United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2004
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)
765 Straits Turnpike, Suite 2000, Middlebury, CT 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 598-0397
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
YES |_| NO |X|
The aggregate market value of the voting common stock held by
non-affiliates of the registrant* (based upon its closing transaction price on
the New York Stock Exchange Composite Tape on June 30, 2004), as of June 30,
2004 was $22,935,357. As of March 15, 2005, 7,945,377 shares of common stock,
$1.00 par value, were outstanding, the only class of the registrant's common
stock.
* Calculated by excluding all shares held by executive officers and directors of
the registrant without conceding that all such persons are "affiliates" of the
registrant for purposes of federal securities laws.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2005 annual meeting - Part III.
Exhibit index appears on page 86. Report consists of 96 pages.
PART I
Item 1. BUSINESS
Katy Industries, Inc. (Katy or the Company) was organized as a Delaware
corporation in 1967 and has an even longer history of successful operations,
with some of its predecessor companies having been established for as long as 75
years. We are organized into two operating groups, Maintenance Products and
Electrical Products, and a corporate group. Each majority-owned company in the
two groups operates within a broad framework of policies and corporate goals.
Katy's corporate group is responsible for overall planning, financial
management, acquisitions, dispositions, and other related administrative and
corporate matters.
Recapitalization
On June 28, 2001, we completed a recapitalization of the Company following
an agreement dated June 2, 2001 with KKTY Holding Company, L.L.C. (KKTY), an
affiliate of Kohlberg Investors IV, L.P. (Kohlberg) (the Recapitalization).
Under the terms of the Recapitalization, KKTY purchased 700,000 shares of newly
issued preferred stock, $100 par value per share (Convertible Preferred Stock),
which is convertible into 11,666,666 common shares, for an aggregate purchase
price of $70.0 million. More information regarding the Convertible Preferred
Stock can be found in Note 12 to the Consolidated Financial Statements of Katy
included in Part II, Item 8. The Recapitalization allowed us to retire
obligations we had under the then-current revolving credit agreement.
Since the Recapitalization, the Company's management has been focused on
the following restructuring and cost reduction initiatives:
o Consolidation of facilities: 35 manufacturing, distribution and
office facilities closed or consolidated (including 2 to be closed
during 2005); manufacture and distribution of each business unit
centralized; Electrical Products manufacturing outsourced to Asia.
o Divestitures of non-core operations: 4 non-core business units have
been sold or otherwise exited and proceeds have been applied to
reduce debt.
o Selling general and administrative (SG&A) cost rationalization:
restructured duplicative corporate and support functions; overhead
reduced; implemented shared sales, administrative and support
services model.
o Organizational changes: across-the-board review of management talent
and key hires made at both the corporate and operational levels.
With these initiatives nearly complete, the Company's focus has shifted to
sustaining revenue growth and managing raw material costs. Our future cost
reductions, if any, will continue to come from process improvements (such as
Lean Manufacturing and Six Sigma), value engineering products, improved
sourcing/purchasing and lean administration.
Operations
Selected operating data for each operating group can be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Part II, Item 7. Information regarding foreign and
domestic operations and export sales can be found in Note 17 to the Consolidated
Financial Statements of Katy included in Part II, Item 8. Set forth below is
information about our operating groups and investments and about our business in
general.
We have restructured many of our operations in order to maintain a low
cost structure, which is essential for us to be competitive in the markets we
serve. These restructuring efforts include consolidation of facilities,
headcount reductions, and evaluation of sourcing strategies to determine the
lowest cost method for obtaining finished product. Costs associated with these
efforts include expenses for recording liabilities for non-cancelable leases at
facilities that are abandoned, severance and other employee termination costs,
costs to move inventory and equipment, consultant costs for sourcing strategy
evaluation, and other exit costs that may be incurred not only with
consolidation of facilities, but potentially the complete shut down of certain
manufacturing and distribution operations. We have incurred significant costs in
this respect, approximately $44 million since the beginning of 2001. As our
post-Recapitalization restructuring plan winds down, we expect to incur
additional costs of approximately $1.5 million to $2.5 million in 2005, mostly
related to the consolidation of abrasives facilities. Additional details
regarding severance, restructuring and related charges can be found in Note 19
to the Consolidated Financial Statements of Katy included in Part II, Item 8.
2
Maintenance Products Group
The Maintenance Products Group's principal business is the manufacturing
and distribution of commercial cleaning products as well as consumer home and
automotive storage products. Commercial cleaning products are sold primarily to
janitorial/sanitary and foodservice distributors who supply end users such as
restaurants, hotels, healthcare facilities and schools. Consumer home and
automotive storage products are primarily sold through major home improvement
and mass market retail outlets. Total revenues and operating loss for the
Maintenance Products Group during 2004 were $278.9 million and ($2.7) million,
respectively. The group accounted for 61% of the Company's revenues in 2004.
Total assets for the group were $154.6 million at December 31, 2004. The
business units in this group are:
Continental Commercial Products, LLC (CCP) is the successor entity to
Contico International, L.L.C. (Contico) and includes as divisions all the former
business units of Contico (JanSan Plastics, Consumer Plastics, Metal Truck Box
and Container), as well as the following business units: Filters and
Grillbricks, Domestic Abrasives and Textiles. CCP is headquartered in Bridgeton,
Missouri near St. Louis, has additional operations in California, Georgia and
Texas, and was created mainly for the purpose of simplifying our business
transactions and improving our customer relationships by allowing customers to
order products from any CCP division on one purchase order.
The JanSan Plastics business unit is a plastics manufacturer and a
distributor of products for the commercial janitorial/sanitary maintenance
and food service markets. JanSan Plastics products include commercial
waste receptacles, buckets, mop wringers, janitorial carts, and other
products designed for commercial cleaning and food service. JanSan
Plastics products are sold under the following brand names:
Continental(R), Kleen Aire(TM), Huskee(TM), SuperKan(TM), KingKan(TM),
Unibody(TM) and Tilt'N Wheel(TM).
The Consumer Plastics business unit is a plastics manufacturer and
distributor of home storage products, sold primarily through major home
improvement and mass market retail outlets. Consumer Plastic products
include plastic home storage units such as domestic storage containers,
shelving and hard plastic gun cases and are sold under the following brand
names: Contico(R) and Tuffbin(R).
The Metal Truck Box business unit is a manufacturer and distributor of
aluminum and steel automotive storage products, sold primarily through
major home improvement outlets. Metal Truck Box products are sold under
the following brand names: Husky(R), Tradesman(R) and Tuff Box(R).
Husky(R) is a registered trademark of Stanley Works.
The Container business unit is a plastics manufacturer and distributor of
industrial storage drums, pails and bins for commercial and industrial
use. Products are sold under the Contico(R) Container brand name.
The Filters and Grillbricks business unit (operating under the Disco name)
is a manufacturer and distributor of filtration, cleaning and specialty
products sold to the restaurant/food service industry. Filters and
Grillbricks products include fryer filters, oil stabilizing powder, grill
cleaning implements and other food service items and are sold under the
Disco name as well as Britesorb(TM), and the Brillo(R) line of cleaning
products.
The Abrasives business unit (operating under the Glit-Microtron and Loren
names) is a manufacturer and distributor of non-woven abrasive products
for commercial and industrial use and also supplies materials to various
original equipment manufacturers (OEM). The Abrasives unit's products
include floor maintenance pads, hand pads, scouring pads, specialty
abrasives for cleaning and finishing and roof ventilation products.
Products are sold primarily in the commercial sanitary maintenance, food
service and construction markets. Glit-Microtron and Loren products are
sold under the following brand names: Glit Kleenfast(R), Fiber
Naturals(R), Big Boss II(R), Blue Ice(R), Brillo(R), BAB-O(R) and Old
Dutch(R) brand names. Brillo(R), Old Dutch(R) and BAB-O(R) are registered
trademarks used under license.
This unit's primary manufacturing facilities are in Wrens, Georgia,
Lawrence, Massachusetts and Pineville, North Carolina. The Lawrence and
Pineville facilities are expected to close during 2005 and their
operations consolidated into the Wrens facility.
The Textiles business unit (operating under the Wilen name) is a
manufacturer and distributor of professional cleaning products which
includes mops, brooms, brushes, and plastic cleaning accessories. Textiles
products are sold primarily through commercial sanitary maintenance and
food service markets, with some products sold through consumer retail
outlets. Products are sold under the following brand names:
Wax-o-matic(TM), Wilen(TM) and Rototech(R).
The Maintenance Products Group also has operations in Canada and the United
Kingdom.
3
The CCP Canada business unit, headquartered in Etobicoke, Ontario, Canada,
is a distributor of primarily plastic products for the commercial and sanitary
maintenance markets in Canada.
The Abrasives Canada business unit (operating under the name Gemtex) is
headquartered in Etobicoke, Ontario, Canada, and is a manufacturer and
distributor of resin fiber disks and other coated abrasives for the OEM's,
automotive, industrial, and home improvement markets. The most prominent brand
name under which the product is sold is TRIM-KUT(R).
The UK JanSan Plastics business unit (operating under the Contico
Manufacturing, Ltd. name) is a distributor of a wide range of cleaning
equipment, storage solutions and washroom dispensers for the commercial and
sanitary maintenance and food service markets in the United Kingdom (U.K.) and
Ireland.
The UK Consumer Plastics business unit (operating under the Contico Europe
Limited name), is a manufacturer and distributor of plastic consumer storage and
home products, sold primarily to major retail outlets in the U.K.
Electrical Products Group
The Electrical Products Group's principal business is the design and
distribution of consumer electric corded products. Products are sold principally
to national home improvement and mass merchant retailers, who in-turn sell to
consumer end-users. Total revenues and operating income for the Electrical
Products Group during 2004 were $178.7 million and $16.8 million, respectively.
The group accounted for 39% of the Company's revenues in 2004. Total assets for
the group were $57.7 million at December 31, 2004. Woods Industries, Inc. (Woods
US) and Woods Industries (Canada), Inc. (Woods Canada) are both subject to
seasonal sales trends in connection with the holiday shopping season, with
stronger sales and profits realized in the third and early fourth quarters. The
business units in this group are:
The Woods US business unit is headquartered in Carmel, Indiana, and
distributes consumer electric corded products and electrical accessories.
Examples of Woods US products are outdoor and indoor extension cords, work
lights, surge protectors, and power strips. Woods US products are sold under the
following brand names: Woods(R), Yellow Jacket(R), Tradesman(R), SurgeHawk(R)
and AC/Delco(R). AC/Delco(R) is a registered trademark of The General Motors
Corporation. These products are sold primarily through national home improvement
and mass merchant retail outlets in the United States. Woods US' products are
sourced primarily from Asia.
The Woods Canada business unit is headquartered in Toronto, Ontario,
Canada, and distributes consumer electric corded products and electrical
accessories. In addition to the products listed above for Woods US, Woods
Canada's primary product offerings include garden lighting and timers. Woods
Canada products are sold under the following brand names: MoonRays(R),
Intercept(TM), and Pro Power(TM). These products are sold primarily through
major home improvement and mass merchant retail outlets in Canada. Woods
Canada's products are sourced primarily from Asia.
See Licenses, Patents and Trademarks below for further discussion
regarding the trademarks used by Katy companies.
Other Operations
Katy's other operations include a 43% equity investment in a shrimp
harvesting and farming operation, Sahlman Holding Company, Inc. (Sahlman), and a
100% interest in Savannah Energy Systems Company (SESCO), the limited partner in
a waste-to-energy facility operator.
Sahlman harvests shrimp off the coast of South and Central America and
owns shrimp farming operations in Nicaragua. Sahlman has a number of
competitors, some of which are larger and have greater financial resources.
Katy's interest in Sahlman is an equity investment. During the third quarter of
2003, after a review of Sahlman's results for 2002 (and in the first half of
2003), and after study of the status of the shrimp industry and markets in the
United States, Katy determined there had been a loss in the value of the
investment that was other than temporary. As a result, Katy concluded that $1.6
million was a reasonable estimate of the value of its investment in Sahlman, and
a charge of $5.5 million was recorded to reduce the carrying value of the
investment. See Note 5 to the Consolidated Financial Statements of Katy included
in Part II, Item 8.
SESCO is the limited partner of the operator of a waste-to-energy facility
in Savannah, Georgia. The general partner of the partnership is an affiliate of
Montenay Power Corporation. See Note 7 to the Consolidated Financial Statements
of Katy included in Part II, Item 8.
4
Discontinued Operations
In 2002 and 2003, we identified and sold certain business units that we
considered non-core to the future operations of the Company. Hamilton Precision
Metals L.P. (Hamilton), a reroller of precision metal foils and strips located
in Lancaster, Pennsylvania, was sold on October 31, 2002 for net proceeds of
$13.9 million. A gain of $3.3 million (net of tax) was recognized in the fourth
quarter of 2002 as a result of the Hamilton sale. Hamilton was formerly part of
the Electrical Products Group. GC/Waldom Electronics, Inc. (GC/Waldom), a
leading value-added distributor of high quality, brand name electrical and
electronic parts, components and accessories headquartered in Rockville,
Illinois, was sold on April 2, 2003 for net proceeds of $7.4 million. A loss
(net of tax) of $0.2 million was recognized in the second quarter of 2003 as a
result of the GC/Waldom sale. GC/Waldom was formerly part of the Electrical
Products Group. Duckback Products, Inc. (Duckback), a manufacturer of high
quality exterior transparent coatings and water repellents located in Chico,
California, was sold on September 16, 2003 for net proceeds of $16.2 million. A
gain (net of tax) of $7.6 million was recognized in the third quarter of 2003 as
a result of the Duckback sale. Duckback was formerly part of the Maintenance
Products Group.
Customers
We have several large customers in the mass merchant/discount/home
improvement retail markets. Two customers, Wal*Mart and Lowe's, accounted for
17% and 12%, respectively, of consolidated net sales. Sales to Wal*Mart are made
by the Woods US, Consumer Plastics, Domestic Abrasives, Woods Canada, Textiles
and JanSan Plastics business units. Sales to Lowe's are made by the Woods US and
Consumer Plastics business units. A significant loss of business from either of
these customers could have a material adverse impact on our results.
Backlog
Maintenance Products:
Our aggregate backlog position for the Maintenance Products Group was $7.3
million and $7.8 million as of December 31, 2004 and 2003, respectively. The
orders placed in 2004 are believed to be firm and based on historical
experience, substantially all orders are expected to be shipped during 2005.
Electrical Products:
Our aggregate backlog position for the Electrical Products Group was $13.9
million and $6.0 million as of December 31, 2004 and 2003, respectively. The
orders placed in 2004 are believed to be firm and based on historical
experience, substantially all orders are expected to be shipped during 2005.
Markets and Competition
Maintenance Products:
We market a variety of commercial cleaning products and supplies to the
commercial janitorial/sanitary maintenance and foodservice markets. Sales and
marketing of these products is handled through a combination of direct sales
personnel, manufacturers' sales representatives, and wholesale distributors.
The commercial distribution channels for our commercial cleaning products
are highly fragmented, resulting in a large number of small customers, mainly
distributors of janitorial cleaning products. The markets for these commercial
products are highly competitive. Competition is based primarily on price and the
ability to provide superior customer service in the form of complete and on-time
product delivery. Other competitive factors include brand recognition and
product design, quality and performance. We compete for market share with a
number of different competitors, depending upon the specific product. In large
part, our competition is unique in each area of 1) plastics, 2) abrasives, 3)
textiles and 4) foodservice. We believe that we have established long standing
relationships with our major customers based on quality products and service,
and a complete line of products. While each product line is marketed under a
different brand name, they are sold as complementary products, with customers
able to access all products through a single purchase order. We also continue to
strive to be a low cost provider in this industry; however, our ability to
remain a low cost provider in the industry is highly dependent on the price of
our raw materials, primarily resin (see discussion below). Being a low cost
producer is also dependent upon our ability to reduce and subsequently control
our cost structure, which has benefited from our nearly completed restructuring
efforts.
We market branded plastic home storage units and plastic, aluminum and
steel automotive storage, and to a lesser extent, abrasive products and mops and
brooms, to mass merchant and discount club retailers in the U.S. Sales and
marketing
5
of these products is generally handled by direct sales personnel and external
representative groups. The consumer distribution channels for these products,
especially the in-home and automotive storage products, are highly concentrated,
with several large mass merchant retailers representing a very significant
portion of the customer base. We compete with a limited number of large
companies that offer a broad array of products and many small companies with
niche offerings. With few consumer storage products enjoying patent protection,
the primary basis for competition is price. Therefore, efficient manufacturing
and distribution capability is critical to success. Ultimately, our ability to
remain competitive in these consumer markets is dependent upon our position as a
low cost producer, and also upon our development of new and innovative products.
We continue to pursue new markets for our products. Our ability to remain a low
cost provider in the industry is highly dependent on the price of our raw
materials, primarily resin (see discussion above). Being a low cost producer is
also dependent upon our ability to reduce and subsequently control our cost
structure, which has benefited from our nearly completed restructuring efforts.
Our restructuring efforts have and will include consolidation of facilities and
headcount reductions.
We also market certain of our products to the construction trade, and
resin fiber disks and other abrasive disks to the OEM trade.
Electrical Products:
We market branded electrical products primarily in North America through a
combination of direct sales personnel and manufacturers' sales representatives.
Our primary customer base consists of major national retail chains that service
the home improvement, mass merchant, hardware and electronic and office supply
markets, and smaller regional concerns serving a similar customer base.
Electrical products sold by the Company are generally used by consumers
and include such items as outdoor and indoor extension cords, work lights, surge
protectors, power strips, garden lighting and timers. We have entered into
license agreements pursuant to which we market certain of our products using
certain other companies' proprietary brand names. Overall demand for our
products is highly correlated with the number of suburban homes and the consumer
demand for appliances, computers, home entertainment equipment, and other
electronic equipment.
The markets for our electrical products are highly competitive.
Competition is based primarily on price and the ability to provide a high level
of customer service in the form of inventory management, high fill rates and
short lead times. Other competitive factors include brand recognition, a broad
product offering, product design, quality and performance. Foreign competitors,
especially from Asia, provide an increasing level of competition. Our ability to
remain competitive in these markets is dependent upon continued efforts to
remain a low-cost provider of these products. In December 2002 and December
2003, Woods US and Woods Canada, respectively, closed their North American
manufacturing facilities and are now sourcing products almost entirely from
international suppliers.
Raw Materials
Our operations have not experienced significant difficulties in obtaining
raw materials, fuels, parts or supplies for their activities during the most
recent fiscal year, but no prediction can be made as to possible future supply
problems or production disruptions resulting from possible shortages. Our
Electrical Products businesses are highly dependent upon products sourced from
Asia, and therefore remain vulnerable to potential disruptions in that supply
chain. We are also subject to uncertainties involving labor relations issues at
entities involved in our supply chain, both at suppliers and in the
transportation and shipping area. Our JanSan Plastics and Consumer Plastics
business units (and some others to a lesser extent) use polyethylene,
polypropylene and other thermoplastic resins as raw materials in a substantial
portion of its plastic products. Prices of plastic resins, such as polyethylene
and polypropylene have increased steadily from the latter half of 2002 through
the early months of 2005 with a notable acceleration in the second half of 2004.
Management has observed that the prices of plastic resins are driven to an
extent by prices for crude oil and natural gas, in addition to other factors
specific to the supply and demand of the resins themselves. We are equally
exposed to price changes for copper at our Woods US and Woods Canada business
units. Prices for copper increased in late 2003 and early 2004, stabilized in a
historically high range in mid-2004 and increased again in late 2004 and early
2005. Prices for aluminum and steel (raw materials used in our Metal Truck Box
business), corrugated packaging material and other raw materials have also
accelerated over the past year. We have not employed an active hedging program
related to our commodity price risk, but are employing other strategies for
managing this risk, including contracting for a certain percentage of resin
needs through supply agreements and opportunistic spot purchases. In 2004, we
experienced $33 million of cost increases in the primary raw materials used in
our products and inflation on other costs such as packaging materials, utilities
and freight. We were able to reduce the impact of these increases to
approximately $24 million through supply contracts, opportunistic buying, vendor
negotiations and other measures. These cost increases have continued in the
first quarter of 2005, and if sustained throughout 2005, would amount to an
increase of over $50 million compared to 2003. In 2004, we passed on about $15
million of these increases through price increases and are announcing additional
price increases in the first and second quarters this year. In a climate of
rising raw material costs (and especially in 2004), we experience difficulty in
raising prices to shift these higher costs to our customers for our plastic
6
products. Our future earnings may be negatively impacted to the extent further
increases in costs for raw materials cannot be recovered or offset through
higher selling prices. We cannot predict the direction our raw material prices
will take during 2005 and beyond.
Employees
As of December 31, 2004, we employed 1,793 people, of which 428 were
members of various unions. Our labor relations are generally satisfactory and
there have been no strikes in recent years. Our operations can be impacted by
labor relations issues involving other entities in our supply chain. We recently
entered into a new union contract with employees at our St. Louis based business
units.
Regulatory and Environmental Matters
We do not anticipate that federal, state or local environmental laws or
regulations will have a material adverse effect on our consolidated operations
or financial position. We anticipate making additional expenditures for
environmental matters during 2005, in accordance with terms agreed upon with the
United States Environmental Protection Agency and various state environmental
agencies. See Note 18 to the Consolidated Financial Statements in Part II, Item
8.
Licenses, Patents and Trademarks
The success of our products historically has not depended largely on
patent, trademark and license protection, but rather on the quality of our
products, proprietary technology, contract performance, customer service and the
technical competence and innovative ability of our personnel to develop and
introduce salable products. However, we do rely to a certain extent on patent
protection, trademarks and licensing arrangements in the marketing of certain
products. Examples of key licensed and protected trademarks include Yellow
Jacket(R), Woods(R), Tradesman(R), AC/Delco(R) (Woods US); Contico(R) (Consumer
Plastics); Continental(R) (JanSan Plastics); Glit(R), Microtron(R), Brillo(R),
and Kleenfast(R) (Abrasives) Wilen(TM) (Textiles); and Trim-Kut(R) (Abrasives
Canada). Companies most reliant upon patented products and technology are CCP,
Woods US, Woods Canada and Gemtex. Further, we are renewing our emphasis on new
product development, which will increase our reliance on patent and trademark
protection across all business units.
Since 1998, Woods Canada used the NOMA(R) trademark in Canada under the
terms of a license with Gentek Inc. (Gentek). In October 2002, Gentek filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In
July 2003, as part of the bankruptcy proceedings, Gentek filed a motion to
reject the trademark license agreement. On November 5, 2003, Gentek's motion was
granted by the U.S. Bankruptcy Court. As a result, this trademark license
agreement is no longer in effect. Woods Canada used the NOMA(R) trademark
through mid-2004 and, subsequently lost the right to brand certain of its
product with the NOMA(R) trademark. Approximately 50% of Woods Canada's sales
were of NOMA(R) - branded products. Woods Canada is replacing those sales with
sales of other products and continues to act as a supplier for the new licensee
of the NOMA(R) trademark.
Available Information
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act. The public may read and copy any materials that the
Company files with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
Also, the SEC maintains an Internet Website that contains reports, proxy and
information statements, and other information regarding issuers, including Katy,
that file electronically with the SEC. The public can obtain documents that we
file with the SEC at http://www.sec.gov.
We maintain a website at http://www.katyindustries.com. We make available,
free of charge through our website, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and, if applicable, all
amendments to these reports as well as Section 16 reports on Forms 3, 4 and 5,
as soon as reasonably practicable after such reports are filed or furnished to
the SEC. The information on our website is not, and shall not be deemed to be, a
part of this report or incorporated into any other filings we make with the SEC.
