such persons specifically for inclusion in any prospectus or
Registration Statement. The Converting Holder shall also indemnify underwriters
and dealer managers participating in the distribution and each person who
"controls" such persons (within the meaning of the Securities Act or the
Exchange Act), their officers, directors, employees and agents to the same
extent as provided herein with respect to the indemnification of Katy, if so
requested;
(h) Promptly after receipt by an indemnified party of notice of any claim or
the commencement of any action, the indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party, notify the
indemnifying party in writing of the claim or the commencement of that action;
provided, however, that the failure to notify the indemnifying party will not
relieve it from any liability that it may have to the indemnified party except
to the extent it was actually damaged or suffered any loss or incurred any
additional expense as a result thereof. If any such claim or action is brought
against an indemnified party, and it notifies the indemnifying party thereof,
the indemnifying party shall be entitled to assume the defense thereof with
counsel selected by the indemnifying party and reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, (i) the
indemnifying party will not be liable to the indemnified party for any legal or
other expense subsequently incurred by the indemnified party in connection with
the defense thereof, (ii) the indemnifying party will not be liable for the
costs and expenses of any settlement of such claim or action unless such
settlement was effected with the written consent of the indemnifying party or
the indemnified party waived any rights to indemnification hereunder in
writing, in which case the indemnified party may effect a settlement without
such consent, and (iii) the indemnified party will be obligated to cooperate
with the indemnifying party in the investigation of such claim or action;
provided, however, that the indemnified party who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by such
indemnified party may employ its own counsel if such indemnified party has been
advised by counsel in writing that, in the reasonable judgment of such counsel,
it is advisable for such indemnified party to be represented by separate
counsel due to the presence of actual or potential conflicts of interest, and
in that event the fees and expenses of such separate counsel will also be paid
by the indemnifying party; provided that the indemnifying party shall not be
liable for the reasonable fees and expenses of more than one separate counsel
at any time for all such indemnified parties. An indemnifying party shall not,
without the prior written consent of the indemnified parties, settle,
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes a release of such
indemnified party reasonably acceptable to such indemnified party from all
liability arising out of such claim, action, suit or proceeding and unless the
indemnifying party shall confirm in a written agreement reasonably acceptable
to such indemnified party, that notwithstanding any federal, state or common
law, such settlement, compromise or consent shall not adversely affect the
right of any indemnified party to indemnification or contribution as provided
in this Agreement as such rights may be limited by applicable law without
regard to such settlement, compromise or consent;
(i) If for any reason the indemnification provided for in paragraphs (f) or
(g) is unavailable to an indemnified party or is insufficient to hold such
indemnified party harmless as contemplated therein, then the indemnifying party
shall contribute to the amount paid or payable by the indemnified party as a
result of such loss, claim , damage or liability in such proportion as is
appropriate to reflect not only the relative benefits received by the
indemnifying party and the indemnified party, but also the relative fault of
the indemnifying party and the indemnified party, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether the untrue (or alleged untrue) statement of a material fact or the
omission (or alleged omission) to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the
B-36
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission; provided, however, that the
obligations of each of the Converting Holders hereunder shall be limited to an
amount equal to the net proceeds to such Converting Holder of Registrable
Securities sold as contemplated herein. No person guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation;
(j) The obligations under this Annex II shall survive the completion of any
offering of Registrable Securities in a Registration Statement pursuant to this
Agreement, and otherwise;
(k) Notwithstanding the foregoing provisions of this Annex II, to the extent
that the provisions regarding indemnification and contribution contained in the
underwriting agreement entered into in connection with any underwritten public
offering contemplated by this Agreement are in conflict with the foregoing
provisions, the provisions in such underwriting agreement shall be controlling,
provided that each Converting Holder, each person, if any, who controls such
Converting Holder (within the meaning of the Securities Act or the Exchange
Act) and their respective directors, officers, employees and agents receive
protection in all material respects as extensive and are subject to obligations
that are not materially more extensive, than those set forth in this Annex II;
(l) In the case of any demand registration pursuant to paragraph (a), Katy
shall pay all registration expenses. In the case of any registration pursuant
to paragraph (c), the requesting Converting Holders shall bear the pro rata
share of underwriter's fees, discounts and commissions incurred in such
registration and any incremental registration expenses, in each case, including
(i) incremental registration and qualification fees and expenses, and (ii) any
incremental costs and disbursements (including legal fees and expenses) that
result from the inclusion of the Registrable Securities included in such
registration, with such incremental expenses being borne by the requesting
Converting Holders on a pro rata basis.
Unless otherwise defined herein, capitalized terms used herein shall have
the meaning ascribed to them in the Agreement to which this Annex II is
attached.
B-37
EXHIBIT A
As used herein, the following terms shall have the following meanings unless
the context otherwise requires:
"Accounts Payable" shall have the meaning set forth in Section 3.5 hereof.
"Accounts Receivable" shall have the meaning set forth in Section 3.5
hereof.
"Affiliate" shall have the meaning set forth in Section 3.10 hereof.
"Agreement" shall have the meaning set forth in Paragraph 1 hereof.
"Agreement Shareholders" shall have the meaning set forth in the Recitals
hereof.
"Business Day" shall have the meaning set forth in Section 1.1 hereof.
"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
"Closing" shall have the meaning set forth in Section 2.2 hereof.
"Code" shall have the meaning set forth in Section 3.13 hereof.
"Common Shares" shall have the meaning set forth in the Recitals hereof.
"Confidentiality Agreement" shall have the meaning set forth in Section 5.2
hereof.
"Contico" shall have the meaning set forth in Section 3.2 hereof.
"Contico Common Units" shall have the meaning set forth in Section 3.2
hereof.
"Contico Preferred Units" shall have the meaning set forth in Section 3.2
hereof.
"Continuing Katy Employees" shall have the meaning set forth in Section 5.4
hereof.
"Contracts" shall have the meaning set forth in Section 3.24 hereof.
"Convertible Preferred Stock" shall have the meaning set forth in the
Recitals hereof.
"Converting Holders" shall have the meaning set forth in Annex II hereof.
"Current Katy Group" shall have the meaning set forth in Section 3.18
hereof.
"DGCL" shall have the meaning set forth in Section 1.1 hereof.
"Environmental, Health and Safety Laws" shall have the meaning set forth in
Section 3.12 hereof.
"ERISA" shall have the meaning set forth in Section 3.13 hereof.
"ERISA Affiliate" shall have the meaning set forth in Section 3.13 hereof.
"Exchange Act" shall have the meaning set forth in Section 1.1 hereof.
"Form S-3" shall have the meaning set forth in Annex II hereof
"GAAP" shall have the meaning set forth in Section 3.4 hereof.
B-38
"Hamilton" shall have the meaning set forth in the Section 3.14 hereof.
"Initial Proxy Statement" shall have the meaning set forth in the Recitals
hereof.
"Insurance Amount" shall have the meaning set forth in Section 5.11 hereof.
"Intellectual Property" shall have the meaning set forth in Section 3.19
hereof.
"Inventory" shall have the meaning set forth in Section 3.5 hereof.
"Katy" shall have the meaning set forth in Paragraph 1 hereof.
"Katy Acquisition Agreement" shall have the meaning set forth in Section 5.8
hereof.
"Katy Affiliated Group" shall have the meaning set forth in Section 3.18
hereof.
"Katy Benefit Plans" shall have the meaning set forth in Section 3.13
hereof.
"Katy Common Stock" shall have the meaning set forth in the Recitals hereof.
"Katy Group" shall have the meaning set forth in Section 3.1 hereof.
"Katy Required Approvals" shall have the meaning set forth in Section 3.3
hereof.
"Katy SEC Reports" shall have the meaning set forth in Section 3.4 hereof.
"Katy Stock Option Plans" shall have the meaning set forth in Section 3.2
hereof.
"Katy Takeover Proposal" shall have the meaning set forth in Section 5.8
hereof.
"Katy's Knowledge" shall have the meaning set forth in Section 3.5 hereof.
"Licenses" shall have the meaning set forth in Section 3.22 hereof.
"Material Adverse Effect" shall have the meaning set forth in Section 3.1
hereof.
"Material Contracts" shall have the meaning set forth in Section 3.24
hereof.
"Officer's Certificate" shall have the meaning set forth in Section 6.3
hereof.
"Option" shall have the meaning set forth in Section 3.2 hereof.
"Other Directors" shall have the meaning set forth in Section 5.14 hereof.
"Other Holders" shall have the meaning set forth in Section 5.14 hereof.