7
Item 2. PROPERTIES
As of December 31, 2004, our total building floor area owned or leased was
3,274,000 square feet, of which 504,000 square feet were owned and 2,770,000
square feet were leased. The following table shows a summary by location of our
principal facilities including the nature of the facility and the related
business unit.
Location Facility Business Unit
-------- -------- -------------
UNITED STATES
California
Norwalk* Manufacturing, Distribution JanSan Plastics, Consumer Plastics,
Container
Santa Fe Springs* ** Distribution JanSan Plastics, Consumer Plastics,
Abrasives, Textiles
Filters & Grillbricks,
Connecticut
Middlebury* Corporate Headquarters Corporate
Georgia
Atlanta* Manufacturing, Distribution Textiles
McDonough* Manufacturing, Distribution Filters & Grillbricks
Wrens Manufacturing, Distribution Abrasives
Indiana
Carmel* Office Woods US
Indianapolis* Distribution Woods US
Massachusetts
Lawrence* ** Manufacturing, Distribution Abrasives
Missouri
Bridgeton* Office, Manufacturing, JanSan Plastics, Consumer Plastics
Distribution
Hazelwood* Manufacturing JanSan Plastics, Consumer Plastics
North Carolina
Pineville* ** Manufacturing Abrasives
Texas
Winters Manufacturing, Distribution Metal Truck Box
CANADA
Ontario
Toronto* Manufacturing, Distribution Abrasives Canada
Toronto* Distribution Woods Canada, CCP Canada
CHINA
Shenzhen* Office Woods US
UNITED KINGDOM
Cornwall
Redruth Manufacturing, Distribution UK Consumer Plastics,
UK JanSan Plastics
Berkshire
Slough* UK JanSan Plastics
* Facility is leased.
** During 2005 we expect to consolidate all of our abrasives operations in
Lawrence, Massachusetts and Pineville, North Carolina into our recently
expanded Wrens, Georgia (Wrens) Abrasives facility. Also during 2005, we
expect to close our distribution facility in Santa Fe Springs, California
and relocate to a nearby facility in southern California.
8
We believe that our current facilities meet our needs in our existing markets
for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
General Environmental Claims
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions are involved in remedial
activities at certain present and former locations and have been identified by
the United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. Based on its estimate of allocation of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent,
public companies, will fully pay the costs apportioned to them, currently
available information concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company has
recorded and accrued for environmental liabilities in amounts that it deems
reasonable. The ultimate costs will depend on a number of factors and the amount
currently accrued represents management's best current estimate of the total
costs to be incurred. The Company expects this amount to be substantially paid
over the next one to four years.
W.J. Smith Wood Preserving Company ("W.J. Smith")
The most significant environmental matter in which the Company is
currently involved relates to the W.J. Smith site. The W.J. Smith matter
originated in the 1980s when the United States and the State of Texas, through
the Texas Water Commission, initiated environmental enforcement actions against
W.J. Smith alleging that certain conditions on the W.J. Smith property in
Denison, Texas (the "Property") violated environmental laws. In order to resolve
the enforcement actions, W.J. Smith engaged in a series of cleanup activities on
the Property and implemented a groundwater monitoring program.
In 1993, the United States Environmental Protection Agency (EPA) initiated
a proceeding under Section 7003 of the Resource Conservation and Recovery Act
(RCRA) against W.J. Smith and Katy. The proceeding sought certain actions at the
site and at certain off-site areas, as well as development and implementation of
additional cleanup activities to mitigate off-site releases. In December 1995,
W.J. Smith, Katy and the EPA agreed to resolve the proceeding through an
Administrative Order on Consent under Section 7003 of RCRA. W. J. Smith and Katy
have completed the cleanup activities required by the Order.
In addition to the administrative claim specifically identified above, a
purported class action lawsuit was filed by twenty individuals in federal court
in the Marshall Division of the Eastern District of Texas, on behalf of
"landowners and persons who reside and/or work in" an identified geographical
area surrounding the Property. The lawsuit purported to allege claims under
state law for negligence, trespass, nuisance and assault and battery. It sought
damages for personal injury and property damage, as well as punitive damages.
The named defendants were Union Pacific Corporation, Union Pacific Railroad
Company, Katy Industries and W.J. Smith. On June 10, 2002, Katy and W.J. Smith
filed a motion to dismiss the case for lack of federal jurisdiction, or in the
alternative, to transfer the case to the Sherman Division. In response,
plaintiffs filed a motion for leave to amend the complaint to add a federal
claim under the Resource Conservation and Recovery Act. On July 30, 2002, the
court dismissed plaintiffs' lawsuit in its entirety.
On July 31, 2002, plaintiffs filed a new lawsuit against the same
defendants, again in the Marshall Division of the Eastern District of Texas,
alleging property damage class action claims under the federal Comprehensive
Environmental Response Compensation & Liability Act (CERCLA), as well as state
common law theories. The Company deposed all of the proposed class
representatives and on October 31, 2003, filed a motion for summary judgment on
the grounds that the court lacks jurisdiction and that Plaintiffs' claims are
barred by the applicable statute of limitations. Plaintiffs filed a motion for
class certification on the property damage claims on that date as well. By
Memorandum Opinion and Order dated June 8, 2004, the Court granted the Company's
Motion for Summary Judgment on the federal jurisdictional claim and dismissed
the case. The Company has not been notified of an appeal and the time for
appealing the decision has passed.
9
Since 1990, the Company has spent in excess of $7.0 million undertaking
cleanup and compliance activities in connection with the WJ Smith matter. While
ultimate liability with respect to this matter is not easy to determine, the
Company has recorded and accrued amounts that it deems reasonable for
prospective liabilities with respect to this matter.
Asbestos Claims
A. The Company has recently been named as a defendant in four lawsuits filed in
state court in Alabama by a total of approximately 24 individual plaintiffs.
There are over 100 defendants named in each case. In all four cases, the
plaintiffs claim that they were exposed to asbestos in the course of their
employment at a former U.S. Steel plant in Alabama and, as a result, contracted
mesothelioma, asbestosis, lung cancer or other illness. They claim that they
were exposed to asbestos in products in the plant which were manufactured by
each defendant. In three of the cases, plaintiffs also assert wrongful death
claims. The Company will vigorously defend the claims against it in these
matters.
B. Sterling Fluid Systems (USA) has tendered over 1,500 cases pending in
Michigan, New Jersey, Illinois, Nevada, Mississippi, Wyoming, Louisiana,
Massachusetts and California to the Company for defense and indemnification.
Sterling bases its tender of the complaints on the provisions contained in a
1993 Purchase Agreement between the parties whereby Sterling purchased the
LaBour Pump business and other assets from the Company. Sterling has not filed a
lawsuit against Katy in connection with these matters.
The tendered complaints all purport to state claims against Sterling and
its subsidiaries. The Company and its current subsidiaries are not named as
defendants. The plaintiffs in the cases also allege that they were exposed to
asbestos and products containing asbestos in the course of their employment.
Each complaint names as defendants many manufacturers of products containing
asbestos, apparently because plaintiffs came into contact with a variety of
different products in the course of their employment. Plaintiffs' claim that
LaBour Pump and/or Sterling may have manufactured some of those products.
With respect to many of the tendered complaints, the Company has taken the
position that Sterling has waived its right to indemnity by failing to timely
request it as required under the 1993 Purchase Agreement. With respect to the
balance of the tendered complaints, the Company has elected not to assume the
defense of Sterling in these matters.
C. LaBour Pump Company, a former subsidiary of the Company, has been named as a
defendant in over 280 similar cases in New Jersey. These cases have also been
tendered by Sterling. The Company has elected to defend these cases, many of
which have been dismissed or settled for nominal sums.
While the ultimate liability of the Company related to the asbestos
matters above cannot be determined at this time, the Company has recorded and
accrued amounts that it deems reasonable for prospective liabilities with
respect to this matter.
Non-Environmental Litigation - Banco del Atlantico, S.A.
In December 1996, Banco del Atlantico ("plaintiff"), a bank located in
Mexico, filed a lawsuit in Texas against Woods US, a subsidiary of Katy, and
against certain past and/or then present officers, directors and former owners
of Woods US (collectively, "defendants"). The plaintiff alleges that the
defendants participated in violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO") involving, among other things, allegedly fraudulently
obtained loans from Mexican banks (including the plaintiff) and "money
laundering" of the proceeds of the illegal enterprise. The plaintiff alleges
that it made loans to a Mexican corporation controlled by certain past officers
and directors of Woods US based upon fraudulent representations and guarantees.
The plaintiff also alleges violations of the Indiana RICO and Crime Victims Act,
common law fraud and conspiracy, fraudulent transfer claims, and seeks recovery
upon certain alleged guarantees purportedly executed by Woods Wire Products,
Inc., a predecessor company from which Woods US purchased certain assets in 1993
(prior to Woods US's ownership by Katy, which began in December 1996). The
primary legal theories under which the plaintiff seeks to hold Woods liable for
its alleged damages are respondeat superior, conspiracy, successor liability, or
a combination of the three.
After several years of procedural disputes, this lawsuit has become more
active recently. In 2003, by order of the Southern District of Texas court, the
case was transferred to the Southern District of Indiana on the ground that
Indiana has a closer relationship to this case than Texas. The case is currently
pending in the Southern District of Indiana. In December 2003, the plaintiff
filed an Amended Complaint. There have been various motions to dismiss filed by
the defendants. These motions have been denied by the court or have become
mooted by subsequent filings by the plaintiff.
In September 2004, the plaintiff and HSBC Mexico, S.A. (collectively,
"plaintiffs"), an additional owner of the Amended Complaint's claims against the
defendants, filed a Second Amended Complaint, which includes new allegations and
10
seeks additional relief from the defendants. The Second Amended Complaint also
adds new defendants (none of which is affiliated with the Company) and claims,
although the fundamental nature of the lawsuit, described above, remains the
same.
The Defendants filed motions to dismiss the Second Amended Complaint on
November 8, 2004. These motions sought dismissal of plaintiffs' Second Amended
Complaint on grounds of, among other things, forum non conveniens and failure to
state a claim. The plaintiffs have responded to defendants' motions and the
defendants have replied. A new Case Management Plan has also been entered in the
case, which ties further case deadlines, including the date for close of
discovery and trial of this action, to the Court's "last ruling" on the pending
motions to dismiss. Discovery is continuing.
The plaintiffs' Second Amended Complaint claims damages in excess of $24
million and requests that damages be trebled under Indiana and federal RICO,
and/or the Indiana Crime Victims Act. The Second Amended Complaint also requests
that the Court void certain transactions and asset sales as purported
"fraudulent transfers," including the 1993 Woods Wire Products, Inc. - Woods US
asset sale, and seeks other relief. Because various jurisdictional and
substantive issues have not yet been fully adjudicated, it is not possible at
this time for the Company to reasonably determine an outcome or accurately
estimate the range of potential exposure. Katy may also have recourse against
the former owners of Woods US and others for, among other things, violations of
covenants, representations and warranties under the purchase agreement through
which Katy acquired Woods US, and under state, federal and common law. Woods US
may also have indemnity claims against the former officers and directors. In
addition, there is a dispute with the former owners of Woods US regarding the
final disposition of amounts withheld from the purchase price, which may be
subject to further adjustment as a result of the claims by the plaintiff. The
extent or limit of any such adjustment cannot be predicted at this time. While
the ultimate liability of the Company related to this matter cannot be
determined at this time, the Company has recorded and accrued amounts that it
deems reasonable for prospective liabilities with respect to this matter.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during
the fourth quarter of 2004.
11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER MARKET PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange (NYSE). The
following table sets forth high and low sales prices for the common stock in
composite transactions as reported on the NYSE composite tape for the prior two
years.
Period High Low
------ ---- ---
2004
First Quarter $6.50 $5.70
Second Quarter 6.47 4.71
Third Quarter 5.40 4.94
Fourth Quarter 5.45 4.36
2003
First Quarter $3.61 $2.54
Second Quarter 4.89 2.40
Third Quarter 5.20 4.80
Fourth Quarter 6.75 5.20
As of March 15, 2005, there were 636 holders of record of our common
stock, in addition to approximately 1,800 holders in street name, and there were
7,945,377 shares of common stock outstanding.
Dividend Policy
Dividends are paid at the discretion of the Board of Directors. Since the
Board of Directors suspended quarterly dividends on March 30, 2001 in order to
preserve cash for operations, the Company has not declared or paid any cash
dividends on its common stock. In addition, the Company's Amended and Restated
Loan Agreement (the "Bank of America Credit Agreement") prohibits the Company
from paying dividends on its securities, other than dividends paid solely in
securities. The Company currently intends to retain its future earnings, if any,
to fund the development and growth of its business and, therefore, does not
anticipate paying any dividends, either in cash or securities, in the
foreseeable future. Any future decision concerning the payment of dividends on
the Company's common stock will be subject to its obligations under the Bank of
America Credit Agreement and will depend upon the results of operations,
financial condition and capital expenditure plans of the Company, as well as
such other factors as the Board of Directors, in its sole discretion, may
consider relevant. For a discussion of our Bank of America Credit Agreement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Equity Compensation Plan Information
Information regarding securities authorized for issuance under the
Company's equity compensation plans as of December 31, 2004 is set forth in Item
12, "Security Ownership of Certain Beneficial Owners and Management."
Share Repurchase Plan
On April 20, 2003, the Company announced a plan to repurchase up to $5.0
million shares of its common stock. In 2004, 12,000 shares of common stock were
repurchased on the open market for approximately $0.1 million, while in 2003,
482,800 shares of common stock were repurchased on the open market for
approximately $2.5 million. We suspended further repurchases under the plan
again on May 10, 2004 and there currently are no plans to resume the share
repurchase program.
12
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Amounts in Thousands, except per share data and percentages)
Net sales $ 457,642 $ 436,410 $ 445,755 $ 447,108 $ 508,850
=========== ========== ========== ========== ==========
Loss from continuing operations [a] $ (36,121) $ (18,887) $ (53,083) $ (65,464) $ (9,111)
Discontinued operations [b] -- 9,523 (1,152) 2,202 3,653
Cumulative effect of a change in accounting principle [b] [c] -- -- (2,514) -- --
----------- ---------- ---------- ---------- ----------
Net loss $ (36,121) $ (9,364) $ (56,749) $ (63,262) $ (5,458)
=========== ========== ========== ========== ==========
(Loss) earnings per share - Basic and diluted:
Loss from continuing operations $ (6.45) $ (3.06) $ (7.67) $ (7.54) $ (1.08)
Discontinued operations -- 1.16 (0.14) 0.26 0.43
Cumulative effect of a change in accounting principle -- -- (0.30) -- --
----------- ---------- ---------- ---------- ----------
Loss per common share $ (6.45) $ (1.90) $ (8.11) $ (7.28) $ (0.65)
=========== ========== ========== ========== ==========
Total assets $ 224,464 $ 241,708 $ 275,977 $ 347,955 $ 446,723
Total liabilities 155,879 139,416 157,405 173,691 263,490
Preferred interest in subsidiary -- -- 16,400 16,400 32,900
Stockholders' equity 68,585 102,292 102,172 157,864 150,333
Long-term debt, including current maturities 58,737 39,663 45,451 84,093 133,838
Impairments of long-lived assets 30,831 11,880 21,204 47,469 --
Severance, restructuring and related charges 3,505 8,132 19,155 13,380 2,651
Depreciation and amortization [d] 14,266 21,954 19,259 20,216 21,096
Capital expenditures 13,876 13,435 10,119 12,566 14,196
Working capital [e] 59,855 43,439 35,206 65,733 97,258
Ratio of debt to capitalization 46.1% 27.9% 27.7% 32.5% 42.2%
Weighted average common shares outstanding - Basic and diluted 7,883,265 8,214,712 8,370,815 8,393,210 8,403,701
Number of employees 1,793 1,808 2,261 2,922 3,509
Cash dividends declared per common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.30
[a] Includes distributions on preferred securities in 2003, 2002, 2001 and
2000.
[b] Presented net of tax.
[c] This amount is a transitional impairment of goodwill recorded with the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
[d] From continuing operations only.
[e] Defined as current assets minus current liabilities, exclusive of deferred
tax assets and liabilities and debt classified as current.
13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY OVERVIEW
For purposes of this discussion and analysis section, reference is made to
the table below and the Company's Consolidated Financial Statements included in
Part II, Item 8. We have two principal operating groups: Maintenance Products
and Electrical Products. The group labeled as Other consists of Sahlman and
SESCO. Two business units formerly included in the Electrical Products Group,
GC/Waldom and Hamilton, and one business formerly included in the Maintenance
Products Group, Duckback, have been classified as Discontinued Operations for
the periods prior to their sale. Duckback was sold on September 16, 2003,
GC/Waldom was sold on April 2, 2003, and Hamilton was sold on October 31, 2002.
Since the Recapitalization, the Company's management has been focused on
the following restructuring and cost reduction initiatives:
o Consolidation of facilities: 35 manufacturing, distribution and office
facilities closed or consolidated (including 2 expected to be closed
during 2005); manufacture and distribution of each business unit
centralized; Electrical Products manufacturing outsourced to Asia.
o Divestitures of non-core operations: 4 non-core business units have been
sold or otherwise exited and proceeds have been applied to reduce debt.
o Selling general and administrative (SG&A) cost rationalization:
restructured duplicative corporate and support functions; overhead
reduced; implemented shared sales, administrative and support services
model.
o Organizational changes: across-the-board review of management talent and
key hires made at both the corporate and operational levels.
With these initiatives nearly complete, the Company's focus has shifted to
sustaining revenue growth and containing raw material costs. Our future cost
reductions are expected to continue to come from process improvements (such as
Lean Manufacturing and Six Sigma), value engineering products, improved
sourcing/purchasing and lean administration.
End-user demand for our Maintenance and Electrical products is relatively
stable and recurring, particularly in comparison to other traditional
manufacturing segments. Demand for products in our markets is strong and
supported by the necessity of the products to users, creating a steady and
predictable market. In the core janitorial/sanitary and foodservice segments,
sanitary and health standards create a steady flow of ongoing demand. The
consumable or short-life nature of most of the products used for cleaning
applications (primarily floor pads, hand pads, and mops, brooms and brushes)
means that they are replaced frequently, creating further demand stability.
During the past few years, we did experience limited recession-driven sales
declines, which we believe was primarily attributable to both reductions in
inventory held by distributors as well as reduced end-user consumption caused by
declines in airport occupancy (particularly after September 11th) and general
hospital occupancy. In addition, many of our Electrical products can be
characterized as "value" items that are frequently lost or discarded, with
subsequent replacement ensuring continuing and stable demand. This is
particularly the case with electrical cords, which consistently experience
strong sales ahead of the holiday season.
The markets in which we compete are expected to experience steady growth
over the next several years. Our core commercial cleaning product markets are
expected to grow at rates approximating gross domestic product (GDP), driven by
increasing sanitary standards as a result of heightened health concerns. In
addition, the improvement in general economic conditions will increase demand
for Katy's cleaning products, due to higher commercial occupancy rates and
increased demand for travel and hospitality industries. The consumer plastics
market as a whole is relatively mature, with its growth characteristics linked
to household expenditures. Demand is driven by the increasing competition of
material possessions by North American households and the desire of consumers to
store those possessions in an attractive and orderly manner. Demand for consumer
plastic storage products is also typically stable, due to consumer perception of
these products as "value" items. The market for automotive storage units, is
driven by sales of trucks, sports utility vehicles (SUV's) and cross/utility
vehicles (CUV's) which grew at a combined average rate of 3.9% per annum between
2000 and 2002. End-users are relatively insensitive to both price and brand-name
offering, instead focusing on product quality and size.
We estimate that the North American market for cords and work lights will
grow at above-GDP growth rates, driven by the growing number of suburban homes
(particularly those with outdoor spaces) and the growth in the use of outdoor
appliances. The market for surge protectors and multiple outlet products is also
expected to grow at above-GDP growth rates driven by the continued use in
consumer purchasers of appliances, computers, home entertainment equipment, and
other electronic equipment, as well as the growing public awareness of the need
to protect these products from power surges.
Key elements in achieving profitability in the Maintenance Products Group
include 1) maintaining a low cost structure, from a production, distribution and
administrative standpoint, 2) providing outstanding customer service and 3)
14
containing raw material costs (especially plastic resins) or raising prices to
shift these higher costs to our customers for our plastic products. In addition
to continually striving to reduce our cost structure, we are seeking to offset
pricing challenges by developing new products for the consumer markets, as new
products or beneficial modifications of existing products increase demand from
our customers, provide novelty to the consumer, and offer an opportunity for
favorable pricing from customers in the national mass merchant retail area.
Retention of customers, or more specifically, product lines with those
customers, is also very important in the mass merchant retail area, given the
vast size of these national accounts. Since the fourth quarter of 2003, we
centralized our customer service and administrative functions for CCP divisions
JanSan Plastics, Abrasives (Glit-Microtron portion only), Textiles and Filters
and Grillbricks in one location, allowing customers to order products from any
CCP commercial unit on one purchase order. We expect to add the customer service
and administrative functions for the remaining Abrasives operations during 2005.
We believe that operating these business units as a cohesive unit will improve
customer service in that our customers' purchasing processes will be simplified,
as will follow up on order status, billing, collection and other related
functions. We believe that this may increase customer loyalty, help in
attracting new customers and lead to increased top line sales in future years.
Key elements in achieving profitability in the Electrical Products Group
are in many ways similar to those mentioned for our Maintenance Products Group.
The achievement and maintenance of a low cost structure is critical given the
significant level of foreign competition, primarily from Asia and Latin America.
For this reason, in December 2002 and December 2003, Woods US and Woods Canada,
respectively, ceased all manufacturing and initiated a fully outsourced strategy
for their consumer electrical products. Customer service, specifically the
ability to fill orders at a rate designated by our customers, is very important
to customer retention, given seasonal sales pressures in the consumer electrical
area. Woods US and Woods Canada are both subject to seasonal sales trends in
connection with the holiday shopping season, with stronger sales and profits
realized in the third and early fourth quarters. Retention of customers is
critical in the Electrical Products Group, given the size of national accounts.
See "OUTLOOK FOR 2005" in this section for discussion of recent
developments related to the Maintenance Products Group and the Electrical
Products Group.
15
Years Ended December 31,
---------------------------------------------------------------
2004 2003 2002
------------------- ------------------- --------------------
(Amounts in Millions, except per share data and percentages)
------- ---------- ------- ---------- --------------------
$ % to Sales $ % to Sales $ % to Sales
------- ---------- ------- ---------- ------- ----------
Net sales $ 457.6 100.0 $ 436.4 100.0 $ 445.8 100.0
Cost of goods sold 396.6 86.7 365.5 83.8 373.6 83.8
------- ---------- ------- ---------- ------- ----------
Gross profit 61.0 13.3 70.9 16.2 72.2 16.2
Selling, general and administrative expenses 57.3 (12.5) 59.8 (13.7) 63.7 (14.3)
Impairments of long-lived assets 30.8 (6.7) 11.9 (2.7) 21.2 (4.8)
Severance, restructuring and related charges 3.5 (0.8) 8.1 (1.8) 19.1 (4.3)
Loss on SESCO joint venture transaction -- -- -- -- 6.0 (1.3)
------- ----- ------- ----- ------- -----
Operating loss (30.6) (6.7) (8.9) (2.0) (37.8) (8.5)
===== ===== =====
Equity in (loss) income of equity method investment -- (5.7) 0.3
Gain (loss) on sale of assets 0.3 0.6 (0.2)
Interest expense (4.0) (6.2) (6.2)
Other, net (0.9) (1.8) (0.1)
------- ------- -------
Loss from continuing operations before (provision) benefit for
income taxes (35.2) (22.0) (44.0)
(Provision) benefit for income taxes from continuing operations (0.9) 3.2 (7.5)
------- ------- -------
Loss from continuing operations before distributions on preferred
interest of subsidiary (36.1) (18.8) (51.5)
Distributions on preferred interest of subsidiary (net of tax) -- (0.1) (1.6)
------- ------- -------
Loss from continuing operations (36.1) (18.9) (53.1)
Income (loss) from operations of discontinued businesses
(net of tax) -- 2.1 (4.5)
Gain on sale of discontinued businesses (net of tax) -- 7.4 3.3
------- ------- -------
Loss before cumulative effect of a change in accounting principle (36.1) (9.4) (54.3)
Cumulative effect of a change in accounting principle (net of tax) -- -- (2.5)
------- ------- -------
Net loss (36.1) (9.4) (56.8)
Gain on early redemption of preferred interest of subsidiary -- 6.6 --
Payment in kind of dividends on convertible preferred stock (14.8) (12.8) (11.1)
------- ------- -------
Net loss attributable to common stockholders $ (50.9) $ (15.6) $ (67.9)
======= ======= =======
Loss per share of common stock - basic and diluted:
Loss from continuing operations $ (4.58) $ (2.30) $ (6.34)
Gain on early redemption of preferred interest of subsidiary -- 0.80 --
Payment-in-kind (PIK) dividends on convertible preferred stock (1.87) (1.56) (1.33)
------- ------- -------
Loss from continuing operations attributable to common
stockholders (6.45) (3.06) (7.67)
Discontinued operations (net of tax) -- 1.16 (0.14)
Cumulative effect of a change in accounting principle (net of tax) -- -- (0.30)
------- ------- -------
Net loss attributable to common stockholders $ (6.45) $ (1.90) $ (8.11)
======= ======= =======
RESULTS OF OPERATIONS
16
2004 COMPARED TO 2003
Overview
Our consolidated net sales in 2004 increased $21.2 million, or 5%, from
2003. Higher net sales resulted from a higher pricing of 4% and favorable
currency translation of 2%, offset by lower volumes of 1%. Gross margins were
13.3% in the year ended December 31, 2004 a decrease of 2.9 percentage points
from the year ended December 31, 2003. Accelerating raw material costs and
incremental operating costs incurred due to the delayed consolidation of the
abrasives facilities were partially offset by the favorable impact of
restructuring, cost containment, lower depreciation and pricing increases. SG&A
as a percentage of sales declined from 13.7% in 2003 to 12.5% in 2004. This
decrease can be primarily attributed to maintaining these costs despite the
increase in net sales. The operating loss increased by $21.7 million to $(30.6)
million, principally due to higher impairments of long-lived assets and lower
gross margins, partially offset by lower severance, restructuring and related
charges.
Overall, we reported a net loss attributable to common shareholders of
($50.9) million [($6.45) per share] for the year ended December 31, 2004, versus
a net loss attributable to common shareholders of ($15.6) million [($1.90) per
share] in the same period of 2003. During the year ended December 31, 2004, we
recorded the impact of paid-in-kind dividends earned on our convertible
preferred stock of ($14.8) million [($1.87) per share]. During the year ended
December 31, 2003, we reported income from discontinued operations of $9.5
million, net of tax [$1.16 per share], a gain on the early redemption of a
preferred interest in a subsidiary of $6.6 million [$0.80 per share] and the
impact of payment-in-kind dividends earned on its convertible preferred stock of
($12.8) million [($1.56) per share].
Net Sales
Maintenance Products Group
Net sales from the Maintenance Products Group decreased from $285.3
million during the year ended December 31, 2003 to $278.8 million during the
year ended December 31, 2004, a decrease of 2%. Overall, this decline was
primarily due to lower volumes of sales of 5%, partially offset by higher
pricing of 1% and the favorable impact of exchange rates of 2%. Sales volume for
the Consumer Plastics business unit, which sells primarily to mass merchant
customers, was significantly lower due to the elimination of certain product
lines with major outlet customers and to a lesser extent due to promotions in
2003 which did not recur in 2004. We also experienced volume declines in our
Abrasives business unit in the U.S. due to shipping and production
inefficiencies caused by the delayed consolidation of two abrasives facilities
into the Wrens, Georgia facility and a fire at our facility in Wrens in the
fourth quarter of 2004 that disrupted production for several weeks. These
decreases in Abrasives sales were partially offset by stronger sales of roofing
products to the construction industry. We experienced volume gains in certain of
our businesses that sell to commercial customers, particularly in our Abrasives
Canada, Textiles, Filters and Grillbricks business units. Abrasives Canada sales
benefited from an improving North American economy, while sales of Textiles and
Filters and Grillbricks products benefited from the ability of customers to
order products from all CCP divisions on one purchase order. The JanSan Plastics
business unit experienced volume declines primarily due to bid business obtained
in 2003 but not repeated in 2004, customer "buy-ins" to achieve certain rebates
in 2003 also not repeated in 2004 and lost market share. Lower JanSan Plastics
volume was partially offset by price increases implemented to combat
accelerating raw material costs. UK JanSan Plastics volumes increased primarily
as a result of the acquisition of Spraychem Limited on April 1, 2003. The UK
Consumer Plastics and UK JanSan Plastics business units also benefited from
favorable exchange rates in 2004 versus 2003.
Electrical Products Group
The Electrical Products Group's sales improved from $151.1 million for the
year ended December 31, 2003 to $178.7 million for the year ended December 31,
2004, an increase of 18%. Sales improved as a result of a higher pricing of 9%,
an increase in volume of 7%, and favorable currency translation of 2%. Multiple
selling price increases were implemented throughout 2004 at Woods US (and to a
lesser extent at Woods Canada) to offset the rising cost of copper and PVC.
Volume at Woods US benefited principally from the acquisition of significant new
product lines with both existing and new customers. Woods Canada experienced a
slight volume increase as sales to its two largest customers benefited from new
product offerings and higher demand was partially offset by the loss of certain
lines of business at certain customers. Sales at Woods Canada were also
favorably impacted by a stronger Canadian dollar versus the U.S. dollar in 2004
versus 2003.
17
Operating Income
Operating income (loss) 2004 2003 Change
---------------------- ---------------------- -----------------------
$ % Margin $ % Margin $ % Margin
- -------- - -------- - --------
Maintenance Products Group $ (2.7) (1.0) $ 9.3 3.3 $ (12.0) (4.3)
Electrical Products Group 16.8 9.4 15.6 10.3 1.2 (0.9)
Unallocated corporate expense (10.4) (13.8) 3.4
-------- -------- --------
3.7 0.8 11.1 2.5 (7.4) (1.7)
Impairments of long-lived assets (30.8) (11.9) (18.9)
Severance, restructuring and related charges (3.5) (8.1) 4.6
-------- -------- --------
Operating loss $ (30.6) (6.7) $ (8.9) (2.0) $ (21.7) (4.7)
======== ======== ========
Maintenance Products Group
The Maintenance Products Group's operating income decreased from $9.3
million (3.3% of net sales) during the year ended December 31, 2003 to an
operating loss of $2.7 million (-1.0% of net sales) for the year ended December
31, 2004. The decrease was primarily attributable to lower volumes and higher
raw material costs in 2004 versus 2003 (that were only partially recovered
through higher selling prices), as well as a decline in the profitability of our
Abrasives business resulting from shipping and production inefficiencies caused
by the delayed consolidation of two facilities into the Wrens, Georgia facility
and the fire at our facility in Wrens in the 4th quarter of 2004 that disrupted
production for several weeks. Operating results were positively impacted by $5.4
million of incremental depreciation in 2003 related to the revision of the
estimated useful lives of certain manufacturing assets, effective January 1,
2003. Operating income was also favorably impacted through benefits realized
from the implementation of cost reduction strategies.
Electrical Products Group
The Electrical Products Group's operating income increased from $15.6
million (10.3% of net sales) for the year ended December 31, 2003 to $16.8
million (9.4% of net sales) for the year ended December 31, 2004, an increase of
8%. The increase in profitability was due to the strong volume increases at the
Woods US business unit as well as improved margins due to the closure of the
Woods Canada manufacturing facility in December 2003 and the completion of a
fully outsourced product strategy for that business. Overall, margins declined
as a result of selling price increases (especially at Woods Canada) not quite
keeping pace with the increasing costs of copper and PVC and the impact of
increased lower-margin direct import sales.
Corporate
Corporate operating expenses decreased from $13.8 million in 2003 to $10.4
million in 2004 principally due to lower casualty insurance costs, lower bonus
expense resulting from a decline in operating performance and decreased expense
for stock appreciation rights due to a lower stock price affecting the variable
plan accounting for these awards.
Impairments of Long-lived Assets
During the fourth quarter of 2004, we recognized an impairment loss of
$29.9 million related to the US Plastics business units (JanSan Plastics,
Consumer Plastics and Container - see discussion of reporting units in Note 4 to
the Consolidated Financial Statements in Part II, Item 8) including $8.0 million
related to goodwill, $8.4 million related to machinery and equipment, $10.9
million related to a customer list intangible and $2.6 million related to a
trademark. In the fourth quarter of 2004, the profitability of the Consumer
Plastics business unit declined sharply as we were unable to pass along
sufficient selling price increases to combat the accelerating cost of resin (a
key raw material used in all of the US Plastics units). We believe that our
future earnings and cash flow could be negatively impacted to the extent further
increases in resin and other raw material costs cannot be offset or recovered
through higher selling prices. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Intangible Assets, we (through
an independent third party valuation firm) performed an analysis of discounted
future cash flows which indicated that the book value of the US Plastics units
was significantly greater than the fair value of those businesses. In addition,
as a result of the goodwill analysis, we also assessed whether there had been an
impairment of the long-lived assets in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The Company concluded that
the book value of equipment, a customer list intangible and trademark associated
with the US Plastics business unit significantly exceeded the fair value and
impairment had occurred. Also in 2004, we recorded impairment charges of $0.8
million related to property and equipment at our Metal Truck Box business unit
and $0.1 million related to certain assets at the Woods US business unit.
18
Impairment charges in 2003 included $7.2 million related to idle and
obsolete equipment, tooling and leasehold improvements at Warson Road,
Hazelwood, Bridgeton, and the Santa Fe Springs, California metals facility, $1.3
million of costs related to the partial closure of Abrasives facilities in
Lawrence, Massachusetts and Pineville, North Carolina and the consolidation into
the Wrens, Georgia facility, $0.4 million of obsolete molds and tooling at our
UK Consumer Plastics facility and $0.4 million associated with the write down of
certain equipment at Woods Canada and Woods US as a result of the closure of the
manufacturing operations at both business units. In addition, $2.6 million of
goodwill and patents of the Abrasives Canada business unit were impaired as it
was determined that future cash flows of this business could not support the
carrying value of its intangible assets. This business unit has experienced a
decline in profitability in recent years principally as a result of increasing
foreign competition.
Severance, Restructuring and Related Charges
Operating results for the Company during the years ended December 31, 2004
and 2003 were negatively impacted by severance, restructuring and related
charges of $3.5 million and $8.1 million, respectively. Charges in 2004 related
to adjustments to previously established non-cancelable lease liabilities for
abandoned facilities ($0.9 million); a non-cancelable lease accrual and
severance as a result of the shutdown of manufacturing and severance at Woods
Canada ($0.9 million); the restructuring of the Abrasives business ($0.8
million); costs for the movement of inventory and equipment in connection with
the consolidation of St. Louis manufacturing and distribution facilities ($0.3
million); the shutdown and relocation of a procurement office in Asia ($0.3
million); costs incurred for the consolidation of administrative functions for
CCP ($0.2 million); and expenses for the closure of CCP Canada's facility and
the subsequent consolidation into the Woods Canada facility ($0.1 million).
The largest of these charges in 2003 related to non-cancelable leases at
abandoned facilities as a result of the consolidation of the CCP facilities in
the St. Louis area into CCP's largest and most modern plant in Bridgeton,
Missouri ($3.7 million). A charge of $1.5 million was recorded related to
severance associated with the shutdown of the Woods Canada manufacturing
operations in December 2003. Charges of $1.2 million were also incurred relating
to the restructuring of the Abrasives business unit, principally to consolidate
the Lawrence, Massachusetts and Pineville, North Carolina facilities into the
newly expanded Wrens, Georgia location. We also incurred charges in 2003 related
to severance costs for headcount reductions ($0.6 million), an adjustment to a
non-cancelable lease accrual due to a change in sub-lease assumptions at Woods
US ($0.5 million), the consolidation of the customer service and administrative
functions for CCP ($0.3 million), costs related to the closure of CCP's metals
facility in Santa Fe Springs, California ($0.2 million) and consulting fees
associated with product outsourcing strategies ($0.1 million).
Other
Upon review of Sahlman's results for 2002 and the first half of 2003, and
after initial study of the status of the shrimp industry and markets in the
United States, we evaluated the business further to determine if there had been
a loss in the value of the investment that was other than temporary. Based upon
the results of a third party appraisal, we estimated the fair value of the
Sahlman business through a liquidation value analysis whereby all of Sahlman's
assets would be sold and all of its obligations would be settled. Also based on
the aforementioned appraisal, we evaluated the business by using various
discounted cash flow analyses, estimating future free cash flows of the business
with different assumptions regarding growth, and reducing the value of the
business arrived at through this analysis by its outstanding debt. All values
were then multiplied by 43%, Katy's investment percentage. The answers derived
by each of the three assumption models were then probability weighted. As a
result, Katy concluded that $1.6 million was a reasonable estimate of the value
of its investment in Sahlman, and therefore a charge of $5.5 million was
recorded in the third quarter of 2003 to reduce the carrying value of the
investment. Based on our assessment at December 31, 2004, we continue to believe
that $1.6 million is a reasonable estimate of our investment in Sahlman.
Interest expense decreased by $2.2 million in 2004 versus 2003, primarily
due to the write-off of unamortized debt costs of $1.8 million in 2003 resulting
from a February 2003 refinancing and other reductions in overall availability.
The remaining decrease in interest expense of $0.4 million was due mainly to
slightly lower average borrowings during 2004, principally as a result of
applying the proceeds from the sale of non-core businesses in 2003 to repay
debt.
Other, net for the year ended December 31, 2004 included the write-off of
certain receivables related to businesses disposed of prior to 2002 ($0.8
million) and the write-off of fees and expenses associated with a financing
which we chose not to pursue ($0.5 million). Other, net for the year ended
December 31, 2003 included the write-off of certain receivables related to
businesses disposed prior to 2002 ($0.7 million), realized foreign exchange
losses ($0.6 million) and costs associated with the proposed sale of certain
subsidiaries ($0.3 million). The gain on sale of assets in 2004 and 2003 were
primarily due to the sales of excess real estate.
19
The provision for income taxes for the year ended December 31, 2004
reflects current expense for state and foreign income taxes offset by the
reduction of certain tax reserves and the recognition of certain foreign
deferred tax assets. During the year ended December 31, 2003, a tax benefit of
$3.2 million was recorded on pre-tax loss to the extent a provision was provided
for the gain on sale of discontinued businesses and income from operations of
discontinued businesses. A further benefit was not recorded due to the valuation
allowance recorded against our net deferred tax assets. Also in 2003, $1.1
million and $3.8 million of income tax expense were attributable to income from
discontinued businesses and the gain on the sale of discontinued businesses,
respectively.
Discontinued Operations
The GC/Waldom and Duckback business units are reported as discontinued
operations for the year ended December 31, 2003. There was no discontinued
operations activity for 2004.
GC/Waldom reported income of $0.1 million (net of tax) in the first half
of 2003. We sold GC/Waldom on April 2, 2003 and recognized a loss (net of tax)
of $0.2 million in the second quarter of 2003 as a result of the sale.
Duckback generated income of $2.0 million (net of tax) in the first nine
months of 2003. We sold Duckback on September 16, 2003 and recognized a gain
(net of tax) of $7.6 million in the third quarter of 2003 as a result of the
sale.
2003 COMPARED TO 2002
Overview
Our consolidated net sales for the Company declined $9.3 million, or 2%
from 2002 levels, due to a volume decline of 3% and lower pricing of 1%,
partially offset by favorable currency translation of 2%. Gross margins held
constant at approximately 16.2% as the benefit of implemented cost reduction
strategies, offset lower pricing, higher resin costs and atypically high
depreciation (see Operating Income -Maintenance Products Group below). SG&A as a
percentage of sales declined from 14.3% in 2002 to 13.7% in 2003. The operating
deficit was reduced significantly from $37.8 million to $8.9 million mostly as a
result of reduced severance, restructuring and related charges, lower
impairments of long-lived assets and the loss on the SESCO joint venture in
2002.
Overall, we reported a net loss attributable to common shareholders of
($15.6) million [($1.90) per share] for the year ended December 31, 2003, versus
a net loss attributable to common shareholders of ($67.9) million, or ($8.11)
per share in the same period of 2002. During the year ended December 31, 2003,
we reported income from discontinued operations of $9.5 million, net of tax
[$1.16 per share], a gain on the early redemption of a preferred interest in a
subsidiary of $6.6 million, net of tax [$0.80 per share], and the impact of
paid-in-kind dividends earned on convertible preferred stock of ($12.8) million
[($1.56) per share]. During the year ended December 31, 2002, we reported
results of discontinued operations of ($1.2) million, net of tax [($0.14) per
share], a cumulative effect of a change in accounting principle of ($2.5)
million [($0.30) per share], as well as the impact of paid-in-kind dividends
earned on convertible preferred stock of ($11.1) million [($1.33) per share].
The tables and narrative below summarize the key factors in the
year-to-year changes in operating results.
Net Sales
Maintenance Products Group
Net sales from the Maintenance Products Group decreased from $300.3
million in 2002 to $285.3 million in 2003, a decrease of 5%. The decline was due
to a volume decrease of 6%, partially offset by the favorable impact of exchange
rates of 1%. The decline in sales is attributed to both commercial and consumer
customers. On the commercial side, sales were lower at the Abrasives Canada
business unit, primarily due to increased foreign competition, and in the
Abrasives business unit, primarily because a major customer increased their
supplier base in 2003. In addition, we believe that the JanSan Plastics business
unit was impacted during the first three quarters of 2003 by the general
economic conditions and reduced demand for cleaning products, due to commercial
real estate vacancy rates and reduced demand in the travel and hospitality
industries. In the fourth quarter, sales for the JanSan Plastics business unit
were higher in 2003 than in 2002 representing an improvement in the health of
the aforementioned industries. Sales were higher in the international markets
for Katy's commercial and sanitary maintenance products, primarily in the UK
JanSan Plastics unit. Sales for the Consumer Plastics business unit, which sells
primarily to mass merchant retail customers, were lower due to the loss of
certain product lines with major retailers and to a lesser extent, downward
pricing pressures and allowance, rebate, and other programs. The UK Consumer
Plastics business
20
benefited overall from stronger volumes and favorable exchange rates, partially
offset by price erosion similar to that in the JanSan Plastics business.
Electrical Products Group
The Electrical Product Group's sales increased from $144.3 million in 2002
to $151.1 million in 2003, an increase of 5%. An increase in volume of 5% and
favorable currency translation of 3% was partially offset by lower pricing of
3%. The Woods US business unit experienced a year-over-year increase in volume
as a result of a strong fourth quarter in 2003. The improvement was primarily
due to higher volumes of direct import merchandise (such as extension cords and
power strips), which are shipped directly from our suppliers to our customers.
Woods US sales performance in 2003 also benefited from the introduction of new
surge products, sales to new customers and same store growth for its largest
customer, a national home improvement retailer. Offsetting these volume
increases was a slight reduction in pricing which was implemented to remain
competitive in certain product lines. Higher sales at Woods Canada in 2003
compared to 2002 were principally due to the impact of a stronger Canadian
dollar versus the U.S. dollar. This increase was offset partially by lower
pricing mostly due to a shift during 2003 to direct import products.
Other
Sales from other operations decreased by $1.2 million, as a result of the
SESCO waste-to-energy operation being turned over to a third party in April
2002.
Operating Income
Operating income (loss) 2003 2002 Change
---------------------------------------------------------------------------
$ % Margin $ % Margin $ % Margin
- -------- - -------- - --------
Maintenance Products Group $ 9.3 3.3 $ 11.7 3.9 $ (2.4) (0.6)
Electrical Products Group 15.6 10.3 8.5 5.9 7.1 4.4
Other (0.8) 0.8
Unallocated corporate expense (13.8) (10.9) (2.9)
-------- -------- --------
11.1 2.5 8.5 1.9 2.6 0.6
Impairments of long-lived assets (11.9) (21.2) 9.3
Severance, restructuring and related charges (8.1) (19.1) 11.0
Loss on SESCO joint venture transaction (6.0) 6.0
-------- -------- --------
Operating loss $ (8.9) (2.0) $ (37.8) (8.5) $ 28.9 6.5
======== ======== ========
Maintenance Products Group
Operating income decreased by $2.4 million from $11.7 million in 2002
(3.9% of net sales) to $9.3 million in 2003 (3.3% of net sales). An overall
decline in net sales for the year (mostly due to volume declines) along with
high raw material costs and atypically high depreciation contributed to the
reduced profitability (excluding severance, restructuring and related charges
and impairments of long-lived assets) of this group in 2003. Profitability for
the year was lower at the Metal Truck Box, Abrasives and Abrasives Canada
business units, due to volume-related issues, while the Consumer Plastics and
Consumer Plastics UK businesses were negatively impacted by top-line pricing
pressures and an unfavorable mix of lower margin products. In addition, all
Consumer Plastics and JanSan Plastics businesses worldwide experienced higher
raw material costs (principally resin) in 2003. Operating results were also
negatively impacted by $5.4 million of incremental depreciation related to the
revision of the estimated useful lives of certain manufacturing assets,
specifically molds and tooling equipment used in the manufacture of plastic
products, from seven to five years, effective January 1, 2003. This change in
estimate was made following significant impairments to these types of assets
recorded during 2002. These shortfalls were partially offset by improved results
at the JanSan Plastics business unit which benefited from the implementation of
cost reduction strategies. Operating results continue to be favorably impacted
by the numerous cost reduction initiatives including the consolidation of our
manufacturing and distribution facilities in the St. Louis area. In the fourth
quarter of 2003, net sales were only down 1% from the fourth quarter of 2002 as
compared to a 6% decline for the first nine months of the year. Operating income
for the fourth quarter of 2003 was $4.6 million as compared to $3.4 million in
the fourth quarter of 2002, an increase of 36%.
Electrical Products Group
21
The Electrical Products Group continued its solid performance in 2003,
once again driven primarily by improved sales volume over 2002, and secondarily,
by higher margins over the prior year. Operating income jumped from $8.5 million
(5.9% of net sales) in 2002 to $15.6 million (10.3% of net sales) in 2003, an
increase of 82%. Profitability in 2003 was positively impacted by cost reduction
strategies at both Woods US and Woods Canada. After significant study and
research into different sourcing alternatives, we decided that Woods US and
Woods Canada would source substantially all of their products from Asia. In
December 2002, Woods US shut down all of its manufacturing facilities, which
were in suburban Indianapolis and in southern Indiana. This was the most
significant initiative benefiting 2003, resulting in approximately $4.6 million
in savings. We believe that restructuring steps executed in 2002 and 2003
related to the Woods US and Woods Canada businesses will allow those businesses
to remain competitive within their markets. The fully outsourced product
strategy has reduced headcount at Woods US by 361 employees (effective in
December 2002) and Woods Canada by 100 employees (effective in December 2003).