"Past Katy Group" shall have the meaning set forth in Section 3.18 hereof.
"Preferred Purchase Price" shall have the meaning set forth in Section 2.1
hereof.
"Preferred Stock Purchase" shall have the meaning set forth in the Recitals
hereof.
"Proxy Statement" shall have the meaning set forth in Section 1.1 hereof.
"Proxy Supplement" shall have the meaning set forth in the Recitals hereof.
"Purchaser" shall have the meaning set forth in Paragraph 1 hereof.
B-39
"Purchaser Affiliate" shall have the meaning set forth in Section 5.14
hereof.
"Purchase Agreement" shall have the meaning set forth in the Recitals
hereof.
"Purchaser Designees" shall have the meaning set forth in Section 1.1
hereof.
"Purchaser Closing Conditions" shall have the meaning set forth in Section
2.1 hereof.
"Purchaser Required Approvals" shall have the meaning set forth in Section
4.2 hereof.
"Purchaser Securities Filings" shall have the meaning set forth in Section
4.6 hereof.
"Reference Balance Sheet" shall have the meaning set forth in Section 3.5
hereof.
"Recapitalization" shall have the meaning set forth in the Recitals hereof.
"Refinancing" shall have the meaning set forth in the Recitals hereof.
"Registrable Securities" shall have the meaning set forth in Section 5.15
hereof.
"Registration Statement" shall have the meaning set forth in Annex II
hereof.
"Rights" shall have the meaning set forth in the Recitals hereof.
"Rights Agreement" shall have the meaning set forth in the Recitals hereof.
"SEC" shall have the meaning set forth in Section 1.2 hereof.
"Securities Act" shall have the meaning set forth in Section 3.3 hereof.
"Securities Filings" shall have the meaning set forth in Section 3.17
hereof.
"Shareholder Meeting" shall have the meaning set forth in the Recitals.
"Subsidiary" shall have the meaning set forth in Section 3.1 hereof.
"Superior Proposal" shall have the meaning set forth in Section 5.8 hereof.
"Tax Return" shall have the meaning set forth in Section 3.18 hereof.
"Taxes" shall have the meaning set forth in Section 3.18 hereof.
"Termination Date" shall have the meaning set forth in Section 5.1 hereof.
"Termination Fee" shall have the meaning set forth in Section 7.2 hereof.
"Unanimously" shall have the meaning set forth in Section 1.1 hereof.
"Voting Agreement" shall have the meaning set forth in the Recitals hereof.
B-40
ANNEX C
CERTIFICATE OF AMENDMENT
TO
THE RESTATED CERTIFICATE OF INCORPORATION
OF
KATY INDUSTRIES, INC.
KATY INDUSTRIES, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation at a meeting on June
2, 2001 adopted a resolution setting forth a proposed amendment of the Restated
Certificate of Incorporation of the Corporation, as amended (the "Restated
Certificate of Incorporation") declaring said amendment to be advisable and
directing that said amendment be submitted to the stockholders of the
Corporation for consideration thereof at the next annual meeting of
stockholders. The proposed amendment to the Restated Certificate of
Incorporation is as follows:
RESOLVED, that Article Fourth of the Restated Certificate of Incorporation
shall be deleted and amended in its entirety to read as follows:
"FOURTH: The aggregate number of shares of all classes of stock which the
corporation shall have the authority to issue is thirty-six million two hundred
thousand (36,200,000) shares, divided into two classes, one class consisting of
one million two hundred thousand (1,200,000) shares of Preferred Stock of the
par value of one hundred dollars ($100.00) per share, and the other class
consisting of thirty-five million (35,000,000) shares of Common Stock of the
par value of one dollar ($1.00) per share.
1. Preferred Stock. The Preferred Stock of the Corporation shall have the
following relative rights and references which are fixed and determined as set
forth herein.
2. Rank. The Preferred Stock shall be prior in right with respect to
distribution of the Corporation's assets upon redemption and upon the voluntary
or involuntary liquidation, dissolution or winding up of the Corporation to all
other equity securities of the Corporation, including, without limitation, the
Common Stock, whether now or hereafter authorized.
3. Certain Definitions. As used in this Article Fourth and elsewhere in this
Certificate of Amendment, unless the context otherwise requires:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Beneficial Ownership" shall have the meaning set forth in Rule 13d-3
under the Exchange Act or any corresponding provision of a successor law.
(c) "Change in Control" shall mean the acquisition by a person or group of
persons, whether in a single transaction or a series of related transactions,
of Beneficial Ownership of thirty percent (30%) or more, after giving effect to
such transaction or transactions, of the combined voting power of the
outstanding capital stock of the Corporation.
(d) "Common Stock" shall mean the Corporation's authorized Common Stock,
$1.00 par value, and any stock into which such Common Stock may thereafter be
changed or converted, and shall also include stock of the Corporation of any
other class, which is not preferred as to dividends or the distribution of
assets upon liquidation, dissolution or winding up over any other class of
stock of the Corporation, issued to the holders of shares of Common Stock upon
any reclassification thereof.
C-1
(e) "Conversion Factor" shall mean six (6), as adjusted from time to time in
accordance with Section 6(c) of this Article Fourth.
(f) "Conversion Rate" shall mean one hundred (100) divided by the Conversion
Factor, as adjusted from time to time in accordance with Section 6(c) of this
Article Fourth.
(g) "Effective Date" shall mean June , 2001.
(h) "Exchange Act" shall mean the United States Securities Exchange Act of
1934, as amended.
(i) "Liquidation" shall mean any voluntary or involuntary liquidation,
winding up, or dissolution of the Corporation. A merger, consolidation or other
business combination between the Corporation and any other entity or a sale or
other disposition of all or substantially all of the assets of the Corporation
will not be treated as a Liquidation.
4. Liquidation Preference.
(a) In the event of any Liquidation, holders of Preferred Stock shall be
entitled to receive out of the assets of the Corporation, prior to and in
preference of any distribution or payment upon the Common Stock, an amount in
cash per share of Preferred Stock equal to the par value thereof. If, upon the
occurrence of a Liquidation, the assets and funds thus distributed among the
holders of the Preferred Stock shall be insufficient to permit the payment in
full of the par value thereof for each share of Preferred Stock, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Preferred Stock in
proportion to their respective ownership of shares of Preferred Stock.
(b) Written notice of such Liquidation stating a payment date and the place
where payment in respect of Liquidation shall be payable, shall be given by
mail, postage prepaid, not less than twenty (20) days prior to the payment date
stated therein, to the holders of record of Preferred Stock, such notice to be
addressed to each such holder at its address as shown by the records of the
Corporation.
5. Dividends. The holders of each outstanding share of Preferred Stock shall
be entitled to receive cumulative dividends at the rate of fifteen percent
(15%) (subject to appropriate adjustments in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting such
shares) per share per annum which shall accrue from August 1, 2001 and be
payable on the first business day of August, in each year (the "Preferred
Dividend Date"), commencing August 1, 2002, provided that no dividends shall
accrue or be payable by the Corporation after December 31, 2004 (the "Final
Preferred Dividend Date"). Each dividend shall be paid in additional shares of
Preferred Stock. Dividends shall be paid on the basis that each share of
Preferred Stock has a value of one hundred dollars ($100.00). The number of
additional shares of Preferred Stock that shall be issued to each holder of
Preferred Stock shall be the total number of shares of Preferred Stock then
held by such holder (including for the avoidance of doubt any shares of
Preferred Stock previously paid to such holders as a dividend hereunder)
multiplied by fifteen percent (15%). Each dividend paid in additional shares of
Preferred Stock shall be mailed to the holders of record of the Preferred Stock
as their names and addresses appear on the share register of the Corporation.
Holders of Preferred Stock shall receive written notification from the
Corporation, which will specify the number of shares of Preferred Stock paid as
a dividend and the recipient's aggregate holdings of Preferred Stock as of the
dividend payment date and after giving effect to the dividend. In the event
that a share of Preferred Stock is converted into Common Stock or redeemed by
the Corporation on a date other than a Preferred Dividend Date, on the date of
such conversion or redemption the Corporation shall pay prorated dividends on
such shares of Preferred Stock accrued from the preceding Preferred Dividend
Date to the date of conversion or redemption. The Corporation shall also pay
prorated dividends on the shares of Preferred Stock accrued during the period
commencing on August 1, 2004 and ending on the Final Preferred Dividend Date
(the "Final Preferred Dividend Period"). In each case, such prorated dividends
shall be calculated by multiplying the annual dividend that would have been
payable to the holder of such share of Preferred Stock (assuming for purposes
of the Final Preferred Dividend Period that dividends would have been payable
for a full one-year period) by a fraction, the numerator of which shall be
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the number of days elapsed since the preceding Preferred Dividend Date and the
denominator of which shall be three hundred and sixty-five (365) days. On the
Final Preferred Dividend Date the holders of Preferred Stock shall receive a
cash payment (based on an assumed value of $100 per share) equal to the value
of any fractional shares then held by such holders. Other than as set forth in
this Section 5, the Preferred Stock shall not be entitled to receive dividends.