Cost reduction initiatives at Woods Canada to reduce product and variable
costs also had a favorable impact on 2003. Higher sales volumes and favorable
currency translation also aided in maintaining margins. During 2002, Woods US
incurred a loss of $0.9 million related to obsolete raw material and packaging
inventory on hand which could not be utilized following the shutdown of its
manufacturing facilities.
Corporate
Corporate operating expenses increased from $10.9 million in 2002 to $13.8
million in 2003 principally due to higher casualty insurance costs, and
increased expense for stock appreciation rights due to an increasing stock price
affecting the variable plan accounting for these awards.
Impairments of Long-lived Assets
The Company recorded impairments of long-lived assets of $11.9 million
during 2003 and $21.2 million during 2002. Charges in 2003 included $7.2 million
related to idle and obsolete equipment, tooling and leasehold improvements at
Warson Road, Hazelwood, Bridgeton, and the Santa Fe Springs, California metals
facility, $1.3 million of costs related to the closure of Abrasives facilities
in Lawrence, Massachusetts and Pineville, North Carolina and the consolidation
into the Wrens, Georgia facility, $0.4 million of obsolete molds and tooling at
our UK Consumer Plastics facility and $0.4 million associated with the write
down of certain equipment at Woods Canada and Woods US as a result of the
closure of the manufacturing operations at both business units. In addition,
$2.6 million of goodwill and patents of the Abrasives Canada business unit were
impaired as it was determined that future cash flows of this business could not
support the carrying value of its intangible assets. This business unit has
experienced a decline in profitability in recent years principally as a result
of increasing foreign competition.
In 2002, CCP impaired property, plant and equipment (primarily molds and
tooling assets) and a customer list intangible by $15.3 million and $3.6
million, respectively. The impairments were primarily associated with assets
used in the Consumer Plastics business, and were the result of analyses
indicating insufficient future cash flows over the remaining useful life of the
assets to cover the carrying values of the assets. Given the unique nature of
molds for specific products, the fair values are often less than historical
cost, resulting in impairments. The Textiles business unit recorded asset
impairments of $1.9 million, resulting from management decisions on the future
use of certain manufacturing assets in their Atlanta, Georgia facility. In
addition, Woods US impaired $0.4 million of equipment as a result of the closure
of its manufacturing operations in December 2002.
Severance, Restructuring and Related Charges
Operating results for the Company during the years ended December 31, 2003
and 2002 were negatively impacted by severance, restructuring and related
charges of $8.1 million and $19.1 million, respectively. The largest of these
charges in 2003 related to non-cancelable leases at abandoned facilities as a
result of the consolidation of the CCP facilities in the St. Louis area into
CCP's largest and most modern plant in Bridgeton, Missouri ($3.7 million). A
charge of $1.5 million was recorded related to severance associated with the
shutdown of the Woods Canada manufacturing operations in December 2003. Charges
of $1.2 million were also incurred relating to the restructuring of the
Abrasives business unit, principally to consolidate the Lawrence, Massachusetts
and Pineville, North Carolina facilities into the newly expanded Wrens, Georgia
location. We also incurred charges in 2003 related to severance costs for
headcount reductions ($0.6 million), an adjustment to a non-cancelable lease
accrual due to a change in sub-lease assumptions at Woods US ($0.5 million), the
consolidation of the customer service and administrative functions for CCP ($0.3
million), costs related to the closure of CCP's metals facility in Santa Fe
Springs, California ($0.2 million) and consulting fees associated with product
outsourcing strategies ($0.1 million).
During 2002, the Company recorded $11.7 million related to the St. Louis
facility consolidation (mostly for non-cancelable lease payments); $3.6 million
in consulting fees associated with product outsourcing strategies, relating to
the Woods
22
US, Woods Canada and Textiles business units; $2.4 million for severance and
other exit costs related to the shut down of all Woods US manufacturing
operations; $0.9 million for severance costs related to various headcount
reductions, mostly in the management level of various business units; $0.3
million for legal fees and involuntary termination benefits related to SESCO;
and $0.2 million related to the consolidation of the customer service and
administrative functions for CCP.
SESCO Joint Venture Transaction
During 2002, we recorded a charge of $6.0 million consisting of 1) the
discounted value of an obligation created by Katy to the third party who took
over daily operation of the SESCO facility, 2) the carrying value of certain
assets contributed to the partnership formed in connection with this transaction
and 3) costs to close the transaction.
Other
Upon review of Sahlman's results for 2002 and the first half of 2003, and
after initial study of the status of the shrimp industry and markets in the
United States, we evaluated the business further to determine if there had been
a loss in the value of the investment that was other than temporary. Based upon
the results of a third party appraisal, we estimated the fair value of the
Sahlman business through a liquidation value analysis whereby all of Sahlman's
assets would be sold and all of its obligations would be settled. Also based on
the aforementioned appraisal, we evaluated the business by using various
discounted cash flow analyses, estimating future free cash flows of the business
with different assumptions regarding growth, and reducing the value of the
business arrived at through this analysis by its outstanding debt. All values
were then multiplied by 43%, Katy's investment percentage. The answers derived
by each of the three assumption models were then probability weighted. As a
result, Katy concluded that $1.6 million was a reasonable estimate of the value
of its investment in Sahlman, and therefore a charge of $5.5 million was
recorded in the third quarter of 2003 to reduce the carrying value of the
investment.
Interest expense was essentially unchanged in 2003 as compared to 2002.
During 2003, we wrote off $1.8 million of unamortized debt issuance costs due to
the reduction in our borrowing capacity as a result of the refinancing of our
debt obligations in February 2003. The amount of this write-off is included in
interest expense. The offsetting decrease in interest expense in 2003 was due
mainly to lower average borrowings during 2003, principally as a result of
applying proceeds from the sale of non-core businesses in 2002 and 2003. To a
lesser extent, lower interest rates contributed to the decline in interest
expense.
Other, net in 2003 included the write-off of certain deferred payment
receivables associated with businesses disposed of prior to 2002 ($0.7 million)
and realized foreign exchange losses ($0.6 million). Other, net in 2002 was
comprised primarily of realized foreign exchange losses. The gain on sale of
assets in 2003 was primarily due to the sales of excess real estate.
Our effective tax rate in 2003 was 14%, indicating that a $3.2 million tax
benefit was recorded on a $22.0 million pretax loss from continuing operations.
A tax benefit was recorded on pre-tax loss to the extent a provision was
provided for the gain on sale of discontinued businesses and income from
operations of discontinued businesses. A further benefit was not recorded due to
the valuation allowance recorded against our net deferred tax assets. See
"Deferred Income Taxes" in "Critical Accounting Policies" and Note 14 to the
Consolidated Financial Statements in Part II, Item 8, for further discussion of
income tax accounting.
In 2002, we recorded a $2.5 million transitional goodwill impairment (net
of tax), as a result of the adoption of SFAS No. 142, which is shown on the
Consolidated Statements of Operations as a cumulative effect of a change in
accounting principle. See Note 3 to the Consolidated Financial Statements in
Part II, Item 8 for a further discussion of goodwill impairments.
Discontinued Operations
Three business units are reported as discontinued operations for 2003 and
2002: Hamilton Precisions Metals, L.P. (Hamilton), GC/Waldom and Duckback.
Hamilton generated $0.2 million (net of tax) of income in 2002 (prior to
its sale on October 31, 2002) and a gain (net of tax) of $3.3 million was
recognized in the fourth quarter of 2002 as a result of the sale.
GC/Waldom reported operating income of $0.1 million (net of tax) in 2003
(prior to its sale on April 2, 2003), versus a $6.4 million operating loss in
2002. Nearly the entire operating loss of GC/Waldom in 2002 was the result of
asset valuation adjustments in anticipation of a sale of this business unit. A
loss (net of tax) of $0.2 million was recognized in the second quarter of 2003
as a result of the GC/Waldom sale.
23
Duckback generated operating income of $2.0 million (net of tax) in 2003
(prior to its sale on September 16, 2003) versus $1.7 million (net of tax) in
2002. A gain (net of tax) of $7.6 million was recognized in the third quarter of
2003 as a result of the Duckback sale.
LIQUIDITY AND CAPITAL RESOURCES
We require funding for working capital needs and capital expenditures. We
believe that our cash flow from operations and the use of available borrowings
under the Bank of America Credit Agreement (as defined below) provide sufficient
liquidity for our operations going forward. As of December 31, 2004, we had cash
and cash equivalents of $8.5 million versus cash and cash equivalents of $6.7
million at December 31, 2003. Also as of December 31, 2004, we had outstanding
borrowings of $58.7 million [46% of total capitalization], under the Bank of
America Credit Agreement with unused borrowing availability on the Revolving
Credit Facility of $33.0 million. As of December 31, 2003, we had outstanding
borrowings of $39.7 million [28% of total capitalization]. We used cash flow
from operations of $8.0 million during the year ended December 31, 2004 versus
the $8.0 million provided by cash flow from operations during the year ended
December 31, 2003. The increased use of cash flow from operations during 2004
versus 2003 was primarily attributable to higher inventories in 2004 due to
higher material costs and increased levels to support higher volumes in the
Electrical Products Group and provide higher levels of customer service. We
expect these liquidity trends to reverse in 2005 as capital expenditures are
expected to be lower in 2005, inventory is being reduced and other elements of
working capital are being managed.
We have a number of obligations and commitments, which are listed on the
schedule later in this section entitled "Contractual and Commercial
Obligations." We have considered all of these obligations and commitments in
structuring our capital resources to ensure that they can be met. See the notes
accompanying the table in that section for further discussions of those items.
We believe that given our strong working capital base, additional liquidity
could be obtained through additional debt financing, if necessary. However,
there is no guarantee that such financing could be obtained. In addition, we are
continually evaluating alternatives relating to the sale of excess assets and
divestitures of certain of our business units. Asset sales and business
divestitures present opportunities to provide additional liquidity by
de-leveraging our financial position.
Bank of America Credit Agreement
On April 20, 2004, we completed a refinancing of our outstanding
indebtedness (the "Refinancing") and entered into a new agreement with Bank of
America Business Capital (formerly Fleet Capital Corporation) (the "Bank of
America Credit Agreement"). Like the previous credit agreement with Fleet
Capital Corporation, the Bank of America Credit Agreement is a $110 million
facility with a $20 million term loan ("Term Loan") and a $90 million revolving
credit facility ("Revolving Credit Facility") with essentially the same terms as
the previous credit agreement. The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks, all of
which participated in the syndicate from the previous credit agreement. Since
the inception of the previous credit agreement, we had repaid $18.2 million of
the previous Term Loan. The ability to repay that loan on a faster than
anticipated timetable was primarily due to funds generated by the sale of
GC/Waldom in April 2003, the sale of Duckback in September 2003 and various
sales of excess real estate. The Bank of America Credit Agreement, and the
additional borrowing ability under the Revolving Credit Facility obtained by
incurring new term debt, results in three important benefits related to our
long-term strategy: (1) additional borrowing capacity to invest in capital
expenditures and/or acquisitions key to our strategic direction, (2) increased
working capital flexibility to build inventory when necessary to accommodate
lower cost outsourced finished goods inventory and (3) the ability to borrow
locally in Canada and the United Kingdom and provide a natural hedge against
currency fluctuations.
Below is a summary of the sources and uses associated with the funding of
the Bank of America Credit Agreement (in thousands):
Sources:
Term Loan incremental borrowings $18,152
=======
Uses:
Repayment of Revolving Credit Facility borrowings $16,713
Certain costs associated with the Bank of America Credit Agreement 1,439
-------
$18,152
=======
The Revolving Credit Facility has an expiration date of April 20, 2009 and
its borrowing base is determined by eligible inventory and accounts receivable.
The Term Loan also has a final maturity date of April 20, 2009 with quarterly
payments of
24
$0.7 million. A final payment of $6.4 million is scheduled to be paid in April
2009. The term loan is collateralized by our property, plant and equipment.
Our borrowing base under the Bank of America Credit Agreement is reduced
by the outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom we conduct business may
require letters of credit in the future that either (1) do not exist today or
(2) would be at higher amounts than those that exist today. Currently, our
largest letters of credit relate to our casualty insurance programs. At December
31, 2004, total outstanding letters of credit were $8.7 million.
All extensions of credit under the Bank of America Credit Agreement are
collateralized by a first priority security interest in and lien upon the
capital stock of each material domestic subsidiary (65% of the capital stock of
certain foreign subsidiaries), and all of our present and future assets and
properties. Customary financial covenants and restrictions apply under the Bank
of America Credit Agreement. Until September 30, 2004, interest accrued on the
Revolving Credit Facility borrowings at 175 basis points over applicable LIBOR
rate and at 200 basis points over LIBOR for borrowings under the Term Loan. In
accordance with the Bank of America Credit Agreement, our margins (i.e. the
interest rate spread above LIBOR) increased by 25 basis points in the fourth
quarter of 2004 based upon certain leverage measurements. Margins increased an
additional 25 basis points in the first quarter of 2005 based on our leverage
ratio (as defined in the Bank of America Credit Agreement) as of December 31,
2004 and will increase another 50 basis points upon the effective date of the
Third Amendment (see below). Also in accordance with the Bank of America Credit
Agreement, margins on the term borrowings will drop 25 basis points if the
balance of the Term Loan is reduced below $10.0 million. Interest accrues at
higher margins on prime rates for swing loans, the amounts of which were nominal
at December 31, 2004.
We incurred additional debt issuance costs in 2004 associated with the
Bank of America Credit Agreement. Additionally, at the time of the inception of
the Bank of America Credit Agreement, we had approximately $4.0 million of
unamortized debt issuance costs associated with the previous credit agreement.
The remainder of the previously capitalized costs, along with the capitalized
costs from the Bank of America Credit Agreement, will be amortized over the life
of the Bank of America Credit Agreement through April 2009. Based on the pro
rata reduction in borrowing capacity from a previous refinancing of the
Company's credit facility and in the connection with the sale of assets
(primarily the GC/Waldom and Duckback businesses) to repay the term loan under
the previous agreement, we charged to expense $1.8 million of previously
unamortized debt issuance costs during 2003. Also, during the first quarter of
2004, we incurred fees and expenses of $0.5 million associated with a financing
which we chose not to pursue.
The revolving credit facility under the Bank of America Credit Agreement
requires lockbox agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements, combined with the existence of
a material adverse effect ("MAE") clause in the Bank of America Credit
Agreement, caused the revolving credit facility to be classified as a current
liability (except as noted below), per guidance in the Emerging Issues Task
Force Issue No. 95-22 , Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements that Include Both a Subjective Acceleration
Clause and a Lock-Box Arrangement. We do not expect to repay, or be required to
repay, within one year, the balance of the revolving credit facility classified
as a current liability. The MAE clause, which is a fairly typical requirement in
commercial credit agreements, allows the lenders to require the loan to become
due if they determine there has been a material adverse effect on our
operations, business, properties, assets, liabilities, condition or prospects.
The classification of the revolving credit facility as a current liability
(except as noted above) is a result only of the combination of the lockbox
agreements and the MAE clause. The Bank of America Credit Agreement does not
expire or have a maturity date within one year, but rather has a final
expiration date of April 20, 2009. The lender had not notified us of any
indication of a MAE at December 31, 2004, and we were not in default of any
provision of the Bank of America Credit Agreement at December 31, 2004.
We were in compliance with the applicable financial covenants in the Bank
of America Credit Agreement at December 31, 2004. However, we determined that
due to declining profitability in the fourth quarter of 2004, potentially lower
profitability in the first half of 2005 and the timing of certain restructuring
payments, we would not meet our Fixed Charge Coverage Ratio (as defined in the
Bank of America Credit Agreement) and could potentially exceed our maximum
Consolidated Leverage Ratio (also as defined in the Bank of America Credit
Agreement) as of the end of the first, second and third quarters of 2005. In
anticipation of not achieving the minimum Fixed Charge Coverage Ratio or
exceeding the maximum Consolidated Leverage Ratio, we obtained an amendment to
the Bank of America Credit Agreement (the "Second Amendment"). The Second
Amendment applied only to the first three quarters of 2005 and the covenants
would have returned to their original levels for the fourth quarter of 2005.
Specifically, the Second Amendment eliminated the Fixed Charge Coverage Ratio,
increased the maximum Consolidated Leverage Ratio, established a Minimum
Consolidated EBITDA (on a latest twelve months basis) for each of the periods
and also established a Minimum Availability (the eligible collateral base less
outstanding borrowings and letters of credit) on each day within the nine-month
period.
Subsequent to the Second Amendment's effective date, we determined that we
would likely not meet our amended financial covenants. On April 13, 2005, we
obtained a further amendment to the Bank of America Credit Agreement (the "Third
Amendment"). The Third Amendment eliminates the maximum Consolidated Leverage
Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment
and adjusts the Minimum Availability such that our eligible collateral must
exceed the sum of our outstanding borrowings and letters of credit under the
Revolving Credit Facility by at least $5 million from the effective date of the
Third Amendment through September 29, 2005 and by at least $7.5 million from
September 30, 2005 until the date we deliver our financial statements for the
first quarter of 2006 to our lenders. Subsequent to the delivery of the
financial statements for the first quarter of 2006, the Third Amendment
reestablishes the minimum Fixed Charge Coverage Ratio as originally set forth in
the Bank of America Credit Agreement. The Third Amendment also reduces the
maximum allowable capital expenditures for 2005 from $15 million to $10 million,
and increases the interest rate margins on all of our outstanding borrowings and
letters of credit to the largest margins set forth in the Bank of America Credit
Agreement. Interest rate margins will return to levels set forth in the Bank of
America Credit Agreement subsequent to the delivery of our financial statements
for the first quarter of 2006 to our lenders.
If we are unable to comply with the terms of amended covenants, we could
seek to obtain further amendments and pursue increased liquidity through
additional debt financing and/or the sale of assets (see discussion above).
25
Contractual and Commercial Obligations
We have contractual obligations associated with operating lease agreements
(many of which relate to our facilities) in the ordinary course of business.
Our obligations as of December 31, 2004, are summarized below (in
thousands of dollars):
Due in less Due in Due in Due after
Contractual Cash Obligations Total than 1 year 1-3 years 4-5 years 5 years
---------------------------- ----- ----------- --------- --------- -------
Revolving credit facility [a] $ 40,166 $ -- $ -- $ 40,166 $ --
Term loans 18,571 2,857 5,714 5,714 4,286
Operating leases [b] 29,355 8,170 11,075 6,253 3,857
Severance and restructuring [b] 2,670 1,323 681 425 241
SESCO payable to Montenay [c] 3,800 1,050 2,200 550 --
---------- ---------- ---------- ---------- ----------
Total Contractual Obligations $ 94,562 $ 13,400 $ 19,670 $ 53,108 $ 8,384
========== ========== ========== ========== ==========
Due in less Due in Due in Due after
Other Commercial Commitments Total than 1 year 1-3 years 4-5 years 5 years
---------------------------- ----- ----------- --------- --------- -------
Commercial letters of credit $ 831 $ 831 $ -- $ -- $ --
Stand-by letters of credit 7,853 7,853 -- -- --
Guarantees [d] 23,670 8,370 15,300 -- --
---------- ---------- ---------- ---------- ----------
Total Commercial Commitments $ 32,354 $ 17,054 $ 15,300 $ -- $ --
========== ========== ========== ========== ==========
[a] As discussed in the Liquidity and Capital Resources section above, the
entire revolving credit facility under the Bank of America Revolving Credit
Agreement is classified as a current liability on the Consolidated Statements of
Financial Position as a result of the combination in the Bank of America Credit
Agreement of 1) lockbox agreements on Katy's depository bank accounts and 2) a
subjective Material Adverse Effect (MAE) clause. The Revolving Credit Facility
expires in April of 2009.
[b] Future non-cancelable lease rentals are included in the line entitled
"Operating leases," which also includes obligations associated with
restructuring activities. The Consolidated Balance Sheet at December 31, 2004,
includes $3.6 million in discounted liabilities associated with non-cancelable
operating lease rentals, net of estimated sub-lease revenues, related to
facilities that have been abandoned as a result of restructuring and
consolidation activities.
[c] Amount owed to Montenay as a result of the SESCO partnership, discussed in
Note 7 to the Consolidated Financial Statements. $1.0 million of this obligation
is classified in the Consolidated Balance Sheets as an Accrued Expense in
Current Liabilities, while the remainder is included in Other Liabilities,
recorded on a discounted basis.
[d] As discussed in Note 7 to the Consolidated Financial Statements in Part II,
Item 8, SESCO, an indirect wholly-owned subsidiary of Katy, is party to a
partnership that operates a waste-to-energy facility, and has certain
contractual obligations, for which Katy provides certain guarantees. If the
partnership is not able to perform its obligations under the contracts, under
certain circumstances SESCO and Katy could be subject to damages equal to the
amount of Industrial Revenue Bonds outstanding (which financed construction of
the facility) less amounts held by the partnership in debt service reserve
funds. Katy and SESCO do not anticipate non-performance by parties to the
contracts.
Off-balance Sheet Arrangements
See Note 7 to the Consolidated Financial Statements in Part II, Item 8 for
a discussion of SESCO.
Cash Flow
Liquidity was negatively impacted during 2004 as a result of lower
operating cash flow. We used $8.0 million of operating cash compared to
operating cash provided during 2003 of $8.0 million. Debt obligations at
December 31, 2004
26
increased $18.9 million from December 31, 2003. This increase in debt was
primarily the result of higher inventory and increased capital expenditures,
partially offset by the proceeds from the sale of assets.
Operating Activities
Cash flow from operating activities before changes in operating assets and
discontinued operations was $8.5 million in 2004 versus $23.0 million in 2003.
While we had net losses in both periods, these amounts included many non-cash
items such as depreciation and amortization, impairments of long-lived assets,
the write-off and amortization of debt issuance costs, the gain or loss on the
sale of assets and the change in the ownership of our equity method investment.
We used $16.5 million and $9.8 million of cash related to operating assets and
liabilities during the years ended December 31, 2004 and 2003, respectively. Our
operating cash flow was unfavorably impacted in 2004 by an increase in inventory
of $11.1 million, due primarily to higher material costs, and increased levels
to support higher volumes in the Electrical Products Group and provide higher
levels of customer service. By the end of 2004, we were turning our inventory at
5.0 times per year versus 5.6 times per year in 2003. Cash of $7.0 million and
$14.7 million was used in 2004 and 2003, respectively, to satisfy severance,
restructuring and related obligations. Restructuring and consolidation
activities, which are expected to end in 2005, are important to reducing our
cost structure to a competitive level. Discontinued operations (Duckback and
GC/Waldom) used $5.2 million of cash flow in 2003.
Investing Activities
Capital expenditures totaled $13.9 million in 2004 as compared to $13.4
million in 2003 as spending for an equipment replacement program (primarily for
plastics products) in 2004 was mostly offset by lower capital expenditures
related to restructuring and consolidation activities. Anticipated capital
expenditures are expected to be significantly lower in 2005 than in 2004, mainly
due to an equipment replacement program in 2004. We sold additional assets in
2004 and 2003 for net proceeds of $5.8 million and $2.8 million, respectively.
On March 31, 2004, Woods Canada sold its manufacturing facility for net proceeds
of $3.2 million and immediately entered into a sale/leaseback arrangement to
allow that business unit to occupy this property as a distribution facility. On
June 28, 2004, CCP sold its vacant metals facility in Santa Fe Springs,
California for net proceeds of $1.9 million. On February 3, 2003, Woods US sold
its manufacturing facility in Moorseville, for net proceeds of $1.8 million, of
which $0.7 million was used to repay a mortgage loan on that property. In
addition to the sale of real estate assets, we received aggregate net proceeds
of $23.6 million for the sale of the GC/Waldom and Duckback businesses in 2003.
Financing Activities
Cash flows from financing activities in 2004 and 2003 reflect the
refinancing of our outstanding obligations in April 2004 and February 2003,
respectively. Overall, debt increased $18.9 million in 2004 versus a decrease of
$5.1 million in 2003. Direct debt costs, primarily associated with the refinance
transactions, totaled $1.5 million and $1.6 million in 2004 and 2003,
respectively. In 2003, we redeemed for $9.8 million (representing a 40%
discount), the remainder of a preferred interest in CCP. During 2004, 12,000
shares of common stock were repurchased on the open market for approximately
$0.1 million under our $5.0 million share repurchase program, while in 2003,
482,800 shares of common stock were repurchased on the open market for
approximately $2.5 million. On May 10, 2004, we suspended the program after
announcing the resumption of the plan on April 20, 2004. We had previously
suspended the program in November 2003. There currently are no plans to resume
the share repurchase program.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In connection with the Contico International, L.L.C. (now CCP) acquisition
on January 8, 1999, we entered into building lease agreements with Newcastle
Industries, Inc. (Newcastle). Lester Miller, the former owner of CCP, and a Katy
director from 1999 to 2000, is the majority owner of Newcastle. Currently, the
Hazelwood, Missouri facility is the only property leased directly from
Newcastle. Rental expense for these properties approximates market rates.
Related party rental expense for the years ended December 31, 2004, 2003 and
2002 was approximately $0.5 million, $0.5 million and $0.8 million,
respectively.
Upon our purchase of the common interest of CCP on January 8, 1999,
Newcastle retained a preferred interest in CCP, represented by 329 preferred
units, each with a stated value of $100,000, for an aggregate stated value of
$32.9 million. The preferred interest yielded an 8% cumulative annual return on
its stated value while outstanding, payable quarterly in cash. In connection
with the Recapitalization, the Company entered into an agreement with Newcastle
to redeem at a 40% discount 165 preferred units, plus accrued distributions
thereon, which, as disclosed above, had a stated value prior to the
Recapitalization of $32.9 million. We utilized approximately $10.2 million of
the proceeds from the Recapitalization for the purpose of redeeming the 165
preferred units. The holder of the preferred interest retained 164 preferred
units, with a stated value of $16.4 million. In
27
connection with a previous credit agreement completed in February 2003, the
remaining 164 preferred units were redeemed early at a similar 40% discount. We
paid Newcastle $0.1 million and $1.3 million of preferred distributions for each
of the years ended December 31, 2003 and 2002, respectively, on the preferred
units of CCP held by Newcastle. The decreases in distributions were due to the
early redemptions of the preferred interest in February 2003 (which was the
remainder of the preferred interest) and in June 2001. We do not owe any further
distributions.
Kohlberg & Co., L.L.C., an affiliate of Kohlberg Investors IV, L.P., whose
affiliate holds all 1,131,551 shares of our Convertible Preferred Stock,
provides ongoing management oversight and advisory services to Katy. We paid
$0.5 million annually for such services in 2004, 2003 and 2002. We expect to pay
$0.5 million annually in future years.
SEVERANCE, RESTRUCTURING AND RELATED CHARGES
See Note 19 to the Consolidated Financial Statements in Part II, Item 8
for a discussion of severance, restructuring and related charges.
OUTLOOK FOR 2005
We experienced strong sales performance during 2004 from the Woods US
retail electrical corded products business, offset by lower volumes in our
JanSan Plastics, Consumer Plastics and Abrasives business units. Price increases
were passed along to our Woods US customers during 2004 as a result of the rise
in copper prices in late 2003 and early 2004 and we are implementing additional
price increases in 2005. While we anticipate a continued strong top line
performance from Woods US, only modest volume growth is expected. We continue to
implement price increases for the JanSan Plastics, Container and Consumer
Plastics business units and for our Metal Truck Box business in response to
higher raw material costs. However, in the Consumer Plastics business, we face
the continuing challenge of passing through price increases to offset these
higher costs, and sales volumes have been and will continue to be negatively
impacted as a result of raising prices.
We expect that the continued shipping and production inefficiencies at our
Abrasives facilities will result in higher operating costs until the
consolidation of two facilities into the Wrens, Georgia facility is completed.
We currently believe this consolidation will occur in 2005 and will result in
improved profitability of our Abrasives business. The disruption to our
Abrasives operations in 2004 resulted in the loss of certain customers. While we
expect to recover some of these lost sales in the current year, we may
experience additional lost sales in 2005. Early in the fourth quarter of 2004,
we experienced a small fire at the Wrens facility. The fire damaged certain
production equipment and affected the operations of certain of our production
lines. However, we have been able to continue to operate the remainder of our
production lines at this facility and have recently obtained equipment allowing
us to operate all product lines at this facility.
Cost of goods sold is subject to variability in the prices for certain raw
materials, most significantly thermoplastic resins used in the manufacture of
plastic products for the JanSan Plastics and Consumer Plastics businesses.
Prices of plastic resins, such as polyethylene and polypropylene have increased
steadily from the latter half of 2002 through the early months of 2005.
Management has observed that the prices of plastic resins are driven to an
extent by prices for crude oil and natural gas, in addition to other factors
specific to the supply and demand of the resins themselves. We are equally
exposed to price changes for copper at our Woods US and Woods Canada business
units. Prices for copper increased in late 2003 and early 2004, stabilized in a
historically high range in mid-2004 and increased again in late 2004 and early
2005. Prices for aluminum and steel (raw materials used in our Metal Truck Box
business), corrugated packaging material and other raw materials have also
accelerated over the past year. We have not employed an active hedging program
related to our commodity price risk, but are employing other strategies for
managing this risk, including contracting for a certain percentage of resin
needs through supply agreements and opportunistic spot purchases. We have
experienced cost increases in the prices of primary raw materials used in our
products and inflation on other costs such as packaging materials, utilities and
freight. In total, these cost increases have continued in the first quarter of
2005, and if sustained throughout 2005, would amount to an increase of over $50
million compared to 2003. In 2004, we passed on about $15 million of these
increases through price increases and are announcing additional price increases
in the first and second quarters this year. In a climate of rising raw material
costs (and especially in 2004), we experience difficulty in raising prices to
shift these higher costs to our customers for our plastic products. Our future
earnings may be negatively impacted to the extent further increases in costs for
raw materials cannot be recovered or offset through higher selling prices. We
cannot predict the direction our raw material prices will take during 2005 and
beyond.
Since the Recapitalization, our management has been focused on a number of
restructuring and cost reduction initiatives, including the consolidation of
facilities, divestiture of non-core operations, selling general and
administrative (SG&A) cost rationalization and organizational changes. In the
future, we expect to benefit from various profit enhancing strategies such as
process improvements (including Lean Manufacturing and Six Sigma), value
engineering products, improved sourcing/purchasing and lean administration.
28
SG&A expenses declined in 2004 as a percentage of sales versus 2003 and
should remain stable as a percentage of sales in 2005. We expect to maintain
modest headcount and rental costs for our corporate office. We have completed
the process of transferring back-office functions of our Textiles (Wilen),
Abrasives (Glit-Microtron portion) and Filters and Grillbricks (Disco) business
units from Georgia to Bridgeton, Missouri, the headquarters of CCP. We expect to
consolidate administrative processes at our Loren portion of the Abrasives
business in 2005 and will continue to evaluate the possibility of further
consolidation of administrative processes.
Our cost reduction efforts, integration of back office functions and
simplifications of our business transactions are all dependent on executing a
system integration plan. This plan involves the migration of data across
information technology platforms and implementation of new software and
hardware. The domestic systems integration plan was substantially completed in
October 2003, while we expect the international systems integration plan to be
completed during 2005.
Interest rates rose in the second half of 2004 and we expect rates to
continue to rise in 2005. Ultimately, we cannot predict the future levels of
interest rates. Until September 30, 2004, interest accrued on the Bank of
America Credit Facility borrowings at 175 basis points over applicable LIBOR
rates, and at 200 basis points over LIBOR for Term Loan borrowings. In
accordance with the Bank of America Credit Agreement, our margins (i.e. the
interest rate spread above LIBOR) increased by 25 basis points in the fourth
quarter of 2004 based upon certain leverage measurements. Margins increased an
additional 25 basis points in the first quarter of 2005 based on our leverage
ratio (as defined in the Bank of America Credit Agreement) as of December 31,
2004 and will increase another 50 basis points upon the effective date of the
Third Amendment. Margins on the term borrowings will drop 25 basis points if the
balance of the Term Loan is reduced below $10.0 million.
Given our history of operating losses, along with guidance provided by the
accounting literature covering accounting for income taxes, we are unable to
conclude it is more likely than not that we will be able to generate future
taxable income sufficient to realize the benefits of domestic deferred tax
assets carried on our books. Therefore, except for our profitable foreign
subsidiaries, a full valuation allowance on the net deferred tax asset position
was recorded at December 31, 2004 and 2003, and we do not expect to record the
benefit of any deferred tax assets that may be generated in 2005. We will
continue to record current expense associated with federal, foreign and state
income taxes.
In 2004, our financial performance benefited from favorable currency
translation as the British Pound Sterling and the Canadian dollar strengthened
throughout the year against the U.S. dollar. While we cannot predict the
ultimate direction of exchange rates, we do not expect to see the same favorable
impact on our financial performance in 2005.
We expect our working capital levels to remain constant or improve as a
percentage of sales as the liquidation of excess inventory in the first half of
2005 will be offset by higher levels to support increased sales. However,
inventory carrying values may be impacted by higher material costs. Cash flow
will be used in 2005 for additional costs related to the consolidation of the
Abrasives facilities as well as the settlement of previously established
restructuring accruals. The majority of these accruals relate to non-cancelable
lease obligations for abandoned facilities. These accruals do not create
incremental cash obligations in that we are obligated to make the associated
payments whether we occupy the facilities or not. The amount we will ultimately
pay out under these accruals is dependent on our ability to successfully sublet
all or a portion of the abandoned facilities.
On March 29, 2005, in anticipation of not achieving the minimum Fixed
Charge Coverage Ratio or exceeding the maximum Consolidated Leverage Ratio as of
the end of the first, second and third quarters of 2005, we obtained the Second
Amendment to the Bank of America Credit Agreement. The Second Amendment applied
only to the first three quarters of 2005 and the covenants would have returned
to their original levels for the fourth quarter of 2005. Specifically, the
Second Amendment eliminated the Fixed Charge Coverage Ratio, increased the
maximum Consolidated Leverage Ratio, established a Minimum Consolidated EBITDA
(on a latest twelve months basis) for each of the periods and also established a
Minimum Availability (the eligible collateral base less outstanding borrowings
and letters of credit) on each day within the nine-month period.
Subsequent to the Second Amendment's effective date, we determined that we
would likely not meet our amended financial covenants. On April 13, 2005, we
obtained a further amendment to the Bank of America Credit Agreement (the "Third
Amendment"). The Third Amendment eliminates the maximum Consolidated Leverage
Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment
and adjusts the Minimum Availability such that our eligible collateral must
exceed the sum of our outstanding borrowings and letters of credit under the
Revolving Credit Facility by at least $5 million from the effective date of the
Third Amendment through September 29, 2005 and by at least $7.5 million from
September 30, 2005 until the date we deliver our financial statements for the
first quarter of 2006 to our lenders. Subsequent to the delivery of the
financial statements for the first quarter of 2006, the Third Amendment
reestablishes the minimum Fixed Charge Coverage Ratio as originally set forth in
the Bank of America Credit Agreement. The Third Amendment also reduces the
maximum allowable capital expenditures for 2005 from $15 million to $10 million,
and increases the interest rate margins on all of our outstanding borrowings and
letters of credit to the largest margins set forth in the Bank of America Credit
Agreement. Interest rate margins will return to levels set forth in the Bank of
America Credit Agreement subsequent to the delivery of our financial statements
for the first quarter of 2006 to our lenders.
If we are unable to comply with the terms of the amended covenants, we
could seek to obtain further amendments and pursue increased liquidity through
additional debt financing and/or the sale of assets. We believe that given our
strong working capital base, additional liquidity could be obtained through
additional debt financing, if necessary. However, there is no guarantee that
such financing could be obtained. In addition, we are continually evaluating
alternatives relating to the sale of excess assets and divestitures of certain
of our business units. Asset sales and business divestitures present
opportunities to provide additional liquidity by de-leveraging our financial
position.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
This report and the information incorporated by reference in this report
contain various "forward-looking statements" as defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, as amended.
The forward-looking statements are based on the beliefs of our management, as
well as assumptions made by, and information currently
29
available to, our management. We have based these forward-looking statements on
current expectations and projections about future events and trends affecting
the financial condition of our business. These forward-looking statements are
subject to risks and uncertainties that may lead to results that differ
materially from those expressed in any forward-looking statement made by us or
on our behalf, including, among other things:
- Increases in the cost of, or in some cases continuation of, the
current price levels of plastic resins, copper, paper board
packaging, and other raw materials.
- Our inability to reduce product costs, including manufacturing,
sourcing, freight, and other product costs.
- Greater reliance on third parties for our finished goods as we
increase the portion of our manufacturing that is outsourced.
- Our inability to reduce administrative costs through consolidation
of functions and systems improvements.
- Our inability to execute our systems integration plan.
- Our inability to successfully integrate our operations as a result
of the facility consolidations.
- Our inability to sub-lease rented facilities which have been
abandoned as a result of consolidation and restructuring
initiatives.
- Our inability to achieve product price increases, especially as they
relate to potentially higher raw material costs.
- The potential impact of losing lines of business at large mass
merchant retailers in the discount and do-it-yourself markets.
- Competition from foreign competitors.
- The potential impact of rising interest rates on our LIBOR-based
Bank of America Credit Agreement.
- Our inability to meet covenants associated with the Bank of America
Credit Agreement.
- The potential impact of rising costs for insurance for properties
and various forms of liabilities.
- The potential impact of changes in foreign currency exchange rates
related to our foreign operations.
- Labor issues, including union activities that require an increase in
production costs or lead to a strike, thus impairing production and
decreasing sales. We are also subject to labor relations issues at
entities involved in our supply chain, including both suppliers and
those involved in transportation and shipping.
- Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
Words and phrases such as "expects," "estimates," "will," "intends,"
"plans," "believes," "anticipates" and the like are intended to identify
forward-looking statements. The results referred to in forward-looking
statements may differ materially from actual results because they involve
estimates, assumptions and uncertainties. Forward-looking statements
included herein are as of the date hereof and we undertake no obligation
to revise or update such statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated
events. All forward-looking statements should be viewed with caution.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 2 to
the Consolidated Financial Statements of Katy included in Part II, Item 8.
Certain of our accounting policies as discussed below require the application of
significant judgment by management in selecting the appropriate assumptions for
calculating amounts to record in our financial statements. By their nature,
these judgments are subject to an inherent degree of uncertainty.
Revenue Recognition - Revenue is recognized for all sales, including sales
to agents and distributors, at the time the products are shipped and title has
transferred to the customer, provided that a purchase order has been received or
a contract has
30
been executed, there are no uncertainties regarding customer acceptances, the
sales price is fixed and determinable and collection is deemed probable. The
Company's standard shipping terms are FOB shipping point. Sales discounts,
returns and allowances, and cooperative advertising are included in net sales,
and the provision for doubtful accounts is included in selling, general and
administrative expenses.
Stock-based Compensation - The Company follows the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, regarding accounting for stock options and other stock awards. APB
Opinion No. 25 dictates a measurement date concept in the determination of
compensation expense related to stock awards including stock options, restricted
stock, and stock appreciation rights. Katy's outstanding stock options all have
established measurement dates and therefore, fixed plan accounting is applied,
generally resulting in no compensation expense for stock option awards. However,
the Company has issued stock appreciation rights, stock awards and restricted
stock awards which are accounted for as variable stock compensation awards and
compensation expense has been recorded for these awards. Compensation expense
for stock awards and stock appreciation rights is recorded in selling, general
and administrative expenses in the Consolidated Statements of Operations.
Accounts Receivable - We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customer's
current creditworthiness, as determined by our review of their current credit
information. We continuously monitor collections and payment from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provision established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past. Since our accounts
receivable are concentrated in a relatively few number of large sized customers,
especially our consumer/retail customers, a significant change in the liquidity
or financial position of any one of these customers could have a material
adverse impact on our ability to collect our accounts receivable and our future
operating results.
Inventories - We value our inventory at the lower of the actual cost to
purchase and/or manufacture the inventory or the current estimated market value
of the inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements for the next twelve
months. Our accounting policies state that operating divisions are to identify,
at a minimum, those inventory items that are in excess of either one year's
historical or one year's forecasted usage, and to use business judgment in
determining which is the more appropriate metric. Those inventory items must
then be evaluated on a lower of cost or market basis for realization. A
significant increase in the demand for our products could result in a short-term
increase in the cost of inventory purchases while a significant decrease in
demand could result in an increase in the amount of excess inventory quantities
on hand. Additionally, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision
required for excess and obsolete inventory. In the future, if our inventory is
determined to be overvalued, we would be required to recognize such costs in our
cost of goods sold at the time of such determination. Therefore, although we
make every effort to ensure the accuracy of our forecasts of future product
demand, any significant unanticipated changes in demand or product developments
could have a significant impact on the value of our inventory and our reported
operating results. Our reserves for excess and obsolete inventory were $4.7
million and $5.6 million, respectively, as of December 31, 2004 and 2003.
Goodwill and Impairments of Long-Lived Assets - In connection with certain
acquisitions, we recorded goodwill representing the cost of the acquisition in
excess of the fair value of the net assets acquired. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Intangible Assets, the fair value of each reporting unit that carries goodwill
is determined annually, and the fair value is compared to the carrying value of
the reporting unit. If the fair value exceeds the carrying value, then no
adjustment is necessary. If the carrying value of the reporting unit exceeds the
fair value, appraisals are performed of long-lived assets and other adjustments
are made to arrive at a revised fair value balance sheet. This revised fair
value balance sheet (without goodwill) is compared to the fair value of the
business previously determined, and a revised goodwill amount is reached. If the
indicated goodwill amount meets or exceeds the current carrying value of
goodwill, then no adjustment is required. However, if the result indicates a
reduced level of goodwill, an impairment is recorded to state the goodwill at
the revised level. Any future impairments of goodwill determined in accordance
with SFAS No. 142 would be recorded as a component of income from continuing
operations.
We review our long-lived assets for impairment in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever
triggering events indicate that an impairment may have occurred. We monitor our
operations to look for triggering events that may cause us to perform an
impairment analysis. These events include, among others, loss of product lines,
poor operating performance and abandonment of facilities. We determine the
lowest level at which cash flows are separately identifiable to perform the
future cash flows tests, and apply the results to the assets related to those
separately identifiable cash flows. In some cases, this may be at the individual
asset level, but in other cases, it is more appropriate to perform this testing
at a business unit level (especially when poor operating performance was the
triggering event). For assets that are to be held and used, we compare
undiscounted future cash flows associated with the asset (or asset
31
group) and determine if the carrying value of the asset (asset group) will be
recovered by those cash flows over the remaining useful life of the asset (or of
the primary asset of an asset group). If the future undiscounted cash flows
indicate that the carrying value of the asset (asset group) will not be
recovered, then the asset is marked to fair value. For assets that are to be
disposed of by sale or by a means other than by sale, the identified asset (or
disposal group if a group of assets or entire business unit) is marked to fair
value less costs to sell. In the case of the planned sale of a business unit,
SFAS No. 144 indicates that disposal groups should be reported as discontinued
operations on the consolidated financial statements if cash flows of the
disposal group are separately identifiable. SFAS No. 144 has had an impact on
the application of accounting for discontinued operations, making it in general
much easier to classify a business unit (disposal group) held for sale as a
discontinued operation. The rules covering discontinued operations prior to SFAS
No. 144 generally required that an entire segment of a business be planned for
disposal in order to classify it as a discontinued operation. We recorded
impairments of long-lived assets during 2004, 2003, and 2002 in accordance with
SFAS No. 144, which are discussed in Notes 3 and 4 to the Consolidated Financial
Statements in Part II., Item 8. We also recorded amounts as discontinued
operations in 2003 (and for all periods presented), which are detailed further
in Note 6 to the Consolidated Financial Statements.
Deferred income taxes - We recognize deferred income tax assets and
liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. Deferred income tax assets
also include federal, state and foreign net operating loss carry forwards,
primarily due to the significant operating losses incurred during recent years,
as well as various tax credits. We regularly review our deferred income tax
assets for recoverability taking into consideration historical net income
(losses), projected future income (losses) and the expected timing of the
reversals of existing temporary differences. We establish a valuation allowance
when it is more likely than not that these assets will not be recovered. As of
December 31, 2004, we had a valuation allowance of $60.0 million. During the
year ended December 31, 2004, we increased the valuation allowance by $13.9
million primarily to provide a full reserve against our net deferred tax asset
position. Except for certain of our foreign subsidiaries, given the negative
evidence provided by our history of operating losses, and considering guidance
provided by SFAS No. 109, Accounting for Income Taxes, we were unable to
conclude that it is more likely that not that our deferred tax assets would be
recoverable through the generation of future taxable income. We will continue to
evaluate our valuation allowance requirements based on future operating results
and business acquisitions and dispositions, and we may adjust our deferred tax
asset valuation allowance. Such changes in our deferred tax asset valuation
allowance will be reflected in current operations through our income tax
provision.
Workers' compensation and product liabilities - We make payments for
workers' compensation and product liability claims generally through the use of
a third party claims administrator. We have purchased insurance coverage for
large claims over our self-insured retention levels. Our workers' compensation
and health benefit liabilities are developed using actuarial methods based upon
historical data for payment patterns, cost trends, and other relevant factors.
In order to consider a range of possible outcomes, we have based our estimates
of liabilities in this area on several different sources of loss development
factors, including those from the insurance industry, the manufacturing
industry, and factors developed in-house. Our general approach is to identify a
reasonable, logical conclusion, typically in the middle range of the possible
outcomes. While we believe that our liabilities for workers' compensation and
product liability claims as of December 31, 2004 are adequate and that the
judgment applied is appropriate, such estimated liabilities could differ
materially from what will actually transpire in the future.
Environmental and Other Contingencies - We and certain of our current and
former direct and indirect corporate predecessors, subsidiaries and divisions
are involved in remedial activities at certain present and former locations and
have been identified by the United States Environmental Protection Agency, 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 our estimate of
allocation of liability among PRPs, the probability that other PRPs, many of
whom are large, solvent, public companies, will fully pay the costs apportioned
to them, currently available information concerning the scope of contamination,
estimated remediation costs, estimated legal fees and other factors, we have
recorded and accrued for environmental liabilities in amounts that we deem
reasonable. The ultimate costs will depend on a number of factors and the amount
currently accrued represents our best current estimate of the total costs to be
incurred. We expect this amount to be substantially paid over the next one to
four years. See Item 3 - LEGAL PROCEEDINGS and Note 18 to the Consolidated
Financial Statements in Part II. Item 8.