6. Conversion. The holders of the Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Optional Conversion Rights. After the earlier of (i) the fifth
anniversary of the Effective Date, (ii) the approval of the Board of Directors
of the Corporation of a merger, consolidation or other business combination
between the Corporation and another entity (except where the Corporation is the
surviving entity and no Change in Control of the Corporation occurs as a result
of the transaction) or a sale or other disposition of all or substantially all
of the Corporation's assets, (iii) the authorization by the Board of Directors
of the Corporation of, or other corporate action taken to effect, a
Liquidation, and (iv) the solicitation of proxies from the holders of any class
or classes of capital stock of the Corporation for any annual or special
meeting of shareholders, however called, at which an election for directors of
the Corporation is held, or any solicitation of written consent of the holders
of any class or classes of capital stock of the Corporation with respect to the
election of directors, against the election as director of any nominee
designated by the holders of the Preferred Stock or for removal of any
incumbent director originally nominated by the holders of the Preferred Stock,
each share of Preferred Stock shall be convertible, at the option of the holder
thereof, at any time, and from time to time, into the number of fully paid and
nonassessable shares of Common Stock equal to the Conversion Rate, as adjusted
from time to time in accordance with Article Fourth, Section 6(c).
(b) Mechanics of Conversion. If a holder of shares of Preferred Stock
desires to exercise its right of conversion, such holder shall give written
notice to the Corporation (the "Conversion Notice") of such holder's election
to convert a stated number of shares of such Preferred Stock (the "Conversion
Shares") into shares of Common Stock, and surrender to the Corporation such
holder's certificate or certificates representing such Conversion Shares. The
Conversion Notice shall state the name or names (with addresses) in which the
certificate or certificates for Common Stock shall be issued. Notwithstanding
the foregoing, the Corporation shall not be required to issue any certificates
to any person other than the holder thereof unless (i) the holder has paid to
the Corporation the amount of any documentary stamp or similar taxes payable in
respect of transfer involved in the issue or delivery of the certificate upon
conversion to a person other than the holder or has established to the
satisfaction of the Corporation that such tax has been paid; and (ii) the
Corporation has obtained reasonable assurance that such transaction is exempt
from the registration requirements of, or is covered by an effective
registration statement under, the Act and all applicable state securities laws,
including, if necessary in the reasonable judgment of the Corporation or its
legal counsel, receipt of an opinion to such effect from counsel reasonably
satisfactory to the Corporation. As soon as is practicable after the receipt of
the Conversion Notice and the surrender of the certificate or certificates
representing the Conversion Shares, the Corporation shall issue and deliver, or
cause to be delivered, to the holder of the Conversion Shares or his nominee or
nominees, a certificate or certificates for the number of shares of Common
Stock issuable upon the conversion of such Conversion Shares and a certificate
or certificates evidencing any shares of Preferred Stock represented by the
certificates so tendered by the holder that were not to be converted. Such
conversion shall be deemed to have been effected as of the close of business on
the date the Corporation received the Conversion Notice and the certificate or
certificates representing the Conversion Shares, and the person or persons
entitled to receive the shares of Common Stock issuable upon conversion shall
be treated for all purposes as the holder or holders of record of such shares
of Common Stock as of the close of business on such date. If the conversion is
in connection with an underwritten offering of securities registered pursuant
to the Act, the conversion may, at the option of any holder tendering Preferred
Stock for conversion, be conditioned upon the closing with the underwriters of
the sale of securities pursuant to such offering in which event the person(s)
entitled to receive Common Stock upon conversion of such Preferred Stock shall
not be deemed to have converted such Preferred Stock until immediately prior to
the closing of such sale of securities.
C-3
(c) Conversion Factor and Conversion Rate Adjustments. The Conversion Factor
and, correspondingly, the Conversion Rate shall be subject to adjustment as
follows:
(i) Dividends and Distributions. In the event the Corporation should
at any time or from time to time after the Effective Date fix a record
date for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in
additional shares of Common Stock, then, as of such record date (or, if
no record date is fixed, as of the close of business on the date on
which the Board of Directors adopts the resolution relating to such
dividend, distribution, split or subdivision), the Conversion Factor in
effect immediately prior to such date shall be multiplied by a
fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior thereto and the denominator
of which shall be the number of shares of Common Stock outstanding
immediately thereafter.
(ii) Combinations. If the number of shares of Common Stock
outstanding at any time after the Effective Date is decreased by a
combination of the outstanding shares of Common Stock, then following
such combination, the Conversion Factor in effect immediately prior
thereto shall be multiplied by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior
thereto and the denominator of which shall be the number of shares of
Common Stock outstanding immediately thereafter.
(iii) Recapitalizations, etc. If any capital reorganization or
reclassification of the Common Stock of the Corporation (other than a
consolidation or merger of the Corporation with or into another
corporation provided for elsewhere in this Article Fourth, Section 6(a)
or other than a Liquidation as set forth in Article Fourth, Section 4),
shall be effected, then, as a condition of such reorganization,
reclassification, consolidation or merger, lawful and adequate
provision shall be made whereby the holders of the Preferred Stock then
outstanding shall have the right to receive, in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable with
respect to such shares of Preferred Stock, such shares of stock,
securities, properties or assets, including cash, as would have been
issued or payable with respect to or in exchange for the shares of
Common Stock which such holders would have held had the shares of
Preferred Stock been converted immediately prior to such
reorganization, reclassification, consolidation or merger. In
connection with any provision made pursuant to the terms of the
preceding sentence, provision shall also be made for adjustments to
have effect thereafter which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The
above provisions of this Section 6(c)(iii) shall similarly apply to
successive reorganizations, reclassifications, consolidations or
mergers.
(iv) Dilutive Transactions. If the Corporation shall issue or sell
shares of Common Stock (including shares now or hereafter held in the
treasury of the Corporation) at a price per share, or shall grant
rights, options or warrants having an exercise price per share, or
securities convertible into Common Stock having a conversion price per
share, less than the Conversion Factor, expressed in dollars, in effect
at that time, then, upon such issue, sale or grant, the Conversion
Factor shall be adjusted to the amount (calculated to the nearest one
hundredth of a cent) determined by dividing: (x) an amount equal to the
sum of (A) the existing Conversion Factor multiplied by the sum of (1)
the number of shares of Common Stock outstanding immediately prior to
such issue, sale or grant and (2) the number of shares of Common Stock
issuable upon conversion, exercise or exchange of any rights, options,
warrants and convertible securities outstanding immediately prior to
such issue, sale or grant, and (B) the aggregate consideration, if any,
received by the Corporation upon such issue, sale or grant (including,
in the case of rights, options, warrants or convertible securities, the
consideration to be received on conversion, exercise or exchange
thereof) by (y) the total number of shares of Common Stock outstanding
and issuable upon conversion, exercise or exchange of any rights,
options, warrants and convertible securities immediately after such
issue, sale or grant; provided, however, that no such adjustment shall
be made with respect to (I) the issuance of shares of Common Stock upon
the exercise or conversion of rights, options, warrants or other
securities convertible into Common Stock
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outstanding as of the Effective Date, (II) shares of Common Stock,
rights, options or warrants granted or awarded by the Corporation, with
the approval of its Board of Directors or the Compensation Committee
thereof, to employees, directors and consultants of the Corporation as
compensation for service to the Corporation in any such capacities, if
such rights, options or warrants are granted at an exercise price or
value not less than the fair market value of a share as of the date of
grant ("Compensatory Securities"), or (III) the issuance of Common
Stock upon the conversion of any Preferred Stock by a holder thereof.
The securities described in subclauses (I), (II) and (III) of this
Article Fourth, Section 6(c)(iv) are referred to below as "Exempted
Securities".