Severance, Restructuring and Related Charges - Since the Recapitalization
in mid-2001, we have initiated several cost reduction and facility consolidation
initiatives including 1) the closure or consolidation of 35 manufacturing,
distribution and office facilities 2) the centralization of business units and
3) the outsourcing of our Electrical Products manufacturing to Asia . These
initiatives have resulted in significant severance, restructuring and related
charges over the past three and one-half years. Included in these charges are
one-time termination benefits including severance, benefits and other
employee-related costs
32
associated with employee terminations; contract termination costs mostly related
to non-cancelable lease liabilities for abandoned facilities, net of sublease
revenue; and other costs associated with the moving of inventory, machinery and
equipment, consolidation of administrative and operational functions and
consultants working on sourcing and other manufacturing and production
efficiency initiatives. We expect to substantially complete our restructuring
program in 2005. In accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, we recognize costs (including costs
for one-time termination benefits) associated with exit or disposal activities
as they are incurred. However, charges related to non-cancelable leases require
estimates of sublease income and adjustments to these liabilities are possible
in the future depending on the accuracy of the sublease assumptions made.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 of the Notes to the Consolidated Financial Statements in Part
II, Item 8 for a discussion of new accounting pronouncements and the potential
impact to the Company's consolidated results of operations and financial
position
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk associated with changes in interest rates
relates primarily to our debt obligations. We currently do not use derivative
financial instruments relating to this exposure. Our interest obligations on
outstanding debt at December 31, 2004 were indexed from short-term LIBOR (London
Inter-bank Offered Rates). We do not believe our exposures to interest rate
risks are material to our financial position or results of operations.
The following table presents as of December 31, 2004, our financial
instruments, rates of interest and indications of fair value:
Expected Maturity Dates
(Amounts in Thousands)
ASSETS
2005 2006 2007 2008 2009 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Temporary cash investments
Fixed rate $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Average interest rate -- -- -- -- -- -- -- --
INDEBTEDNESS
Fixed rate debt $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Average interest rate -- -- -- -- -- -- -- --
Variable interest rate $2,857 $2,857 $2,857 $2,857 $47,310 $ -- $58,738 $58,738
Average interest rate 4.79% 4.79% 4.79% 4.79% 4.53% -- 4.58% --
Foreign Exchange Risk
We are exposed to fluctuations in the Euro, British pound, Canadian dollar
and various Asian currencies such as the Chinese Renminbi. Some of our
subsidiaries make significant U.S. dollar purchases from Asian suppliers,
particularly in China, Taiwan and the Philippines. An adverse change in foreign
currency exchange rates of Asian countries could result in an increase in the
cost of purchases. We do not currently hedge foreign currency transaction or
translation exposures. Our net investment in foreign subsidiaries translated
into U.S. dollars at December 31, 2004 is $32.3 million. A 10% change in foreign
currency exchange rates would amount to $3.3 million change in our net
investment in foreign subsidiaries at December 31, 2004.
Commodity Price Risk
We have not employed an active hedging program related to our commodity
price risk, but are employing other strategies for managing this risk, including
contracting for a certain percentage of resin needs through supply agreements
and opportunistic spot purchases. See Part I - Item 1 - Raw Materials and Part
II - Item 7 - OUTLOOK FOR 2005 for a further discussion of our raw materials.
33
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Katy Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Katy
Industries, Inc. and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill to conform to Statement of
Financial Accounting Standards No. 142.
/S/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 29, 2005, except for Note 8,
which is as of April 13, 2005
34
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 and 2003
(Amounts in Thousands)
ASSETS
2004 2003
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 8,525 $ 6,748
Trade accounts receivable, net of allowances of $2,827 and $3,029 66,689 65,197
Inventories, net 65,674 53,545
Other current assets 4,233 1,658
--------- ---------
Total current assets 145,121 127,148
--------- ---------
OTHER ASSETS:
Goodwill 2,239 10,215
Intangibles, net 7,428 22,399
Other 9,946 10,352
--------- ---------
Total other assets 19,613 42,966
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 1,897 3,196
Buildings and improvements 13,537 17,198
Machinery and equipment 132,825 129,240
--------- ---------
148,259 149,634
Less - Accumulated depreciation (88,529) (78,040)
--------- ---------
Property and equipment, net 59,730 71,594
--------- ---------
Total assets $ 224,464 $ 241,708
========= =========
See Notes to Consolidated Financial Statements.
35
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 and 2003
(Amounts in Thousands, except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
---- ----
CURRENT LIABILITIES:
Accounts payable $ 39,079 $ 37,259
Accrued compensation 5,269 6,212
Accrued expenses 39,939 40,238
Current maturities, long-term debt 2,857 2,857
Revolving credit agreement 40,166 36,000
----------- -----------
Total current liabilities 127,310 122,566
----------- -----------
LONG-TERM DEBT, less current maturities 15,714 806
OTHER LIABILITIES 12,855 16,044
----------- -----------
Total liabilities 155,879 139,416
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 18 and 21) -- --
----------- -----------
STOCKHOLDERS' EQUITY
15% Convertible preferred stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 1,131,551 shares and 925,750
shares, respectively, liquidation value $113,155 and $98,396, respectively 108,256 93,507
Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 25,111 40,441
Accumulated other comprehensive income 4,564 2,387
Accumulated deficit (57,258) (21,137)
Treasury stock, at cost, 1,876,827 shares
and 1,941,327 shares, respectively (21,910) (22,728)
----------- -----------
Total stockholders' equity 68,585 102,292
----------- -----------
Total liabilities and stockholders' equity $ 224,464 $ 241,708
=========== ===========
See Notes to Consolidated Financial Statements.
36
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
(Amounts in Thousands, Except Per Share Amounts)
2004 2003 2002
---- ---- ----
Net sales $ 457,642 $ 436,410 $ 445,755
Cost of goods sold 396,608 365,563 373,578
----------- ----------- -----------
Gross profit 61,034 70,847 72,177
Selling, general and administrative expenses 57,283 59,740 63,657
Impairments of long-lived assets 30,831 11,880 21,204
Severance, restructuring and related charges 3,505 8,132 19,155
Loss on SESCO joint venture transaction -- -- 6,010
----------- ----------- -----------
Operating loss (30,585) (8,905) (37,849)
Equity in (loss) income of equity method investment (including
impairment charge of $5.5 million in 2003) -- (5,689) 295
Gain (loss) on sale of assets 278 627 (160)
Interest expense (3,968) (6,193) (6,205)
Other, net (963) (1,805) (89)
----------- ----------- -----------
Loss from continuing operations before (provision) benefit
for income taxes (35,238) (21,965) (44,008)
(Provision) benefit for income taxes from continuing operations (883) 3,158 (7,482)
----------- ----------- -----------
Loss from continuing operations before distributions on preferred
interest of subsidiary (36,121) (18,807) (51,490)
Distributions on preferred interest of subsidiary (net of tax) -- (80) (1,593)
----------- ----------- -----------
Loss from continuing operations (36,121) (18,887) (53,083)
Income (loss) from operations of discontinued businesses (net of tax) -- 2,081 (4,458)
Gain on sale of discontinued businesses (net of tax) -- 7,442 3,306
----------- ----------- -----------
Loss before cumulative effect of a change in accounting principle (36,121) (9,364) (54,235)
Cumulative effect of a change in accounting principle (net of tax) -- -- (2,514)
----------- ----------- -----------
Net loss (36,121) (9,364) (56,749)
Gain on early redemption of preferred interest of subsidiary -- 6,560 --
Payment-in-kind of dividends on convertible preferred stock (14,749) (12,811) (11,136)
----------- ----------- -----------
Net loss attributable to common stockholders $ (50,870) $ (15,615) $ (67,885)
=========== =========== ===========
Loss (earnings) per share of common stock - Basic and diluted
Loss from continuing operations attributable to common stockholders $ (6.45) $ (3.06) $ (7.67)
Discontinued operations (net of tax) -- 1.16 (0.14)
Cumulative effect of a change in accounting principle -- -- (0.30)
----------- ----------- -----------
Net loss attributable to common stockholders $ (6.45) $ (1.90) $ (8.11)
=========== =========== ===========
See Notes to Consolidated Financial Statements.
37
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
(Amounts in Thousands)
Convertible Common Other
Preferred Stock Stock Additional Compre-
Number of Par Number of Par Paid-in hensive
Shares Value Shares Value Capital (Loss) Income
-------------------------------------------------------------------------------------
Balance, January 1, 2002 700,000 $ 69,560 9,822,204 $ 9,822 $ 58,314 $ (4,625)
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- 1,913
Pension minimum liability adjustment -- -- -- -- -- (334)
Comprehensive loss
Issuance of convertible preferred stock
related to PIK dividends accrued 105,000 -- -- -- -- --
Payment in kind dividends accrued -- 11,136 -- -- (11,136) --
Stock option grant -- -- -- -- (477) --
Other -- -- -- -- -- --
-------------------------------------------------------------------------------------
Balance, December 31, 2002 805,000 80,696 9,822,204 9,822 46,701 (3,046)
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- 5,419
Pension minimum liability adjustment -- -- -- -- -- 14
Comprehensive loss
Purchase of treasury stock -- -- -- -- -- --
Issuance of convertible preferred stock
related to PIK dividends accrued 120,750 -- -- -- -- --
Redemption of preferred
interest in subsidiary, net of tax -- -- -- -- 6,560 --
Payment in kind dividends accrued -- 12,811 -- -- (12,811) --
Other -- -- -- -- (9) --
-------------------------------------------------------------------------------------
Balance, December 31, 2003 925,750 93,507 9,822,204 9,822 40,441 2,387
Net loss -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- 2,065
Pension minimum liability adjustment -- -- -- -- -- 112
Comprehensive loss
Purchase of treasury stock -- -- -- -- -- --
Issuance of convertible preferred stock
related to PIK dividends accrued 205,801 -- -- -- -- --
Payment in kind dividends accrued -- 14,749 -- -- (14,749) --
Stock option exercise -- -- -- -- (571) --
Other -- -- -- -- (10) --
-------------------------------------------------------------------------------------
Balance, December 31, 2004 1,131,551 $ 108,256 9,822,204 $ 9,822 $ 25,111 $ 4,564
=====================================================================================
Retained Compre-
Earnings hensive Total
Unearned (Accumulated Treasury Income Stockholders'
Compensation Deficit) Stock (Loss) Equity
---------------------------------------------------------------------------
Balance, January 1, 2002 $ (106) $ 44,976 $ (20,077) $ 157,864
Net loss -- (56,749) -- $ (56,749) (56,749)
Foreign currency translation adjustment -- -- -- 1,913 1,913
Pension minimum liability adjustment -- -- -- (334) (334)
---------
Comprehensive loss $ (55,170)
=========
Issuance of convertible preferred stock
related to PIK dividends accrued -- -- --
Payment in kind dividends accrued -- -- --
Stock option grant -- -- -- (477)
Other 106 -- (151) (45)
-------------------------------------------------------------------------
Balance, December 31, 2002 -- (11,773) (20,228) 102,172
Net loss -- (9,364) -- $ (9,364) (9,364)
Foreign currency translation adjustment -- -- -- 5,419 5,419
Pension minimum liability adjustment -- -- -- 14 14
---------
Comprehensive loss $ (3,931)
=========
Purchase of treasury stock -- -- (2,520) (2,520)
Issuance of convertible preferred stock
related to PIK dividends accrued -- -- --
Redemption of preferred
interest in subsidiary, net of tax -- -- -- 6,560
Payment in kind dividends accrued -- -- -- --
Other -- -- 20 11
-------------------------------------------------------------------------
Balance, December 31, 2003 -- (21,137) (22,728) 102,292
Net loss -- (36,121) -- $ (36,121) (36,121)
Foreign currency translation adjustment -- -- -- 2,065 2,065
Pension minimum liability adjustment -- -- -- 112 112
---------
Comprehensive loss $ (33,944)
=========
Purchase of treasury stock -- -- (75) (75)
Issuance of convertible preferred stock
related to PIK dividends accrued -- -- --
Payment in kind dividends accrued -- -- -- --
Stock option exercise -- -- 875 304
Other -- -- 18 8
-------------------------------------------------------------------------
Balance, December 31, 2004 $ -- $ (57,258) $ (21,910) $ 68,585
=========================================================================
See Notes to Consolidated Financial Statements
38
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
(Amounts in Thousands)
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net loss $ (36,121) $ (9,364) $ (56,749)
(Income) loss from discontinued operations -- (9,523) $ 1,152
---------- ---------- ----------
Loss from continuing operations $ (36,121) $ (18,887) $ (55,597)
Cumulative effect of a change in accounting principle -- -- 2,514
Depreciation and amortization 14,266 21,954 19,259
Impairments of long-lived assets 30,831 11,880 21,204
Write-off and amortization of debt issuance costs 1,076 2,981 1,605
(Gain) loss on sale of assets (278) (627) 160
Loss on SESCO joint venture transaction -- -- 6,010
Equity in loss (income) of equity method investment -- 5,689 (295)
Deferred income taxes (1,228) -- 8,889
---------- ---------- ----------
8,546 22,990 3,749
---------- ---------- ----------
Changes in operating assets and liabilities:
Accounts receivable (177) (3,869) 9,591
Inventories (11,146) 5,504 (4,150)
Other assets (1,313) 1,100 776
Accounts payable 918 (727) 3,369
Accrued expenses (1,662) (9,679) 6,640
Other, net (3,137) (2,125) 4,997
---------- ---------- ----------
(16,517) (9,796) 21,223
---------- ---------- ----------
Net cash (used in) provided by continuing operations (7,971) 13,194 24,972
Net cash (used in) provided by discontinued operations -- (5,159) 6,931
---------- ---------- ----------
Net cash (used in) provided by operating activities (7,971) 8,035 31,903
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures of continuing operations (13,876) (13,324) (9,987)
Capital expenditures of discontinued operations -- (111) (132)
Acquisition of subsidiary, net of cash acquired -- (1,161) --
Collections of notes receivable from sales of subsidiaries 43 1,035 820
Proceeds from sale of subsidiaries, net -- 23,647 13,947
Proceeds from sale of assets, net 5,778 2,839 249
---------- ---------- ----------
Net cash (used in) provided by investing activities (8,055) 12,925 4,897
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) of revolving loans 4,037 (8,751) (12,249)
Proceeds of term loans 18,152 20,000 --
Repayments of term loans (3,244) (16,337) (26,393)
Direct costs associated with debt facilities (1,485) (1,583) (720)
Redemption of preferred interest of subsidiary -- (9,840) --
Repayment of real estate mortgage -- (700) --
Repurchases of common stock (75) (2,520) --
Proceeds from the exercise of stock options 304 -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities 17,689 (19,731) (39,362)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents 114 677 (432)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,777 1,906 (2,994)
Cash and cash equivalents, beginning of period 6,748 4,842 7,836
---------- ---------- ----------
Cash and cash equivalents, end of period $ 8,525 $ 6,748 $ 4,842
========== ========== ==========
See Notes to Consolidated Financial Statements
39
KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004 and 2003
(Thousands of dollars, except per share data)
Note 1. ORGANIZATION OF THE BUSINESS
The Company is organized into two operating segments: the Maintenance
Products Group and the Electrical Products Group. The activities of the
Maintenance Products Group include the manufacture and distribution of a variety
of commercial cleaning supplies and consumer home and automotive storage
products. The Electrical Products Group is a distributor of consumer electrical
corded products. Principal geographic markets are in the United States, Canada,
and Europe and include the sanitary maintenance, foodservice, mass merchant
retail, home improvement and automotive, markets.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include the
accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% voting interest, collectively "Katy" or the "Company". All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority-owned and where
the Company exercises significant influence are reported using the equity
method.
As part of the continuous evaluation of its operations, Katy has acquired
and disposed of certain of its operating units in recent years. Those which
affected the Consolidated Financial Statements for the years ended December 31,
2003 and 2002 are discussed in Note 6.
At December 31, 2004, the Company owns 30,000 shares of common stock, a
43% interest, in Sahlman Holding Company, Inc. (Sahlman) that is accounted for
under the equity method. Sahlman is engaged in the business of harvesting shrimp
off the coast of South and Central America and shrimp farming in Nicaragua. As
of December 31, 2004 and 2003, the investment balance was $1.6 million. See Note
5 on impairment of equity method investment.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition - Revenue is recognized for all sales, including sales
to agents and distributors, at the time the products are shipped and title has
transferred to the customer, provided that a purchase order has been received or
a contract has been executed, there are no uncertainties regarding customer
acceptances, the sales price is fixed and determinable and collectibility is
deemed probable. The Company's standard shipping terms are FOB shipping point.
Sales discounts, returns and allowances, and cooperative advertising are
included in net sales, and the provision for doubtful accounts is included in
selling, general and administrative expenses.
Cash and Cash Equivalents - Cash equivalents consist of highly liquid
investments with original maturities of three months or less.
Advertising Costs - Advertising costs are expensed as incurred.
Advertising costs expensed in 2004, 2003 and 2002 were $3.8 million, $3.3
million and $3.9 million, respectively.
Accounts Receivable and Allowance for Doubtful Accounts - Trade accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Company's best estimate of the amount of
probable credit losses in its existing accounts receivable. The Company
determines the allowance based on its historical write-off experience. The
Company reviews its allowance for doubtful accounts quarterly, which includes a
review of past due balances over 90 days and over a specified amount for
collectibility. All other balances are reviewed on a pooled basis by market
distribution channels. Account balances are charged off against the allowance
when the Company determines it is probable the receivable will not be recovered.
The Company does not have any off-balance-sheet credit exposure related to its
customers. Charges to expense for probable credit losses were $3.1 million, $3.2
million and $3.7 million in 2004, 2003 and 2002, respectively.
40
Inventories - Inventories are stated at the lower of cost or market value,
and reserves are established for excess and obsolete inventory (shown below in
the table as "Inventory reserves") in order to ensure proper valuation of
inventories. Cost includes materials, labor and overhead. At December 31, 2004
and 2003, approximately 39% and 35%, respectively, of Katy's inventories were
accounted for using the last-in, first-out (LIFO) method, while the remaining
inventories were accounted for using the first-in, first-out (FIFO) method.
Current cost, as determined using the FIFO method, exceeded LIFO cost by $4.7
million and $1.9 million at December 31, 2004 and 2003, respectively. The
components of inventories are:
December 31,
------------------------------
2004 2003
---- ----
(Amounts in Thousands)
Raw materials $ 23,220 $ 18,664
Work in process 1,826 1,573
Finished goods 45,299 38,938
Inventory reserves (4,671) (5,630)
-------- --------
$ 65,674 $ 53,545
======== ========
Goodwill - In connection with certain acquisitions, the Company recorded
goodwill representing the cost of the acquisition in excess of the fair value of
the net assets acquired. Beginning in 2002, goodwill is not amortized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Intangible Assets. The fair value of each reporting unit that
carries goodwill is determined annually, and the fair value is compared to the
carrying value of the reporting unit. If the fair value exceeds the carrying
value, then no adjustment is necessary. If the carrying value of the reporting
unit exceeds the fair value, appraisals are performed of long-lived assets and
other adjustments are made to arrive at a revised fair value balance sheet. This
revised fair value balance sheet (without goodwill) is compared to the fair
value of the business previously determined, and a revised goodwill amount is
reached. If the indicated goodwill amount meets or exceeds the current carrying
value of goodwill, then no adjustment is required. However, if the result
indicates a reduced level of goodwill, an impairment is recorded to state the
goodwill at the revised level. Any future impairments of goodwill determined in
accordance with SFAS No. 142 would be recorded as a component of income from
continuing operations. See Note 3.
Property and Equipment - Property and equipment are stated at cost and
depreciated over their estimated useful lives: buildings (10-40 years) generally
using the straight-line method; machinery and equipment (3-20 years) using
straight-line or composite methods; tooling (5 years) using the straight-line
method; and leasehold improvements using the straight-line method over the
remaining lease period or useful life, if shorter. Costs for repair and
maintenance of machinery and equipment are expensed as incurred, unless the
result significantly increases the useful life or functionality of the asset, in
which case capitalization is considered. Depreciation expense from continuing
operations for 2004, 2003 and 2002 was $12.5 million, $19.8 million, and $16.6
million, respectively.
Katy adopted SFAS No. 143, Accounting for Asset Retirement Obligations, on
January 1, 2003 (SFAS No. 143). SFAS No. 143 requires that an asset retirement
obligation associated with the retirement of a tangible long-lived asset be
recognized as a liability in the period in which it is incurred or becomes
determinable, with an associated increase in the carrying amount of the related
long-term asset. The cost of the tangible asset, including the initially
recognized asset retirement cost, is depreciated over the useful life of the
asset. In accordance with SFAS No. 143, the Company has recorded as of December
31, 2004 an asset of $0.9 million and related liability of $1.2 million for
retirement obligations associated with returning certain leased properties to
the respective lessors upon the termination of the lease arrangements. A summary
of the changes in asset retirement obligation since the date of adoption is
included in the table below (in thousands):
41
January 1, 2003, balance upon adoption of SFAS No. 143 $ 1,026
Obligations incurred 148
Accretion expense 19
Abandonment obligations settled through property divestitures (34)
Changes in estimates, including timing 11
-------
SFAS No. 143 Obligation at December 31, 2003 $ 1,170
Accretion expense 49
Changes in estimates, including timing 18
-------
SFAS No. 143 Obligation at December 31, 2004 $ 1,237
=======
Impairment of Long-lived Assets - Long-lived assets are reviewed for
impairment if events or circumstances indicate the carrying amount of these
assets may not be recoverable through future undiscounted cash flows. If this
review indicates that the carrying value of these assets will not be
recoverable, based on future undiscounted net cash flows from the use or
disposition of the asset, the carrying value is reduced to fair value. Katy
adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets on January 1, 2002. See Note 4.
Income Taxes - Income taxes are accounted for using a balance sheet
approach known as the liability method. The liability method accounts for
deferred income taxes by applying the statutory tax rates in effect at the date
of the balance sheet to the differences between the book basis and tax basis of
the assets and liabilities. The Company records a valuation allowance when it is
more likely than not that some portion or all of the deferred income tax asset
will not be realizable. See Note 14.
Foreign Currency Translation - The results of the Company's foreign
subsidiaries are translated to U.S. dollars using the current-rate method.
Assets and liabilities are translated at the year end spot exchange rate,
revenue and expenses at average exchange rates and equity transactions at
historical exchange rates. Exchange differences arising on translation are
recorded as a component of accumulated other comprehensive income (loss). Katy
recorded gains (losses) on foreign exchange transactions (included in other, net
in the Consolidated Statement of Operations) of $0.3 million, ($0.6 million) and
($0.4 million), in 2004, 2003 and 2002, respectively.
Fair Value of Financial Instruments - Where the fair values of Katy's
financial instrument assets and liabilities differ from their carrying value or
Katy is unable to establish the fair value without incurring excessive costs,
appropriate disclosures have been given in the Notes to the Consolidated
Financial Statements. All other financial instrument assets and liabilities not
specifically addressed are believed to be carried at their fair value in the
accompanying Consolidated Balance Sheets.
Stock Options and Other Stock Awards - The Company follows the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, regarding accounting for stock options and other stock awards. APB
Opinion No. 25 dictates a measurement date concept in the determination of
compensation expense related to stock awards including stock options, restricted
stock, and stock appreciation rights. Katy's outstanding stock options all have
established measurement dates and therefore, fixed plan accounting is applied,
generally resulting in no compensation expense for stock option awards. However,
the Company has issued stock appreciation rights, stock awards and restricted
stock awards which are accounted for as variable stock compensation awards for
which compensation expense is recorded. Compensation (income) expense associated
with the vesting of stock appreciation rights was ($0.1 million), $1.0 million
and $13.0 thousand in 2004, 2003 and 2002, respectively. Compensation expense
relative to stock awards was $8.9 thousand, $6.5 thousand and $8.0 thousand in
2004, 2003 and 2002, respectively. Compensation expense recorded associated with
restricted stock awards was zero, $13.0 thousand, and $0.1 million in 2004, 2003
and 2002, respectively. Compensation expense for stock awards and stock
appreciation rights is recorded in selling, general and administrative expenses
in the Consolidated Statements of Operations.