For purposes of this Article Fourth, Section 6(c)(iv) above, the following
clauses 1. through 3., inclusive, shall also be applicable:
1. If the Corporation shall grant any rights, options or warrants to
purchase Common Stock or to purchase securities convertible into Common Stock
(other than Exempted Securities), and the purchase price per share for which
Common Stock is issuable upon the exercise or conversion of such securities
(determined by dividing (x) the total amount, if any, received or receivable by
the Corporation as consideration for the granting of all such rights, options
or warrants, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such rights, options or
warrants, plus, in the case of convertible securities, the minimum aggregate
amount of additional consideration payable upon the conversion thereof, by (y)
the maximum aggregate number of shares of Common Stock issuable upon the
exercise of such rights, options or warrants or upon the conversion of any such
convertible securities issuable upon the exercise of such rights, options or
warrants) shall be less than the Conversion Factor, expressed in dollars, in
effect immediately prior to the time of the granting of such rights, options,
warrants or convertible securities, then the maximum aggregate number of shares
of Common Stock issuable upon the exercise of such rights, options or warrants
or upon the conversion of the total maximum amount of such convertible
securities issuable upon the exercise of such rights, options or warrants shall
(as of the date of grant thereof) be deemed to be outstanding and to have been
issued for such price per share. No further adjustments of the Conversion
Factor shall be made upon the actual issuance of such Common Stock or
convertible securities upon the exercise or conversion of such securities,
except as otherwise provided in clause 3. below;
2. If the Corporation shall issue or sell any convertible securities (other
than Exempted Securities), and the purchase per share for which Common Stock is
issuable upon such conversion (determined by dividing (x) the total amount
received or receivable by the Corporation as consideration for the issue or
sale of all such convertible securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion thereof, by (y) the maximum aggregate number of shares of Common
Stock issuable upon the conversion of all such convertible securities) shall be
less than the Conversion Factor, expressed in dollars, in effect immediately
prior to the time of such issue or sale, then the maximum number of shares of
Common Stock issuable upon conversion of all such convertible securities shall
(as of the date of the issue or sale thereof) be deemed outstanding and to have
been issued for such price per share, provided that, except as otherwise
specified in clause 3. below, (A) no further adjustments of the Conversion
Factor shall be made upon the actual issuance of such Common Stock upon
conversion of such convertible securities, and (B) if any such issue or sale of
such convertible securities is made upon the exercise of any rights to
subscribe for or to purchase or upon exercise of any option or warrant to
purchase any such convertible securities, no further adjustment of the
Conversion Factor shall be made by reason of such issue or sale; and
3. If the purchase price or number of shares purchasable provided for in any
right, warrant or option referred to in clause 1. above, or the rate at which
any convertible securities referred to in clause 1. or 2. above are convertible
into Common Stock shall change at any time (other than under or by reason of
provisions designed to protect against dilution in connection with events for
which provision for adjustments in the Conversion Factor are provided for
herein), the Conversion Factor then in effect hereunder shall forthwith be
readjusted to such Conversion Factor as would have been obtained had the
adjustments made upon the issuance of such rights, warrants, options or
convertible securities been made upon the basis of the changed terms; and on
the expiration of any such right, warrant or option referred to in clause 1.
above or the termination of any such right to convert such convertible
securities referred to in clause 1. or 2. above, the Conversion Factor then
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in effect hereunder shall forthwith be readjusted to such Conversion Factor as
would have been obtained had the adjustments made upon the issuance of such
rights, warrants or options or convertible securities been made upon the basis
of the issuance of only the number of shares of Common Stock, if any,
theretofore actually delivered upon the exercise of such rights, warrants or
options or upon the conversion of such convertible securities.
(d) No Impairment. The Corporation will not, by amendment of its
Restated Certificate of Incorporation or through any reorganization,
reclassification, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of
this Section 6 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Preferred Stock against impairment.
(e) No Fractional Shares: Certificate as to Adjustments.
(i) No fractional shares of Common Stock shall be issued upon
conversion of the Preferred Stock. In lieu of fractional shares, the
Corporation shall pay the holder the fair market value of such
fractional share of Common Stock in cash.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Factor and the corresponding Conversion Rate for the
Preferred Stock pursuant to this Section 6, the Corporation, at its
expense, shall as soon as practicable compute such adjustment or
readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Preferred Stock,
furnish or cause to be furnished to such holder a like certificate
setting forth (A) such adjustment and readjustment, (B) the Conversion
Factor and Conversion Rate at the time in effect, and (C) the number of
shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of a share of
Preferred Stock.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock solely for the purpose of effecting the conversion of the
shares of the Preferred Stock, free from any preemptive right or other
obligation, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of the
Preferred Stock; and if at any time the number of authorized but unissued
shares of the Common Stock shall not be sufficient to effect the conversion of
all then outstanding shares of the Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock, the
Corporation shall as soon as practicable take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purposes. The Corporation
shall prepare and shall use its best efforts to obtain and keep in force such
governmental or regulatory permits or other authorizations as may be required
by law, and shall comply with all requirements as to registration,
qualification or listing of the Common Stock, in order to enable the
Corporation lawfully to issue and deliver to each holder of record of Preferred
Stock such number of shares of its Common Stock as shall from time to time be
sufficient to effect the conversion of all Preferred Stock then outstanding and
convertible into shares of Common Stock.
(g) Notices. Any notice required by the provisions of this Article Fourth,
Section 6 to be given to the holders of shares of Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, or by a
recognized commercial delivery service (e.g., United Parcel Service), delivery
prepaid and addressed to each holder of record at his address appearing on the
books of this Corporation.
7. Voting Rights. Except as provided in Section 8 below, and except as
otherwise required by law, a holder of Preferred Stock shall have no voting
rights.
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8. Protective Provisions. The Corporation shall not, without first obtaining
the approval (by vote or written consent) of the holders of at least a majority
of the then outstanding shares of Preferred Stock:
(a) authorize or issue any class or series of equity security having
equal or superior rights as to payment upon liquidation, dissolution or a
winding up of the Corporation;
(b) amend its Restated Certificate of Incorporation or By-Laws in any
way, or enter into a merger, consolidation, reorganization,
recapitalization or sale of all or substantially all of its assets, in any
case which adversely effects the rights and preferences of the holders of
the Preferred Stock as a class (except that the Corporation may complete a
reverse-split of its Common Stock without the consent of the holders of the
Preferred Stock);
(c) engage in any transaction which would impair or reduce the rights of
the holders of the Preferred Stock as a class.
9. Optional Redemption of the Preferred Stock. The Convertible Preferred
Stock will not be subject to a sinking fund or other obligations of the
Corporation to redeem or retire the Preferred Stock. The holders of Preferred
Stock shall have no right to compel the Corporation to redeem the Preferred
Stock. The Preferred Stock shall be redeemable in whole, but not in part, at
the Corporation's option at any time on or after June 30, 2021. The redemption
price per share of Preferred Stock shall equal the par value thereof, and shall
be payable in cash to the order of the holder on the 30th day after notice of
redemption shall have been given to the holders, subject to each holder's right
to convert any or all of its shares of Preferred Stock into Common Stock in
lieu of such payment.
10. Cancellation of Shares. No Preferred Stock acquired by the Corporation
by reason of redemption, purchase, conversion or otherwise shall be reissued,
and all such acquired Preferred Stock shall be canceled, retired, and
eliminated from the shares which the Corporation shall be authorized to issue.
The Corporation shall from time to time take such appropriate corporate action
as may be necessary to reduce the authorized number of Preferred Shares
accordingly.
SECOND: That the Board of Directors of the Corporation at a meeting on March
29, 2001 adopted resolutions setting forth a proposed amendment of the Restated
Certificate of Incorporation declaring said amendment to be advisable and
directing that said amendment be submitted to the stockholders of the
Corporation for consideration thereof at the next annual meeting of
stockholders. The proposed amendment to the Restated Certificate of
Incorporation is as follows:
RESOLVED, that Article Tenth of the Restated Certificate of Incorporation be
and it hereby is renumbered as Article Eleventh.
FURTHER RESOLVED, that a new Article Tenth be and it hereby is added to the
Restated Certificate of Incorporation as follows:
"TENTH: Commencing with the annual meeting of stockholders in 2001,
directors shall be divided into two classes, as nearly equal in number as
possible, designated as Class I and Class II. The initial term of office of the
Class I directors shall expire on the day of the first annual meeting of
stockholders following the end of the 2001 fiscal year (the "2002 Annual
Meeting") and the initial term of office of the Class II directors shall expire
on the day of the annual meeting of stockholders next succeeding the 2002
Annual Meeting. At each annual meeting of stockholders following such
classification and division of the members of the board of directors, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the second succeeding annual meeting of
stockholders after their election, so that the term of office of one class of
directors shall expire in each year. Each director shall hold office until the
expiration of such director's term of office and until such director's
successors shall have been elected and qualified, or until such director's
earlier resignation, removal or death. In case of any increase or decrease,
from time to time, in the number of directors constituting the whole board of
directors, the number of directors in each class shall be determined by action
of the board of directors. A director elected by the remainder of the board of
directors to
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fill a vacancy shall hold office for the remaining term of the predecessor
director and until such director's successor has been elected and qualified, or
until such director's earlier resignation, removal and death."
THIRD: That pursuant to Section 242 of the General Corporation Law of the
State of Delaware, the holders of a majority of the issued and outstanding
shares of capital stock of the Corporation entitled to vote on the matter voted
in favor of, approved and adopted the foregoing proposed amendments of the
Restated Certificate of Incorporation at the Corporation's annual meeting, duly
convened and held on June [ ], 2001.
FOURTH: That the aforesaid amendments were duly adopted in accordance with
the applicable provisions of Sections 141 and 242(b)(1) of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment
to be signed and executed in its corporate name by its President and attested
to by its Secretary, who declare, affirm, acknowledge and certify, under the
penalties of perjury, that this is their free act and deed and that the facts
stated herein are true and caused its corporate seal to be hereunto affixed, as
of the day of June, 2001.
Effective Date: June , 2001
ATTEST:
Katy Industries, Inc.
a Delaware corporation
By: _________________________________ By: _________________________________
Arthur R. Miller, Secretary Robert M. Baratta, President
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ANNEX D
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STOCK VOTING AGREEMENT
by and among
KKTY HOLDING COMPANY, L.L.C.
and
THE SHAREHOLDERS NAMED HEREIN
Dated as of June 2, 2001
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TABLE OF CONTENTS
Page
----
1.Definitions............................................................. 1
2.Termination of Stock Voting and Tender Agreement........................ 1
3.Provisions Concerning the Securities.................................... 1
(a)Agreement To Vote the Securities...................................... 1
(b)Grant of Proxy........................................................ 2
(c)Other Proxies Revoked................................................. 2
4.Representations and Warranties of Each Shareholder...................... 3
(a)Power, etc. .......................................................... 3
(b)Ownership of Common Shares............................................ 3
(c)No Conflicts.......................................................... 3
(d)No Finder's Fees...................................................... 3
(e)No Encumbrances....................................................... 3
(f)Reliance by Purchaser................................................. 3
5.Additional Covenants of Each Shareholder................................ 4
(a)No Solicitation....................................................... 4
(b)Restriction on Transfer, Proxies and Non-Interference................. 4
(c)[Reserved]............................................................ 4
(d)Stop Transfer; Changes in Subject Shares.............................. 4
(e)Cooperation........................................................... 4
(f)Releases.............................................................. 4
6.Fiduciary Duties........................................................ 5
7.Miscellaneous........................................................... 5
(a)Further Assurances.................................................... 5
(b)Notices............................................................... 5
(c)Interpretation........................................................ 6
(d)Counterparts.......................................................... 6
(e)Entire Agreement; No Third-Party Beneficiaries........................ 6
(f)Governing Law......................................................... 6
(g)Assignment............................................................ 6
(h)Binding Agreement..................................................... 6
(i)Severability.......................................................... 6
(j)Enforcement of this Agreement......................................... 6
(k)Amendments............................................................ 6
8.Termination............................................................. 7
9.Publication............................................................. 7
10.Scope of Obligations.................................................... 7
i
STOCK VOTING AGREEMENT
STOCK VOTING AGREEMENT (this "Agreement") dated as of June 2, 2001, among
KKTY HOLDING COMPANY, L.LC., a Delaware limited liability company ("Purchaser")
and the shareholders listed on Schedule I hereto (individually, a
"Shareholder," and collectively, the "Shareholders").
WITNESSETH:
WHEREAS, simultaneously with entering into this Agreement, Purchaser and
Katy Industries, Inc., a Delaware corporation ("Katy"), are entering into a
Preferred Stock Purchase and Recapitalization Agreement (the "Recapitalization
Agreement"), pursuant to which Purchaser will purchase from Katy 700,000 shares
of newly issued preferred stock, $100.00 par value per share (the "Convertible
Preferred Stock"), convertible based on a price of $6.00 per Common Share into
an aggregate of 11,666,666 Common Shares (equivalent to a ratio of
approximately 16.67 Common Shares per share of Convertible Preferred Stock),
for a purchase price of $100.00 per share (or an aggregate purchase price of
$70,000,000) (the "Preferred Stock Purchase") (the Preferred Stock Purchase and
the other transactions contemplated by the Recapitalization Agreement are
collectively referred to herein as the "Recapitalization");
WHEREAS, as of the date hereof, each Shareholder is the record and, except
in the case of a Shareholder who is a trustee and owns the Common Shares for
the benefit of a beneficiary, beneficial owner of the number of Common Shares
set forth opposite such Shareholder's name on Schedule I hereto;
WHEREAS, the Shareholders have agreed that the Shareholders shall vote
2,480,000 Common Shares owned (whether of record or beneficially) by such
Shareholders, as of the date hereof and any Common Shares hereinafter acquired
up to an aggregate of 2,480,000 Common Shares owned (these 2,480,000 Common
Shares owned (whether of record or beneficially) as of the date hereof and
hereinafter acquired, the "Securities") with respect to certain questions that
may be put to the Shareholders, in each case, in accordance with the terms and
conditions of this Agreement; and
WHEREAS, as an inducement and a condition to entering into the
Recapitalization Agreement, Purchaser has required that the Shareholders enter
into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual premises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions. For purposes of this Agreement capitalized terms used and
not defined herein have the respective meanings ascribed to them in the
Recapitalization Agreement.
2. Termination of Stock Voting and Tender Agreement. The Purchaser and the
Shareholders agree that the Stock Voting and Tender Agreement dated as of March
29, 2001 among the Purchaser and the Shareholders terminated in accordance with
Section 8 thereof upon the termination of the Preferred Stock Purchase and
Recapitalization Agreement dated as March 29, 2001 between the Purchaser and
Katy Industries, Inc. and that no party has any liability to any other party
under that Stock Voting and Tender Agreement.
3. Provisions Concerning the Securities.
(a) Agreement To Vote the Securities. The Shareholders hereby severally and
jointly agree that during the period (i) commencing on the date hereof and
continuing until the earlier of the Closing Date or the termination of this
Agreement (such period, the "Closing Voting Period"), at any meeting of the
holders of any class or classes of the capital stock of Katy, however called,
or in connection with any solicitation of
written consent of the holders of any class or classes of the capital stock of
Katy, the Shareholders shall vote (or cause to be voted) the Securities (but
for the avoidance of doubt not more or less than 2,480,000 Common Shares) in
favor of any actions required to authorize and effect the Recapitalization and
any actions required in furtherance thereof, including, without limitation, to
vote (A) in favor of the election of all of the directors nominated by Katy's
Board of Directors, including each Purchaser Designee (unless the matters
referred to in (B) and (C) below have not been approved by Katy's
shareholders), (B) in favor of the approval and adoption of an amendment to
Katy's Certificate of Incorporation authorizing (1) classification of Katy's
Board of Directors into two classes with staggered terms of office, (2)
1,200,000 shares of Convertible Preferred Stock and (3) an increase in the
total number of Common Shares that Katy shall have the authority to issue to
35,000,000 (C) in favor of the issuance and sale of Convertible Preferred Stock
pursuant to the Preferred Stock Purchase and the issuance of Common Shares upon
the conversion of the Convertible Preferred Stock, (D) against any action,
transaction or agreement that would result in a breach in any respect of any
covenant, representation or warranty or any other obligation or agreement of
Katy under the Recapitalization Agreement or of such Shareholder under this
Agreement, and (E) except as otherwise agreed to in writing in advance by
Purchaser, against the following actions (other than the Recapitalization and
the transactions contemplated by the Recapitalization Agreement): (1) any
extraordinary corporate transaction, such as a reorganization,
recapitalization, merger, consolidation or other business combination involving
Katy; (2) a sale, lease or transfer of a significant part of the assets of
Katy, or a reorganization, recapitalization, dissolution or liquidation of
Katy; (3) any change in the persons who constitute the board of directors of
Katy; (4) any change in the present capitalization of Katy or any amendment of
Katy's Certificate of Incorporation or By-laws other than the authorization and
adoption of an amendment to Katy's Certificate of Incorporation authorizing (I)
classification of Katy's Board of Directors into two classes with staggered
terms of office, (II) 1,200,000 shares of Convertible Preferred Stock and (III)
an increase in the total number of Common Shares that Katy shall have the
authority to issue to 35,000,000; (5) any other material change in Katy's
corporate structure or business; or (6) any other action involving Katy which
is intended, or could reasonably be expected, to impede, interfere with, delay,
postpone, or materially adversely affect the Recapitalization and the
transactions contemplated by this Agreement or the Recapitalization Agreement;
and (ii) commencing on the Closing Date and continuing until the earlier of the
date Purchaser exercises its right to convert any of the Convertible Preferred
Stock into Common Shares or the termination of this Agreement (such period, the
"Convertible Voting Period"), at any meeting of the holders of any class or
classes of the capital stock of Katy, however called, at which an election for
directors of Katy is held or in connection with any solicitation of written
consent of the holders of any class or classes of capital stock of Katy with
respect to an election of directors of Katy, the Shareholders shall vote (or
cause to be voted) the Securities (but for the avoidance of doubt not more than
2,480,000 Common Shares) in favor of the election of all directors nominated by
Katy's Board of Directors then in office, including, without limitation, each
nominee for director designated by Purchaser. Subject to Section 5(d) during
the Convertible Voting Period, the Shareholders hereby jointly and severally
agree that the Shareholders shall not enter into any agreement or understanding
with any person the effect of which would be to violate the provisions and
agreements contained in this Agreement.