42
Application of SFAS No. 123, Accounting for Stock-Based Compensation, if
fully adopted by the Company, would change the method for recognition of expense
related to option grants to employees. Under SFAS No. 123, compensation cost
would be recorded based upon the fair value of each option at the date of grant
using an option-pricing model that takes into account as of the grant date the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the expected term of the option. Options
granted during 2004, 2003 and 2002 totaled 6,000, 36,000 and 295,000,
respectively. The weighted average fair value for stock options granted during
2004, 2003 and 2002 is $5.91, $4.76 and $3.62, respectively.
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. This standard provides alternative methods of transition for a
voluntary change to the fair value based methods of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123, to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 were adopted by the Company at December
31, 2002. Katy will continue to comply with the provisions under APB Opinion No.
25 for accounting for stock-based employee compensation.
The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with the following assumptions:
dividend yield from 0% to 3.53%; expected volatility at 56.26%; risk-free
interest rates ranging from 4.0% to 6.40%; and expected lives of nine to ten
years. Had compensation cost been determined based on the fair value method of
SFAS No. 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below (thousands of dollars, except
per share data).
For the years ended December 31,
--------------------------------------------
2004 2003 2002
---- ---- ----
Net loss attributable to common stockholders, as reported $ (50,870) $ (15,615) $ (67,885)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 1,852 378 281
---------- ---------- ----------
Pro forma net loss $ (52,722) $ (15,993) $ (68,166)
========== ========== ==========
Earnings per share
Basic and diluted-as reported $ (6.45) $ (1.90) $ (8.11)
========== ========== ==========
Basic and diluted-pro forma $ (6.69) $ (1.95) $ (8.14)
========== ========== ==========
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
New Accounting Pronouncements
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") became law in the U.S. The Act introduces
a prescription drug benefit under Medicare, as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide retiree benefits in
certain circumstances. FASB Staff Position (FSP) 106--2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 ("FSP 106--2"), issued in May 2004, requires
measures of the accumulated postretirement benefit obligation ("APBO") and net
periodic postretirement benefit cost ("NPPBC") to reflect the effects of the
Act. FSP 106--2 is effective for the Company in the third quarter of fiscal
2004, however Katy had chosen to defer adoption until its next measurement date,
subject to the final provisions of the Act. While the Company expects that it
may
43
be entitled to the Federal subsidy for certain of its plans, management has
estimated that the effect of the Act on the Company's accumulated postretirement
benefit obligations will not be material. See Note 9 of the Notes to the
Consolidated Financial Statements of this Annual Report for the disclosures
required by FSP 106-2.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
spoilage. In addition, SFAS 151 requires that allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of SFAS 151 are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company
expects the adoption of SFAS 151 will not have a material impact on its results
of operations and financial position.
In December 2004, the FASB issued Statement No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. SFAS 123R supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and amends FASB Statement No. 95, Statement of Cash Flows. The approach to
quantifying stock-based compensation expense in SFAS 123R is similar to SFAS
123. However, the revised statement requires all share-based payments to
employees, including grants of employee stock options, to be recognized as an
expense in the Consolidated Statements of Operations based on their fair values
as they are earned by the employees under the vesting terms. Pro forma
disclosure of stock-based compensation expense, as is the Company's practice
under SFAS 123, will not be permitted after the first half of 2005, since SFAS
123R must be adopted no later than the first interim or annual period beginning
after June 15, 2005. The Company expects to follow the "modified prospective"
method of adoption of SFAS 123R whereby earnings for prior periods will not be
restated as though stock based compensation had been expensed, rather than the
"modified retrospective" method of adoption which would entail restatements of
previously published earnings. The Company is currently evaluating the effect of
this Statement on the Company, which will be dependent in large part upon future
equity-based grants.
In December 2004, the FASB issued FSP No. 109-1, Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004. The American Jobs Creation Act of 2004 includes a tax deduction of up to
9% of the lesser of qualified production activities income, as defined, or
taxable income, after the deduction for the utilization of any net operating
loss carryforwards. The FSP clarified that this deduction should be accounted
for as a special tax deduction in accordance with SFAS No. 109. The Company
expects that due to its net operating loss carryforwards and its full domestic
valuation allowance, the new deduction will have no impact on income tax expense
for fiscal years 2005 and 2006.
In December 2004, the FASB issued FSP No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004. The Company has completed its review of the
Repatriation Provision and has concluded that it will not benefit from the Act
due to the Company's current tax position. As a result, the Repatriation
Provision did not have any impact on income tax expense during fiscal 2004. See
Note 14.
Reclassifications - Certain amounts from prior years have been
reclassified to conform to the 2004 financial statement presentation.
Note 3. GOODWILL AND INTANGIBLE ASSETS
During 2002, Katy completed the transition to SFAS No. 142 with regard to
accounting and reporting of goodwill and other intangible assets.
The first phase in the determination of potential transitional goodwill
impairment was completed in the second quarter of 2002. Valuations of six Katy
reporting units' carrying values were completed. Those reporting units were
Contico, Disco (Disco), Duckback Products, Inc. (Duckback), Gemtex, Ltd.
(Gemtex), Loren Products (Loren) and GC/Waldom Electronics, Inc. (GC/Waldom).
Contico
44
is now represented by the JanSan Plastics, Consumer Plastics, Metal Truck Box
and Container business units of Continental Commercial Products, L.L.C. (CCP),
while Disco is now referred to as the Filters and Grillbricks business unit of
CCP and Loren is now part of the Abrasives business unit of CCP. Duckback and
GC/Waldom are discontinued operations. The analyses indicated that the fair
values were less than the carrying values for three of the six reporting units:
Contico, Loren and GC/Waldom. The second phase in the determination of the
transitional goodwill impairment was completed by September 30, 2002.
Independent appraisals were obtained on the relevant reporting units' property,
plant and equipment and intangible assets. The fair value balance sheets as of
December 31, 2001 which resulted from this work indicated that transitional
goodwill impairment charges of $4.2 million (pre-tax) were required at the Loren
and GC/Waldom reporting units. The goodwill of the Contico business unit, which
was also evaluated in the second phase of the project, was determined to have a
carrying value that was not in excess of fair value as of December 31, 2001. The
transitional goodwill impairment of $4.2 million ($2.5 million, net of tax) is
presented in the Consolidated Statements of Operations as a cumulative effect of
a change in accounting principle in accordance with SFAS No. 142. Loren is part
of the Maintenance Products Group and GC/Waldom was formerly part of the
Electrical Products Group. In accordance with SFAS No. 142, Katy evaluated the
carrying value of goodwill balances at the reporting units as of December 31,
2002, and determined that no further impairments were required. During 2004, the
Company determined that there was impairment to the goodwill associated with
JanSan Plastics, Consumer Plastics and Container business units (collectively,
US Plastics) in the amount of $8.0 million. In 2003, the Company determined
there was impairment associated with its Abrasives Canada (Gemtex) business unit
of $0.3 million. See Note 4 for further discussion of impairments
Below is a summary of activity (all in the Maintenance Products Group) in
the goodwill accounts since December 31, 2002 (in thousands):
Goodwill at December 31, 2002 $ 10,543
Impairment charge (328)
--------
Goodwill at December 31, 2003 10,215
Impairment charge (7,976)
--------
Goodwill at December 31, 2004 $ 2,239
========
The Company adopted the non-amortization provisions of SFAS No. 142 for
goodwill and indefinite-lived intangibles during the first quarter of 2002.
Following is detailed information regarding Katy's intangible assets (in
thousands):
December 31,
---------------------------
2004 2003
---- ----
Customer lists $ 10,976 $ 21,890
Trade names 6,577 9,160
Patents 2,932 2,689
---------- ----------
Subtotal 20,485 33,739
Accumulated amortization (13,057) (11,340)
---------- ----------
Intangible assets, net $ 7,428 $ 22,399
========== ==========
Katy reviews its definite-lived intangible assets for impairment purposes
whenever events or circumstances indicate that the carrying amount may not be
recoverable, in accordance with SFAS No. 144. All of Katy's intangible assets
are definite-lived intangibles. The Company recorded impairments related to
certain patents, customer lists and trademarks in 2004, 2003 and 2002. See Note
4 for further discussion of these impairments.
45
Katy recorded amortization expense on intangible assets of $1.7 million,
$2.1 million and $2.6 million in 2004, 2003 and 2002, respectively. Estimated
aggregate future amortization expense related to intangible assets is as follows
(in thousands):
2005 $678
2006 648
2007 630
2008 620
2009 576
Note 4. IMPAIRMENTS OF LONG-LIVED ASSETS
The Company operates three businesses in the United States that are
engaged in the manufacture and distribution of plastics products, JanSan
Plastics, Consumer Plastics and Container (collectively, US Plastics). Since all
of these business units essentially share long-lived assets, namely
manufacturing equipment and certain intangibles, it is difficult to attribute
separately identifiable cash flows emanating from each of the units. Therefore,
in accordance with guidance provided in SFAS No. 142, SFAS No. 144 and EITF
Topic D-101, Clarification of Reporting Unit Guidance in Paragraph 30 of FASB
Statement No. 142, the Company determined that the appropriate level of testing
for impairment under SFAS No. 142 and SFAS No. 144 was at the US Plastics
combination of units. In the fourth quarter of 2004, the profitability of the
Consumer Plastics business unit declined sharply as the Company was unable to
pass along sufficient selling price increases to combat the accelerating cost of
resin (a key raw material used in the US Plastics units). The Company believes
that future earnings and cash flow could be negatively impacted to the extent
further increases in resin and other raw material costs cannot be offset or
recovered through higher selling prices. In accordance with SFAS No. 142, the
Company (through an independent third party valuation firm) performed an
analysis of discounted future cash flows which indicated that the book value of
the US Plastics units was significantly greater than the fair value of those
businesses. In addition, as a result of the goodwill analysis, the Company also
assessed whether there had been an impairment of the long-lived assets in
accordance with SFAS No.144. The Company concluded that the book value of
equipment, a customer list intangible and trademark associated with the US
Plastics business unit significantly exceeded the fair value and impairment had
occurred. Accordingly, the Company recognized an impairment loss and related
charge of $29.9 million in 2004. The charges include $8.0 million related to
goodwill, $8.4 million related to machinery and equipment, $10.9 million related
to a customer list and $2.6 million related to the trademark. Also in 2004, the
Company recorded impairment charges of $0.8 million related to property and
equipment at its Metal Truck Box business unit and $0.1 million related to
certain assets at the Woods US business unit.
During 2003, the Company recorded impairments of property, plant and
equipment of $9.3 million. Charges included $7.2 million related to idle and
obsolete equipment, tooling and leasehold improvements at certain CCP facilities
in Missouri and California, $1.3 million of obsolete or idled assets related to
the closure of Abrasives facilities in Lawrence, Massachusetts and Pineville,
North Carolina and the subsequent consolidation into the Wrens, Georgia
facility, and $0.4 million of obsolete molds and tooling at our plastics
facility in the United Kingdom. In addition, impairments of $0.4 million were
recorded for certain equipment at the Woods and Woods Canada business units in
connection with the shutdown of their manufacturing operations. At December 31,
2003, the Company's annual goodwill impairment analysis resulted in a charge of
$0.3 million at the Abrasives Canada (Gemtex) business unit due to the decline
in profitability of that business resulting from increasing foreign competition.
In addition, $2.3 million of patents of the Abrasives Canada business unit were
impaired as it was determined that future cash flows of this business could not
support the carrying value of its intangible assets.
In 2002, the Company recorded impairments of property, plant and equipment
of $16.9 million. CCP impaired certain assets (principally molds and tooling
assets associated with the Consumer Plastics business unit) totaling $15.3
million. The impairments were the result of analyses indicating insufficient
future cash flows over the remaining useful life of the assets to cover the
carrying values of the assets. Given the unique nature of molds for specific
products, the fair values are often less than historical cost,
46
resulting in impairments. The Textiles business unit recorded asset impairments
of $1.2 million, resulting from management decisions on the future use of
certain manufacturing assets in their Atlanta, Georgia facility. In addition,
Woods US impaired $0.4 million of equipment as a result of the closure of its
manufacturing operations in December 2002. Also during 2002, Katy determined
that the carrying value of a customer list intangible asset at the Consumer
Plastics business unit would not be recovered by projected future undiscounted
cash flows. As a result, an impairment charge of $3.6 million was recorded
during 2002, reducing the carrying value of that customer list intangible to
$6.8 million at December 31, 2002. Also during 2002, Katy recognized an
impairment charge of $0.7 million on the trademark intangible asset at the
Textiles (Wilen) business unit. Poor performance in the Textiles unit in recent
years had driven the profitability of that business to very low levels
(including some years with operating losses). This performance continued in
2002, and it was determined that these performance levels negated the relative
value of the trademark intangible.
Note 5. IMPAIRMENT OF EQUITY METHOD INVESTMENT
During the third quarter of 2003, Katy reduced the carrying value of its
43% equity investment in Sahlman to $1.6 million, resulting in a charge to
operations of $5.5 million.
Sahlman is in the business of harvesting shrimp off the coast of South and
Central America, and farming shrimp in Nicaragua and its customers are primarily
in the United States. Sahlman experienced poor results of operations in 2002,
primarily as a result of producers receiving very low prices for shrimp.
Increased foreign competition, especially from Asia, has had a significant
downward impact on shrimp prices in the United States. Upon review of Sahlman's
results for 2002 and through the second quarter of 2003, and after initial study
of the status of the shrimp industry and markets in the United States, Katy
evaluated the business further to determine if there had been a loss in the
value of the investment that was other than temporary. Per ABP No. 18, The
Equity Method for of Accounting for Investments in Common Stock, losses in the
value of equity investments that are other than temporary should be recognized.
Based upon the results of a third party appraisal, Katy estimated the fair
value of the Sahlman business through a liquidation value analysis whereby all
of Sahlman's assets would be sold and all of its obligations would be settled.
Also based on the aforementioned appraisal, Katy evaluated the business by using
various discounted cash flow analyses, estimating future free cash flows of the
business with different assumptions regarding growth, and reducing the value of
the business arrived at through this analysis by its outstanding debt. All
values were then multiplied by 43%, Katy's investment percentage. The answers
derived by each of the three assumption models were then probability weighted.
As a result, Katy concluded that $1.6 million was a reasonable estimate of the
value of its investment in Sahlman. Based on its assessment at December 31,
2004, the Company continues to believe that $1.6 million is a reasonable
estimate of its investment in Sahlman.
Note 6. DISCONTINUED OPERATIONS
Three of Katy's operations have been classified as discontinued operations
as of December 31, 2002, and for the years ended December 31, 2003 and 2002, in
accordance with SFAS No. 144, Accounting for the Impairments or Disposal of Long
Lived Assets. There was no discontinued operations activity in 2004.
Duckback Products, Inc. (Duckback) was sold on September 16, 2003, with
Katy collecting net proceeds of $16.2 million. The proceeds were used to pay
down a portion of the Company's term loans and revolving credit facility.
Duckback generated operating profit of $3.1 million ($2.0 million after-tax) in
2003 (prior to its sale) versus $2.8 million ($1.7 million after tax) in 2002. A
gain of $11.7 million ($7.6 million net of tax) was recognized in the third
quarter of 2003 as a result of the sale.
GC/Waldom Electronics, Inc. (GC/Waldom) was held for sale at December 31,
2002 and was sold
47
on April 2, 2003, with Katy collecting net proceeds of $7.4 million. The
proceeds were used to pay down a portion of the Company's term loans ($2.2
million), as well as the Company's revolving credit facility. GC/Waldom reported
operating profit of $0.1 million ($0.1 million after-tax) in 2003 (prior to its
sale) versus a loss of $6.4 million (with no related tax benefit) in 2002. The
loss in 2002 includes a charge of $6.2 million related to the reduction in
carrying value of GC/Waldoms's net assets as Katy anticipated the sale of this
business in early 2003 and indications were that a book loss was probable. A
loss of $0.3 million ($0.2 million net of tax) was recognized in the second
quarter of 2003 as a result of the sale.
Hamilton Precision Metals, L.P. (Hamilton) was sold on October 31, 2002,
with Katy collecting net proceeds of $13.9 million. These proceeds were used
primarily to pay off the remaining balance of the Company's then outstanding
term debt. The Company is entitled to receive additional payments dependent upon
the occurrence of certain events associated with Hamilton's financial
performance in 2004, however the Company does not anticipate that it will
receive any proceeds for 2004. This contingent amount has not been recorded as a
receivable on the Consolidated Balance Sheets. Hamilton generated operating
profit of $1.6 million ($0.2 million after-tax) in 2002 (prior to its sale) and
a gain of $5.5 million ($3.3 million net of tax) was recognized in the fourth
quarter of 2002 as a result of the sale.
Duckback was previously presented as part of the Maintenance Products
Group for segment reporting purposes, while both Hamilton and GC/Waldom were
previously presented as part of the Electrical Products Group. Management and
the board of Katy determined that these businesses were not core to the
Company's long-range strategic goals.
The historical operating results have been segregated as discontinued
operations on the Consolidated Statements of Operations. As of December 31, 2004
and December 31, 2003, there were no discontinued operations.
Selected financial data for discontinued operations is summarized as
follows (in thousands):
2004 2003 2002
---------- ---------- ----------
Net sales $ -- $ 18,896 $ 47,126
Pre-tax operating profit (loss) $ -- $ 3,201 $ (1,988)
Pre-tax gain on sale of discontinued operations $ -- $ 11,449 $ 5,462
Note 7. SESCO PARTNERSHIP
On April 29, 2002, SESCO, an indirect wholly owned subsidiary of Katy,
entered into a partnership agreement with Montenay Power Corporation and its
affiliates (Montenay) that turned over the control of SESCO's waste-to-energy
facility to the partnership. The Company caused SESCO to enter into this
agreement as a result of evaluations of SESCO's business. First, Katy concluded
that SESCO was not a core component of the Company's long-term business
strategy. Moreover, Katy did not feel it had the management expertise to deal
with certain risks and uncertainties presented by the operation of SESCO's
business, given that SESCO was the Company's only waste-to-energy facility. Katy
had explored options for divesting SESCO for a number of years, and management
felt that this transaction offered a reasonable strategy to exit this business.
The partnership, with Montenay's leadership, assumed SESCO's position in
various contracts relating to the facility's operation. Under the partnership
agreement, SESCO contributed its assets and liabilities (except for its
liability under the loan agreement with the Resource Recovery Development
Authority (the Authority) of the City of Savannah and the related receivable
under the service agreement with the Authority) to the partnership. While SESCO
has a 99% interest as a limited partner, Montenay has the day to day
responsibility for administration, operations, financing and other matters of
the partnership, and accordingly, the partnership will not be consolidated. Katy
agreed to pay Montenay $6.6 million over the span of seven years under a note
payable as part of the partnership and related agreements. Certain amounts may
be due to SESCO upon expiration of the service agreement in 2008; also, Montenay
48
may purchase SESCO's interest in the partnership at that time. Katy has not
recorded any amounts receivable or other assets relating to amounts that may be
received at the time the service agreement expires, given their uncertainty.
The Company made a payment of $1.0 million in July 2004 on the $6.6
million note. The table below schedules the remaining payments as of December
31, 2004 which are reflected in accrued expenses and other liabilities in the
Consolidated Balance Sheet (in thousands):
2005 1,050
2006 1,100
2007 1,100
2008 550
-------
$ 3,800
=======
In the first quarter of 2002, the Company recognized a charge of $6.0
million consisting of 1) the discounted value of the $6.6 million note, 2) the
carrying value of certain assets contributed to the partnership, consisting
primarily of machinery spare parts, and 3) costs to close the transaction. It
should be noted that all of SESCO's long-lived assets were reduced to a zero
value at March 31, 2002, so no additional impairment was required. On a going
forward basis, Katy would expect that income statement activity associated with
its involvement in the partnership will not be material, and Katy's Consolidated
Balance Sheet will carry the liability mentioned above.
In 1984, the Authority issued $55.0 million of Industrial Revenue Bonds
and lent the proceeds to SESCO under the loan agreement for the acquisition and
construction of the waste-to-energy facility that has now been transferred to
the partnership. The funds required to repay the loan agreement come from the
monthly disposal fee paid by the Authority under the service agreement for
certain waste disposal services, a component of which is for debt service. To
induce the required parties to consent to the SESCO partnership transaction,
SESCO retained its liability under the loan agreement. In connection with that
liability, SESCO also retained its right to receive the debt service component
of the monthly disposal fee.
Based on an opinion from outside legal counsel, SESCO has a legally
enforceable right to offset amounts it owes to the Authority under the loan
agreement against amounts that are owed from the Authority under the service
agreement. At December 31, 2004, this amount was $23.7 million. Accordingly, the
amounts owed to and due from SESCO have been netted for financial reporting
purposes and are not shown on the Consolidated Balance Sheets.
In addition to SESCO retaining its liabilities under the loan agreement,
to induce the required parties to consent to the partnership transaction, Katy
also continues to guarantee the obligations of the partnership under the service
agreement. The partnership is liable for liquidated damages under the service
agreement if it fails to accept the minimum amount of waste or to meet other
performance standards under the service agreement. The liquidated damages, an
off balance sheet risk for Katy, are equal to the amount of the Industrial
Revenue Bonds outstanding, less $4.0 million maintained in a debt service
reserve trust. Management does not expect non-performance by the other parties.
Additionally, Montenay has agreed to indemnify Katy for any breach of the
service agreement by the partnership.
Following are scheduled principal repayments on the loan agreement (and
the Industrial Revenue Bonds) (in thousands):
2005 8,370
2006 15,300
--------
Total $ 23,670
========
49
Note 8. INDEBTEDNESS
On April 20, 2004, the Company completed a refinancing of its outstanding
indebtedness (the "Refinancing") and entered into a new agreement with Bank of
America Business Capital (formerly Fleet Capital Corporation) (the "Bank of
America Credit Agreement"). Like the previous credit agreement with Fleet
Capital Corporation, the Bank of America Credit Agreement is a $110 million
facility with a $20 million term loan ("Term Loan") and a $90 million revolving
credit facility ("Revolving Credit Facility") with essentially the same terms as
the previous credit agreement. The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks, all of
which participated in the syndicate from the previous credit agreement. Since
the inception of the previous credit agreement, Katy had repaid $18.2 million of
the previous Term Loan. The ability to repay that loan on a faster than
anticipated timetable was primarily due to funds generated by the sale of
GC/Waldom in April 2003, the sale of Duckback in September 2003 and various
sales of excess real estate. The additional funds raised by the Term Loan were
used to pay down revolving loans (after costs of the transaction), creating
additional borrowing capacity. In addition, the Bank of America Credit Agreement
contains credit sub-facilities in Canada and the United Kingdom which will allow
the Company to borrow funds locally in these countries and provide a natural
hedge against currency fluctuations.
Under the Bank of America Credit Agreement, the Term Loan has a final
maturity date of April 20, 2009 with quarterly payments of $0.7 million. The
Term Loan is collateralized by the Company's property, plant and equipment. The
Revolving Credit Facility also has an expiration date of April 20, 2009 and its
borrowing base is determined by eligible inventory and accounts receivable.
Unused borrowing availability on the Revolving Credit Facility was $33.0 million
at December 31, 2004.