(b) Grant of Proxy. Each Shareholder severally and not jointly hereby
appoints Purchaser, and any designee of Purchaser, each of them individually,
such Shareholder's proxy and attorney-in-fact, with full power of substitution
and resubstitution, to vote, to act by written consent or to request that the
chairman or secretary of Katy call a special meeting of stockholders, during
the Closing Voting Period with respect to such Shareholder's Securities in
accordance with paragraph (a) of this Section. This proxy is given to secure
the performance of the duties of each Shareholder during the Closing Voting
Period under this Agreement. Each Shareholder severally and not jointly affirms
that this proxy and power of attorney are coupled with an interest and shall be
irrevocable during the Closing Voting Period. Each Shareholder severally and
not jointly shall take such further action or execute such other instruments as
may be necessary to effectuate the intent of this proxy.
(c) Other Proxies Revoked. Each Shareholder severally and not jointly
represents and warrants that any proxies heretofore given in respect of such
Shareholder's Securities are not irrevocable, and that all such proxies have
been or are hereby revoked.
D-2
4. Representations and Warranties of Each Shareholder. Each Shareholder,
severally and not jointly, hereby represents and warrants to Purchaser as
follows:
(a) Power, etc. Such Shareholder has all necessary power and authority
to execute and deliver this Agreement, appoint the proxies and attorneys-
in-fact referred to in Section 3(b) hereof and to consummate the
transactions contemplated by this Agreement. This Agreement has been duly
and validly executed and delivered by such Shareholder and, assuming its
due authorization, execution and delivery by each other party hereto,
constitutes the legal, valid and binding obligation of such Shareholder,
enforceable against such Shareholder in accordance with its terms, except
insofar as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles, whether applied in a
proceeding at law or in equity.
(b) Ownership of Common Shares. Such Shareholder is the record and,
except in the case of a Shareholder who is a trustee and owns the Common
Shares for the benefit of a beneficiary, beneficial owner of the number of
Common Shares listed beside such Shareholder's name on Schedule I attached
hereto. All of such Common Shares are issued and are outstanding. Such
Shareholder has sole voting power and sole power to issue instructions with
respect to the matters set forth in Section 3 and Section 5 hereof, as the
case may be, sole power of disposition and sole power to agree to all of
the matters set forth in this Agreement, in each case with respect to all
of such Common Shares, with no limitations, qualifications or restrictions
on such rights, subject only to applicable laws, Katy's Certificate of
Incorporation, and the terms of this Agreement.
(c) No Conflicts. (i) No filing with, and no permit, authorization,
consent or approval of, any state or federal public body or authority is
necessary for the execution of this Agreement by such Shareholder and the
consummation by such Shareholder of the transactions contemplated by this
Agreement and (ii) none of the execution and delivery of this Agreement by
such Shareholder, the consummation by such Shareholder of the transactions
contemplated by this Agreement or compliance by such Shareholder with any
of the provisions of this Agreement shall (A) conflict with or result in
any breach of or constitute (with or without notice or lapse of time or
both) a default (or give rise to any third party right of termination,
cancellation, material modification or acceleration) or result in the
creation of a lien or encumbrance on the assets of such Shareholder
(including such Shareholder's Common Shares) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
contract, trust instrument, commitment, arrangement, understanding,
agreement or other instrument or obligation of any kind to which such
Shareholder is a party or by which such Shareholder or any of such
Shareholder's properties or assets may be bound, or (B) violate any order,
writ, injunction, decree, judgment, order, statute, rule or regulation
applicable to such Shareholder or any of such Shareholder's properties or
assets.
(d) No Finder's Fees. Except as disclosed pursuant to the
Recapitalization Agreement, no broker, investment banker, financial advisor
or other person is entitled to any broker's, finder's, financial advisor's
or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf
of such Shareholder in its capacity as a holder of Katy Common Stock. Such
Shareholder, on behalf of itself and its affiliates, hereby acknowledges
that it is not entitled to receive any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement or by the Recapitalization
Agreement.
(e) No Encumbrances. The Common Shares listed beside such Shareholder's
name on Schedule I attached hereto and the certificates representing such
Common Shares are now, and at all times during the term hereof will be,
held by such Shareholder, or by a nominee or custodian for the benefit of
such Shareholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever, except as disclosed in Schedule II hereto
and for any such encumbrances or proxies arising hereunder.
(f) Reliance by Purchaser. Such Shareholder understands and acknowledges
that Purchaser is entering into the Recapitalization Agreement in reliance
upon such Shareholder's execution and delivery of this Agreement.
D-3
5. Additional Covenants of Each Shareholder. Each Shareholder severally and
not jointly covenants and agrees as follows:
(a) No Solicitation. During the Closing Voting Period such Shareholder
shall not, in its capacity as such, directly or indirectly through another
person (i) solicit, initiate or encourage (including, without limitation,
by way of furnishing information), or take any other action designed to
facilitate, any inquiries or the making of any proposal which constitutes
any Katy Takeover Proposal, (ii) participate in any discussions or
negotiations regarding any Katy Takeover Proposal, (iii) withdraw or
modify, or propose publicly to withdraw or modify, in a manner adverse to
Purchaser, the approval or recommendation of such Shareholder of the
Recapitalization (including for the avoidance of doubt the Shareholders'
agreement to vote the Securities in accordance with Section 3 hereof), (iv)
approve or recommend, or propose publicly to approve or recommend, any Katy
Takeover Proposal, or (v) enter into a Katy Acquisition Agreement or any
agreement, arrangement or understanding requiring such Shareholder to
abandon, terminate or fail to consummate this Agreement or any other
transaction contemplated hereby, in each case without the prior written
consent of the Purchaser. Such Shareholder shall promptly advise Purchaser
orally and in writing of any request for information or of any Katy
Takeover Proposal, the material terms and conditions of such request or
Katy Takeover Proposal and the identity of the person making such request
or Katy Takeover Proposal. Such Shareholder will keep Purchaser reasonably
informed of the status and details (including amendments or proposed
amendments) of any such request or Katy Takeover Proposal on a daily basis
or more frequently as may be reasonably requested by Purchaser. For the
avoidance of doubt, nothing in this Section 5(a) restricts a Shareholder,
in his or her capacity as a director or officer of Katy, from taking action
permitted under the Recapitalization Agreement.
(b) Restriction on Transfer, Proxies and Non-Interference. Such
Shareholder shall not (i) except as contemplated in this Agreement,
directly or indirectly, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, transfer, tender, pledge, encumbrance, assignment or
other disposition of, any or all of such Shareholders Securities or any
interest therein during the Closing Voting Period; (ii) except as
contemplated by this Agreement, grant any proxies or powers of attorney,
deposit any of such Securities into a voting trust or enter into a voting
agreement with respect to any of such Securities; or (iii) take any action
that would make any representation or warranty of such Shareholder
contained in this Agreement untrue or incorrect or have the effect of
preventing or disabling such Shareholder from performing such Shareholder's
obligations under this Agreement.
(c) [Reserved].
(d) Stop Transfer; Changes in Subject Shares. Such Shareholder agrees
with, and covenants to, Purchaser that such Shareholder shall not request
that Katy register the transfer (book-entry or otherwise) of any
certificate or uncertificated interest representing any of such
Shareholder's Securities during the Closing Voting Period. For the
avoidance of doubt, nothing in this Agreement shall restrict any
Shareholder's right to sell, transfer, tender, pledge, encumber, assign or
otherwise dispose of the Securities during the Convertible Voting Period.
In the event of a stock dividend or distribution, or any change in any
class of capital stock of Katy by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, the term
"Securities" shall be deemed to refer to and include the Securities as well
as all such stock dividends and distributions and any shares into which or
for which any or all of the Securities may be changed or exchanged.
(e) Cooperation. Such Shareholder, in its capacity as a shareholder,
shall cooperate fully with Purchaser and Katy in connection with their
respective efforts to fulfill the conditions to the Recapitalization set
forth in Article VI of the Recapitalization Agreement and the Purchaser
Closing Conditions set forth in Annex I to the Recapitalization Agreement.
(f) Releases. Such Shareholder hereby fully, unconditionally and
irrevocably releases, effective as of the Closing Date, any and all claims
and causes of action that such Shareholder, in its capacity as a
D-4
shareholder, has or may have against Katy or any present or former
director, officer, employee or agent of Katy arising or resulting from or
relating to any act, omission, event or occurrence prior to the date hereof
and that have arisen or resulted as of the Closing Date. The foregoing
release does not include a release by any Shareholder of such Shareholder's
rights to indemnification and advancement of expenses under Katy's
Certificate of Incorporation or By-Laws, by agreement, by law, or pursuant
to insurance policies or any claim by that Shareholder in any other
capacity (including as a director, officer or employee). If requested by
Purchaser, such Shareholder shall execute an additional release at the
Closing Date releasing such claims as may arise between the date hereof and
the Closing Date.
6. Fiduciary Duties. Notwithstanding anything in this Agreement to the
contrary, the covenants and agreements set forth herein shall not prevent any
Shareholder or any representative of Purchaser serving on Katy's Board of
Directors or as an officer of Katy from taking any action, subject to the
applicable provisions of the Recapitalization Agreement, while acting in his or
her capacity as a director or officer of Katy.
7. Miscellaneous.
(a) Further Assurances. From time to time, at Purchaser's request and
without further consideration, each Shareholder shall execute and deliver such
additional documents and take all such further lawful action as may be
necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Agreement.
(b) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, mailed, certified or
registered mail with postage prepaid, sent by overnight courier or telecopied
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(i) if to Purchaser, to
KKTY Holding Company, L.L.C.
c/o Kohlberg & Co., L.L.C.
111 Radio Circle
Mount Kisco, New York 10549
Telecopy: (914) 244-0689
Attention: Mr. Christopher Lacovara
with copies to:
Hunton & Williams
200 Park Avenue
New York, New York 10166
Telecopy: (212) 309-1100
Attention: Raul Grable, Esq.
(ii) if to the Shareholders, to the address set forth beside each
Shareholder's name listed on Schedule I hereto
with a copy to:
Hogan & Hartson LLP
One Tabor Center, Suite 1500
1200 Seventeenth Street
Denver, Colorado 80202-5840
Telecopy: (303) 899-7333
Attention: Douglas Pluss, Esq.
D-5
(c) Interpretation. When a reference is made in this Agreement to a Section,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
(d) Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement,
including the documents and instruments referred to herein (i) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (ii) except in respect of Section 9, is not intended to confer upon any
person or entity other than the parties any rights or remedies hereunder.
(f) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to the
conflict of laws rules thereof.
(g) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the prior
written consent of the other parties, except that Purchaser may assign, in its
sole discretion, any of or all their rights, interests and obligations under
this Agreement to any direct or indirect wholly owned subsidiary of Purchaser.
Subject to the preceding sentences, this Agreement shall be binding upon, inure
to the benefit of, and be enforceable by, the parties and their respective
successors and assigns.
(h) Binding Agreement. Each Shareholder agrees that this Agreement and such
Shareholder's obligations under it shall attach to such Shareholder's
Securities and shall bind any person to which legal or beneficial ownership of
the Securities passes, whether by operation of law or otherwise, including such
Shareholder's heirs, guardians, administrators or successors, provided however,
that this Agreement shall not bind any purchaser of the Securities, during the
Convertible Voting Period. Notwithstanding any transfer of Securities during
the Closing Voting Period, the transferor shall remain liable for the
performance of all its obligations under this Agreement.
(i) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy in any particular situation or in any jurisdiction, that term or
provision shall nevertheless remain in full force and effect in other
situations or jurisdictions, and all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect, so long as the
economic or legal substance of the transactions contemplated hereby are not
affected in any manner materially adverse to any party. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as possible in a
mutually acceptable manner in order that the transactions be consummated as
originally contemplated to the fullest extent possible.
(j) Enforcement of this Agreement. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity.
(k) Amendments. This Agreement may not be amended except by an instrument in
writing signed by the parties.
D-6
8. Termination. This Agreement shall terminate, and neither Purchaser nor
any Shareholder shall have any rights or obligations hereunder and this
Agreement shall become null and void and have no effect, upon the termination
of the Recapitalization Agreement in accordance with its terms without the
Recapitalization having occurred, except nothing in this Section 8 shall
relieve any party of liability for breach of this Agreement.
9. Publication. Each Shareholder hereby agrees to permit Purchaser and Katy
to publish and disclose in the Proxy Statement and the Purchaser Securities
Filings relating to the transactions contemplated by the Recapitalization
Agreement (including all documents and schedules filed with the SEC) its
identity and intent with respect to the Securities and the nature of its
commitments under this Agreement.
10. Scope of Obligations. Notwithstanding anything to the contrary in this
Agreement, no obligation of the Shareholders under this Agreement (including
their obligations under Section 3 and Section 5 hereof) shall apply or in any
way affect any shares of capital stock or other securities owned by the
Shareholders other than the Securities. For the purposes of several (but not
joint) obligations of Shareholders under this Agreement, the number of
Securities owned by each Shareholder with respect to which such Shareholder is
committing to make such obligations, is the number calculated by multiplying
2,480,000 by the number of Common Shares owned by such Shareholder (as set
forth on Schedule I hereto), then dividing the product by the total number of
Common Shares owned by all Shareholders (as set forth on Schedule I hereto).
[THE FOLLOWING PAGE IS THE SIGNATURE PAGE]
D-7
IN WITNESS WHEREOF, Purchaser and each Shareholder have caused this
Agreement to be duly executed as of the day and year first above written.
KKTY Holding Company, L.L.C.
/s/ Christopher Lacovara
By: _________________________________
Name:Christopher Lacovara
Title:Authorized Manager
CRL, Inc.
/s/ Jonathan P. Johnson
By: _________________________________
Name:Jonathan P. Johnson
Title:President
/s/ Wallace E. Carroll, Jr.
_____________________________________
/s/ Amelia M. Carroll
_____________________________________
Wallace Foundation
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name:Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name:Amelia M. Carroll
Title:Trustee
Wallace E. Carroll Trust U/A Dated
7-1-57
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name:Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name:Amelia M. Carroll
Title:Trustee
D-8
Wallace E. & Lelia H. Carroll Trust
U/A Dated 5-1-58
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title: Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title: Trustee
Wallace E. Carroll Trust U/A
Dated 1-20-61
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title: Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title: Trustee
Lelia H. Carroll Trust U/A
Dated 7-12-62
F/B/O Wallace E. Carroll, Jr.
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name: Wallace E. Carroll, Jr.
Title: Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name: Amelia M. Carroll
Title: Trustee
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Pamela C. Crigler
/s/ Philip E. Johnson
By: _________________________________
Name: Philip E. Johnson
Title: Trustee
D-9
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Susan S. Leonard
/s/ Philip E. Johnson
By: _________________________________
Name:Philip E. Johnson
Title:Trustee
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Margaret B. Berzins
/s/ Philip E. Johnson
By: _________________________________
Name:Philip E. Johnson
Title:Trustee
Wallace E. Carroll, Jr. Trust #2 U/A
Dated 12-30-76
F/B/O Wallace E. Carroll, III
/s/ Philip E. Johnson
By: _________________________________
Name:Philip E. Johnson
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Pamela C. Crigler
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name:Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name:Amelia M. Carroll
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Susan S. Leonard
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name:Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name:Amelia M. Carroll
Title:Trustee
D-10
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Margaret B. Berzins
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name:Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name:Amelia M. Carroll
Title:Trustee
Wallace E. Carroll Trust U/A
Dated 12-20-79
F/B/O Wallace E. Carroll, III
/s/ Wallace E. Carroll, Jr.
By: _________________________________
Name:Wallace E. Carroll, Jr.
Title:Trustee
/s/ Amelia M. Carroll
By: _________________________________
Name:Amelia M. Carroll
Title:Trustee
D-11
Schedule I
Number of
Common Shares
Held of
Record or
Owned
Name of Shareholder Officers/Trustees Beneficially Notice Address
------------------- ----------------------- ------------- -------------------------------
CRL, Inc. .............. Jonathan P. Johnson, 2,073,436 6300 S. Syracuse Way, Suite 300
President Englewood, Colorado 80111
Wallace E. Carroll, N/A 182,274
Jr. ...................
Amelia M. Carroll....... N/A 10,765 c/o CRL
(see address above)
Wallace Foundation...... Wallace E. Carroll, Jr. 32,910 c/o CRL
Amelia M. Carroll (see address above)
Wallace E. Carroll Trust Wallace E. Carroll, Jr. 2,151 c/o CRL
U/A Dated 7-1-57.......
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr.
Robert E. Kolek *
Wallace E. & Lelia H. Wallace E. Carroll, Jr. 603,000 c/o CRL
Carroll Trust U/A Dated
5-1-58.................
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr.
Robert E. Kolek*
Wallace E. Carroll Trust Wallace E. Carroll, Jr. 11,881 c/o CRL
U/A Dated 1-20-61......
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr.
Lelia H. Carroll Trust Wallace E. Carroll, Jr. 180,661 c/o CRL
U/A Dated 7-12-62......
F/B/O Wallace E. Amelia M. Carroll (see address above)
Carroll, Jr.
Wallace E. Carroll, Jr. Philip E. Johnson
Trust #2 U/A Dated 12-
30-76..................
F/B/O Pamela C. Crigler 193 c/o CRL
Susan S. Leonard 194 (see address above)
Margaret B. Berzins 193
Wallace E Carroll, 182
III
(Four separate
trusts--trustee is
the same for all
four)
Wallace E. Carroll Trust Wallace E. Carroll, Jr.
U/A Dated 12-20-79.....
F/B/O Pamela C. Crigler Amelia M. Carroll 1,690 c/o CRL
Susan S. Leonard Robert E. Kolek* 1,690 (see address above)
Margaret B. Berzins 1,690
Wallace E Carroll, 1,690
III.................
(Four separate
trusts--trustees are
the same for all
four)
---------
Totals.................. 3,104,600
=========
--------
* Powers of this trustee are limited. He is not entitled to vote on matters
involving Katy.
D-12
Schedule II
Common Shares
Subject to Pledge Name and Address of
Name of Shareholder or Other Encumbrance Lienholder
------------------- -------------------- -------------------
CRL, Inc. ....................... 2,073,436 Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60675
Wallace E. Carroll, Jr. ......... 177,239 Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60675
Wallace E. Carroll, Jr. ......... 3,000 Katy Industries, Inc.
6300 South Syracuse Way
Suite 300
Englewood, Colorado 80111
D-13
ANNEX E
TERMINATION OF PREFERRED STOCK PURCHASE
AND RECAPITALIZATION AGREEMENT DATED AS OF MARCH 29, 2001
Reference is made to the Preferred Stock Purchase and Recapitalization
Agrement, dated as of March 29, 2001 (the "March Recapitalization Agreement"),
between KKTY Holding Company, L.L.C. (the "Purchaser") and Katy Industries,
Inc. ("Katy").
Katy and the Purchaser hereby agree to terminate the March Recapitalization
Agreement by mutual written consent, effective upon the execution and delivery
of this agreement to terminate, pursuant to Section 7.1(a) of the March
Recapitalization Agreement.
[Remainder of page left blank intentionally]
IN WITNESS WHEREOF, the parties hereto have caused this agreement to
terminate the March Recapitalization Agreement to be duly executed and
delivered on this second day of June, 2001.
KATY Industries, Inc.
/s/ Robert M. Baratta
By: _________________________________
Name: Robert M. Baratta
Title: President
KKTY Holding Company, L.L.C.
/s/ Christopher Lacovara
By: _________________________________
Name: Christopher Lacovara
Title: Authorized Manager
E-2
KATY INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert M. Baratta and Stephen P. Nicholson,
and each of them, each with full power of substitution, to represent the
undersigned and to vote all the shares of the stock of Katy Industries, Inc.
which the undersigned is entitled to vote at the adjourned Annual Meeting of
Stockholders of Katy Industries, Inc. to be held at the Inter-Continental
Central Park South, located at 112 Central Park South, New York, New York on
June 26, 2001 at 10:00 a.m. local time, and at any postponements or adjournments
thereof (1) as hereinafter specified upon the proposals listed below and as more
particularly described in Katy's Proxy Statement and the Supplement to Katy's
Proxy Statement, receipt of which is hereby acknowledged, and (2) in their
discretion upon such other matters as may properly come before the meeting or
any postponements or adjournments thereof. The undersigned hereby acknowledges
receipt of Katy's 2000 Annual Report on Form 10-K.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN
AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK MAY BE
REPRESENTED AT THE MEETING.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF KATY.
(Continued and to be signed on reverse side)
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
The shares represented hereby shall be voted as specified. If no
specification is made, such shares shall be voted FOR proposals 1, 2, 3, 4, 5
and 6.
A vote FOR the following proposals is recommended by the Board of
Directors:
1. To approve the issuance and sale of 700,000 shares of Katy's convertible
preferred stock, $100 par value per share, to KKTY Holding Company, L.L.C. and
the issuance of shares of common stock to the holder of the convertible
preferred stock in accordance with the terms of the convertible preferred stock.
Approval of this proposal is contingent on approval of Proposal 2, Proposal 3
and Proposal 6.
[_] For [_] Against [_] Abstain
2. To amend Katy's Restated Certificate of Incorporation to authorize 1,200,000
shares of convertible preferred stock. Approval of this proposal is contingent
on approval of Proposal 1, Proposal 3 and Proposal 6.
[_] For [_] Against [_] Abstain
3. To amend Katy's Restated Certificate of Incorporation to establish a
classified Board of Directors. Approval of this proposal is contingent on
approval of Proposal 1, Proposal 2 and Proposal 6.
[_] For [_] Against [_] Abstain
4. Election of Directors
[_] For All [_] Withhold All [_] For All Except
In the event that Proposal 1, Proposal 2, Proposal 3 and Proposal 6 are
approved, the election of:
Class I Directors: C. Michael Jacobi, Robert M. Baratta, Daniel B. Carroll and
Wallace E. Carroll, Jr., each to serve a one year term until the next annual
meeting of stockholders in 2002.
Class II Directors: Christopher Anderson, William F. Andrews, Samuel P. Frieder,
James A. Kohlberg and Christopher Lacovara, each to serve a two year term until
the annual meeting of stockholders in 2003.
Instruction: To withhold authority to vote for any individual nominee, write the
nominee's name in the space provided below.
_______________________________
In the event that Proposal 1, Proposal 2, Proposal 3 or Proposal 6 is not
approved, the election of: William F. Andrews, Robert M. Baratta, Amelia M.
Carroll, Daniel B. Carroll, Wallace E. Carroll, Jr., Arthur R. Miller, Charles
W. Sahlman, Jacob Saliba and Glenn W. Turcotte, each to serve a one year term
until the next annual meeting of stockholders in 2002.
Instruction: To withhold authority to vote for any individual nominee, write the
nominee's name in the space provided below.
_______________________________
5. To ratify the appointment of Arthur Andersen LLP as Katy's independent
auditors for the fiscal year ending December 31, 2001.
[_] For [_] Against [_] Abstain
6. To amend Katy's Restated Certificate of Incorporation to increase the number
of shares of common stock that Katy is authorized to issue from 25,000,000 to
35,000,000. Approval of this proposal is contingent on approval of Proposal 1,
Proposal 2 and Proposal 3.
Please check this box if you plan to attend the annual meeting. [_]
Date: _________________________
(signature)
Date: _________________________
(signature)
Sign exactly as your name(s) appears on your stock certificate. If shares of
stock stand of record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above Proxy. If shares of stock are held of record by a
corporation, the Proxy should be executed by the President or Vice President and
the Secretary or Assistant Secretary, and the corporate seal should be affixed
thereto. Executors or administrators or other fiduciaries who execute the above
Proxy for a deceased stockholder should give their full title. Please date the
proxy.
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT!
PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.