Below is a summary of the sources and uses associated with the funding of
the Bank of America Credit Agreement (in thousands):
Sources:
Term Loan incremental borrowings $18,152
=======
Uses:
Repayment of Revolving Credit Facility borrowings $16,713
Certain costs associated with the Bank of America Credit Agreement 1,439
-------
$18,152
=======
All extensions of credit under the Bank of America Credit Agreement are
collateralized by a first priority security interest in and lien upon the
capital stock of each material domestic subsidiary (65% of the capital stock of
each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions apply under
the Bank of America Credit Agreement. Until September 30, 2004, interest accrued
on Revolving Credit Facility borrowings at 175 basis points over applicable
LIBOR rates, and at 200 basis points over LIBOR for borrowings under the Term
Loan. In accordance with the Bank of America Credit Agreement, margins (i.e. the
interest rate spread above LIBOR) increased by 25 basis points in the fourth
quarter of 2004 based upon certain leverage measurements. Margins increased an
additional 25 basis points in the first quarter of 2005 based on our leverage
ratio (as defined in the Bank of America Credit Agreement) as of December 31,
2004 and will increase another 50 basis points upon the effective date of the
Third Amendment (see below). Additionally, margins on the Term Loan will drop an
additional 25 basis points if the balance of the Term Loan is reduced below
$10.0 million. Interest accrues at higher margins on prime rates for swing
loans, the amounts of which were nominal at December 31, 2004.
Long-term debt consists of the following:
50
December 31,
--------------------------
2004 2003
---- ----
(Amounts in Thousands)
Term loan payable under Fleet Credit Agreement, interest based on
LIBOR and Prime Rates (4.75%-5.75%), due through 2009 $ 18,571 $ 3,663
Revolving loans payable under the Bank of America Credit Agreement,
interest based on LIBOR and Prime Rates (4.375 - 5.50%) 40,166 36,000
---------- ----------
Total debt 58,737 39,663
Less revolving loans, classified as current (see below) (40,166) (36,000)
Less current maturities (2,857) (2,857)
---------- ----------
Long-term debt $ 15,714 $ 806
========== ==========
Aggregate remaining scheduled maturities of the Term Loan as of December
31, 2004 are as follows (in thousands):
2005 $2,857
2006 2,857
2007 2,857
2008 2,857
2009 7,143
The Revolving Credit Facility under the Bank of America Credit Agreement
requires lockbox agreements which provide for all receipts to be swept daily to
reduce borrowings outstanding. These agreements, combined with the existence of
a material adverse effect ("MAE") clause in the Bank of America Credit
Agreement, cause the Revolving Credit Facility to be classified as a current
liability per guidance in Emerging Issues Task Force Issue No. 95--22, Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement.
The Company does not expect to repay, or be required to repay, within one year,
the balance of the Revolving Credit Facility classified as a current liability.
The MAE clause, which is a typical requirement in commercial credit agreements,
allows the lenders to require the loan to become due if they determine there has
been a material adverse effect on the Company's operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the Revolving Credit Facility as a current liability was a result only of the
combination of the lockbox agreements and the MAE clause. The Revolving Credit
Facility does not expire or have a maturity date within one year, but rather has
a final expiration date of April 20, 2009. The lender has not notified Katy of
any indication of a MAE at December 31, 2004, and to management's knowledge, the
Company was not in violation of any provision of the Bank of America Credit
Agreement at December 31, 2004.
The Company was in compliance with the applicable financial covenants in
the Bank of America Credit Agreement at December 31, 2004. However, the Company
determined that due to declining profitability in the fourth quarter of 2004,
potentially lower profitability in the first half of 2005 and the timing of
certain restructuring payments, it would not meet our Fixed Charge Coverage
Ratio (as defined in the Bank of America Credit Agreement) and could potentially
exceed its maximum Consolidated Leverage Ratio (also as defined in the Bank of
America Credit Agreement) as of the end of the first, second and third quarters
of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage
Ratio or exceeding the maximum Consolidated Leverage Ratio, the Company obtained
an amendment to the Bank of America Credit Agreement (the "Second Amendment").
The Second Amendment applied only to the first three quarters of 2005 and the
covenants would have returned to their original levels for the fourth quarter of
2005. Specifically, the Second Amendment eliminated the Fixed Charge Coverage
Ratio, increased the maximum Consolidated Leverage Ratio, established a Minimum
Consolidated EBITDA (on a latest twelve months basis) for each of the periods
and also established a Minimum Availability (the eligible collateral base less
outstanding borrowings and letters of credit) on each day within the nine-month
period.
Subsequent to the Second Amendment's effective date, the Company
determined that it would likely not meet its amended financial covenants. On
April 13, 2005, the Company obtained a further amendment to the Bank of America
Credit Agreement (the "Third Amendment"). The Third Amendment eliminates the
maximum Consolidated Leverage Ratio and the Minimum Consolidated EBITDA as
established by the Second Amendment and adjusts the Minimum Availability such
that our eligible collateral must exceed the sum of the Company's outstanding
borrowings and letters of credit under the Revolving Credit Facility by at least
$5 million from the effective date of the Third Amendment through September 29,
2005 and by at least $7.5 million from September 30, 2005 until the date the
Company delivers its financial statements for the first quarter of 2006 to its
lenders. Subsequent to the delivery of the financial statements for the first
quarter of 2006 the Third Amendment reestablishes the minimum Fixed Charge
Coverage Ratio as originally set forth in the Bank of America Credit Agreement.
The Third Amendment also reduces the maximum allowable capital expenditures for
2005 from $15 million to $10 million, and increases the interest rate margins on
all of the Company's outstanding borrowings and letters of credit to the largest
margins set forth in the Bank of America Credit Agreement. Interest rate margins
will return to levels set forth in the Bank of America Credit Agreement
subsequent to the delivery of the Company's financial statements for the first
quarter of 2006 to its lenders.
If the Company is unable to comply with the terms of the amended
covenants, it could seek to obtain further amendments and pursue increased
liquidity through additional debt financing and/or the sale of assets. The
Company believes that given its strong
51
working capital base, additional liquidity could be obtained through additional
debt financing, if necessary. However, there is no guarantee that such financing
could be obtained. In addition, the Company is continually evaluating
alternatives relating to the sale of excess assets and divestitures of certain
of its business units. Asset sales and business divestitures present
opportunities to provide additional liquidity by de-leveraging our financial
position.
Letters of credit totaling $8.7 million were outstanding at December 31,
2004, which reduced the unused borrowing availability under the Revolving Credit
Facility.
All of the debt under the Bank of America Credit Agreement is re-priced to
current rates at frequent intervals. Therefore, its fair value approximates its
carrying value at December 31, 2004.
Katy has incurred additional debt issuance costs in 2004 associated with
the Bank of America Credit Agreement. Additionally, at the time of the inception
of the Bank of America Credit Agreement, Katy had approximately $4.0 million of
unamortized debt issuance costs associated with the previous credit agreement.
The remainder of the previously capitalized costs, along with the capitalized
costs incurred in connection with the Bank of America Credit Agreement, will be
amortized over the life of the Bank of America Credit Agreement through April
2009. Future quarterly amortization expense is expected to be approximately $0.3
million. Based on the pro rata reduction in borrowing capacity from the previous
credit facilities and in connection with the sale of assets (primarily the
GC/Waldom and Duckback businesses) to repay the term under the previous
facility, Katy charged to expense $1.8 million of previously unamortized debt
issuance costs in 2003. During 2004, Katy incurred fees and expenses of $0.5
million (reported in Other, net on the Condensed Consolidated Statement of
Operations) associated with a financing which the Company chose not to pursue.
Note 9. EARNINGS PER SHARE
The Company's diluted earnings per share were calculated using the
treasury stock method in accordance with SFAS No. 128, Earnings Per Share. The
basic and diluted earnings per share (EPS) calculations are as follows:
For the Year Ended December 31, 2004 2003 2002
------------------------------- ---- ---- ----
Basic and Diluted EPS:
Loss from continuing operations $ (36,121) $ (18,887) $ (53,083)
Gain on early redemption of preferred interest of subsidiary -- 6,560 --
Payment-in-kind dividends on convertible preferred stock (14,749) (12,811) (11,136)
---------- ---------- ----------
Loss from continuing operations attributable to common stockholders (50,870) (25,138) (64,219)
Discontinued operations (net of tax) -- 9,523 (1,152)
Cumulative effect of a change in accounting principle (net of tax) -- -- (2,514)
---------- ---------- ----------
Net loss attributable to common stockholders $ (50,870) $ (15,615) $ (67,885)
========== ========== ==========
Weighted average shares - Basic and Diluted 7,883 8,215 8,371
Per share amount:
Loss from continuing operations attributable to common stockholders $ (6.45) $ (3.06) $ (7.67)
Discontinued operations (net of tax) -- 1.16 (0.14)
Cumulative effect of a change in accounting principle (net of tax) -- -- (0.30)
---------- ---------- ----------
Net loss attributable to common stockholders $ (6.45) $ (1.90) $ (8.11)
========== ========== ==========
As of December 31, 2004 and 2003, 1,530,000 and 1,605,000 options were
in-the-money and 195,650 and 194,200 options were out-of-the money,
respectively. At December 31, 2004, 1,131,551 convertible preferred shares were
outstanding, which are in total convertible into 18,859,183 shares of Katy
52
common stock. At December 31, 2003, 925,750 convertible preferred shares were
outstanding, along with 58,207 convertible preferred shares accrued through paid
in kind dividends, which were in total convertible into 16,399,283 shares of
Katy common stock. At December 31, 2002, 805,000 convertible preferred shares
were outstanding, along with 50,947 convertible preferred shares accrued through
PIK dividends, which were convertible into 14,265,783 shares of Katy common
stock. In-the-money options and convertible preferred shares were not included
in the calculation of diluted earnings per share in any period presented because
of their anti-dilutive impact as a result of the Company's net loss position.
Note 10. RETIREMENT BENEFIT PLANS
Pension and Other Postretirement Plans
Several subsidiaries have pension plans covering substantially all of
their employees. These plans are noncontributory, defined benefit pension plans.
The benefits to be paid under these plans are generally based on employees'
retirement age and years of service. The companies' funding policies, subject to
the minimum funding requirements of employee benefit and tax laws, are to
contribute such amounts as determined on an actuarial basis to provide the plans
with assets sufficient to meet the benefit obligations. Plan assets consist
primarily of fixed income investments, corporate equities and government
securities. The Company also provides certain health care and life insurance
benefits for some of its retired employees. The post-retirement health plans are
unfunded. Katy uses an annual measurement date as of December 31 for the
majority of its pension and other postretirement benefit plans for all years
presented. Information regarding the Company's pension and other postretirement
benefit plans as of for the years ended December 31, 2004 and 2003 are as
follows:
53
Pension Benefits Other Benefits
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
(Amounts in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,608 $ 2,595 $ 2,613 $ 2,506
Service cost 6 29 -- 26
Interest cost 95 144 188 169
Plan amendments -- (189) -- --
Actuarial loss 64 20 720 242
Settlement -- -- -- --
Benefits paid (229) (991) (350) (330)
--------- --------- --------- ---------
Benefit obligation at end of year $ 1,544 $ 1,608 $ 3,171 $ 2,613
========= ========= ========= =========
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,435 $ 1,860 $ -- $ --
Actuarial return on plan assets 100 152 -- --
Employer contributions -- 414 350 330
Settlement -- -- -- --
Benefits paid (229) (991) (350) (330)
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 1,306 $ 1,435 $ -- $ --
========= ========= ========= =========
Reconciliation of prepaid (accrued) benefit cost:
Funded status $ (238) $ (173) $ (3,171) $ (2,613)
Unrecognized net actuarial loss (gain) 657 645 918 239
Unrecognized prior service cost -- -- 129 191
--------- --------- --------- ---------
Prepaid (accrued) benefit cost $ 419 $ 472 $ (2,124) $ (2,183)
========= ========= ========= =========
Amount recognized in financial statements:
Other current assets $ 148 $ 151 $ -- $ --
Accrued expenses and other liabilities (294) (356) (2,124) (2,183)
Accumulated other comprehensive income 565 677 --
--------- --------- --------- ---------
Total recognized $ 419 $ 472 $ (2,124) $ (2,183)
========= ========= ========= =========
Components of net periodic benefit cost:
Service cost $ 6 $ 29 $ -- $ 26
Interest cost 95 144 188 169
Expected return on plan assets (112) (147) -- --
Amortization of net transition asset 11 3 -- --
Amortization of prior service cost -- -- 60 60
Amortization of net gain 53 65 42 --
Curtailment/settlement recognition -- 33 -- --
--------- --------- --------- ---------
Net periodic benefit cost $ 53 $ 127 $ 290 $ 255
========= ========= ========= =========
Assumptions as of December 31:
Discount rates 5.75% 6.25% 5.75% 6.75%
Expected return on plan assets 8.00% 6.75% N/A N/A
Assumed rates of compensation increases N/A N/A N/A N/A
54
Impact of one-percent increase in health care trend rate:
Increase in accumulated postretirement benefit obligation $ 288 $ 166
Increase in service cost and interest cost $ 18 $ 11
Impact of one-percent decrease in health care trend rate:
Decrease in accumulated postretirement benefit obligation $ 231 $ 133
Decrease in service cost and interest cost $ 14 $ 9
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation as of December 31, 2004 was 9% in 2005
grading to 5% by 2011.
In determining the expected return on plan assets, the Company considers
the relative weighting of plan assets, the historical performance of total plan
assets and individual asset classes and economic and other indictors of future
performance. In addition, the Company may consult with and consider the opinions
of financial and other professionals in developing appropriate return
benchmarks.
The allocation of pension plan assets is as follows:
Target Percentage of
Allocation Plan Assets
Asset Category 2005 2004 2003
----------------- -------- ------- -------
Equity Securities 30 - 35% 35% 32%
Debt Securities 60 - 65% 65% 68%
Real estate 0% 0% 0%
Other 0 - 3% 0% 0%
100%
Assets are rebalanced to the target asset allocation at least once per
quarter.
There are no required contributions to the pension plans for 2004 and as a
result, Katy does not anticipate making any contributions in 2005.
The following table presents estimated future benefit payments:
Pension Plans Other Plans
------------- ------------
2005 $ 36 $ 333
2006 36 347
2007 35 350
2008 36 350
2009 41 347
2010-2015 198 1,617
------------- ------------
Total $ 382 $ 3,344
============= ============
In addition to the plans described above, in 1993 the Company's Board of
Directors approved a retirement compensation program for certain officers and
employees of the Company and a retirement compensation arrangement for the
Company's then Chairman and Chief Executive Officer. The Board approved a total
of $3.5 million to fund such plans. This amount represented the best estimate of
the obligation that vested immediately upon Board approval and is to be paid for
services rendered to date.
55
The Company had $2.1 million and $2.4 million recorded in accrued compensation
and other liabilities at December 31, 2004 and 2003, respectively, for this
obligation.
401(k) Plans
The Company offers its employees the opportunity to voluntarily
participate in one of two 401(k) plans administered by the Company or one of its
subsidiaries. On January 1, 2002, Katy consolidated certain of its 401(k) plans
and reduced the number of plans within the Company from five to two. The Company
makes matching and other contributions in accordance with the provisions of the
plans and, under certain provisions, at the discretion of the Company. The
Company made annual matching and other contributions of $0.7 million, $0.6
million and $0.5 million in 2004, 2003 and 2002, respectively.
Note 11. PREFERRED INTEREST OF SUBSIDIARY
Upon the Company's purchase of the common interest of CCP (formerly
Contico International L.L.C) on January 8, 1999, Newcastle Industries, Inc.
(Newcastle) retained a preferred interest in CCP, represented by 329 preferred
units, each with a stated value of $100,000, for an aggregate stated value of
$32.9 million. The preferred interest yielded an 8% cumulative annual return on
its stated value while outstanding, payable quarterly in cash. In connection
with the Recapitalization, the Company entered into an agreement with Newcastle
to redeem at a 40% discount 165 preferred units, plus accrued distributions
thereon, which, as disclosed above, had a stated value prior to the
Recapitalization of $32.9 million. Katy utilized approximately $10.2 million of
the proceeds from the Recapitalization for the purpose of redeeming the 165
preferred units. The holder of the preferred interest retained 164 preferred
units, with a stated value of $16.4 million. In connection with a previous
credit agreement completed in February 2003, the remaining 164 preferred units
were redeemed early at a similar 40% discount. The difference between the amount
paid on redemption and the stated value of preferred interest redeemed was
recognized as an increase to Additional Paid-in Capital in the Consolidated
Statements of Stockholders' Equity, and was a reduction to the net loss
attributable to common stockholders in the calculation of basic earnings per
share in 2003.
Note 12. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
On June 28, 2001, Katy completed a recapitalization following an agreement
on June 2, 2001 with KKTY Holding Company, LLC (KKTY), an affiliate of Kohlberg
Investors IV, L.P. (Kohlberg) (the "Recapitalization"). Under the terms of the
Recapitalization, KKTY purchased 700,000 shares of newly issued preferred stock,
$100 par value per share (Convertible Preferred Stock), which is convertible
into 11,666,666 common shares, for an aggregate purchase price of $70.0 million.
The Convertible Preferred shares were entitled to a 15% payment in kind (PIK)
dividend (that is, dividends in the form of additional shares of Convertible
Preferred Stock), compounded annually, which started accruing on August 1, 2001.
PIK dividends were paid on August 1, 2002 (105,000 convertible preferred shares,
equivalent to 1,750,000 common shares); August 1, 2003 (120,750 convertible
preferred shares, equivalent to 2,012,500 common shares); August 1, 2004
(138,862.5 convertible preferred shares equivalent to 2,314,375 common shares);
and on December 31, 2004 (66,938.5 convertible preferred shares, equivalent to
1,115,642 common shares). No dividends accrue or are payable after December 31,
2004. If converted, the 11,666,666 common shares, along with the 7,192,517
equivalent common shares from PIK dividends paid through December 31, 2004,
would represent approximately 70% of the outstanding shares of common stock as
of December 31, 2004, excluding outstanding options. The accruals of the PIK
dividends were recorded as a charge to Retained Earnings in 2001 and as a charge
to Additional Paid-in Capital starting in 2002 when the Company entered into an
Accumulated Deficit position, and an increase to Convertible Preferred Stock.
The dividends were recorded at fair value, reduced earnings available to common
shareholders in the calculation of basic and diluted earnings per share, and are
presented on the Consolidated Statements of Operations as an adjustment to
arrive at net loss available to common shareholders.
56
The Convertible Preferred Stock is convertible at the option of the holder
at any time after the earlier of 1) June 28, 2006, 2) board approval of a
merger, consolidation or other business combination involving a change in
control of the Company, or a sale of all or substantially all of the assets or
liquidation of the Company, or 3) a contested election for directors of the
Company nominated by KKTY. The preferred shares 1) are non-voting (with limited
exceptions), 2) are non-redeemable, except in whole, but not in part, at the
Company's option (as approved only by the Class I directors) at any time after
June 30, 2021, 3) were entitled to receive cumulative PIK dividends through
December 31, 2004, as mentioned above, at a rate of 15% percent, 4) have no
preemptive rights with respect to any other securities or instruments issued by
the Company, and 5) have registration rights with respect to any common shares
issued upon conversion of the Convertible Preferred Stock. Upon a liquidation of
Katy, the holders of the Convertible Preferred Stock would receive the greater
of (i) an amount equal to the par value ($100 per share) of their Convertible
Preferred Stock, or (ii) an amount that the holders of the Convertible Preferred
Stock would have received if their shares of Convertible Preferred Stock were
converted into common stock immediately prior to the distribution upon
liquidation.
Share Repurchase
On April 20, 2003, the Company announced a plan to spend up to $5.0
million to repurchase shares of its common stock. During 2003, the Company
repurchased 482,800 shares of its common stock on the open market for
approximately $2.5 million. The Company suspended this plan in November 2003. On
April 20, 2004, the Company announced the resumption of the plan. In 2004,
12,000 shares of common stock were repurchased on the open market for
approximately $0.1 million. The Company suspended further repurchases under the
plan again on May 10, 2004 and there currently are no plans to resume the share
repurchase program.
Rights Plan
In January 1995, the Board of Directors adopted a Stockholder Rights
Agreement and distributed one right for each outstanding share of the Company's
common stock (not otherwise exempted under the terms of the agreement). The
rights entitle the stockholders to purchase, upon certain triggering events,
shares of either the Company's common stock or any acquiring company's stock, at
a reduced price. The rights are not and will not become exercisable unless
certain change of control events or increases in certain parties' percentage
ownership occur. Consistent with the intent of the Rights Agreement, a
shareholder who caused a triggering event would not be able to exercise their
rights. If stockholders were to exercise rights, the effect would be to increase
the percentage ownership stakes of those not causing the triggering event, while
decreasing the percentage ownership stake of the party causing the triggering
event. The Rights Agreement was amended on June 2, 2001 to clarify that the
Recapitalization was not a triggering event under the Rights Agreement. As of
December 31, 2004, there are 7,945,377 rights outstanding, of which none are
currently exercisable.
Note 13. STOCK INCENTIVE PLANS
Restricted Stock Grant
During 2000 and 1999, the Company issued restricted stock grants in the
amount of 3,000 and 45,100 shares, respectively, to certain key employees of the
Company. These stock grants vest over a three-year period, of which 25% vested
immediately upon distribution. As a result of restricted stock grants, the
Company recognized compensation expense for 2003 and 2002 in the amount of $13.0
thousand and $0.1 million, respectively. As of December 31, 2003, all
compensation associated with restricted stock grants had been earned and
expensed.
57
Director Stock Grant
During 2004, 2003 and 2002, the Company granted all independent,
non-employee directors 500 shares of Company common stock as part of their
compensation. The total grant to the directors for the years ended December 31,
2004, 2003 and 2002 was 1,500 shares for each respective period.
Stock Options
At the 1995 Annual Meeting, the Company's stockholders approved the
Long-Term Incentive Plan (the "1995 Incentive Plan") authorizing the issuance of
up to 500,000 shares of Company common stock pursuant to the grant or exercise
of stock options, including incentive stock options, nonqualified stock options,
SARs, restricted stock, performance units or shares and other incentive awards
to executives and certain key employees. The Compensation Committee of the Board
of Directors administers the 1995 Incentive Plan and determines to whom awards
may be granted, the type of award as well as the number of shares of Company
common stock to be covered by each award and the terms and conditions of such
awards. The exercise price of stock options granted under the 1995 Incentive
Plan cannot be less than 100 percent of the fair market value of such stock on
the date of grant. In the event of a Change in Control of the Company, awards
granted under the 1995 Incentive Plan are subject to substantially similar
provisions to those described under the 1997 Incentive Plan. The definition of
Change in Control of the Company under the 1995 Incentive Plan is substantially
similar to the definition described under the 1997 Incentive Plan.
At the 1995 Annual Meeting, the Company's stockholders approved the
Non-Employee Directors Stock Option Plan (the "Directors Plan") authorizing the
issuance of up to 200,000 shares of Company common stock pursuant to the grant
or exercise of nonqualified stock options to outside directors. The Board of
Directors administers the Directors Plan. The exercise price of stock options
granted under the Directors Plan is equal to the fair market value of the
Company's common stock on the date of grant. Stock options granted pursuant to
the Directors Plan are immediately vested in full on the date of grant and
generally expire 10 years after the date of grant.
At the 1998 Annual Meeting, the Company's stockholders approved the 1997
Long-Term Incentive Plan (the "1997 Incentive Plan"), authorizing the issuance
of up to 875,000 shares of Company common stock pursuant to the grant or
exercise of stock options, including incentive stock options, nonqualified stock
options, SARs, restricted stock, performance units or shares and other incentive
awards. The Compensation Committee of the Board of Directors administers the
1997 Incentive Plan and determines to whom awards may be granted, the type of
award as well as the number of shares of Company common stock to be covered by
each award, and the terms and conditions of such awards. The exercise price of
stock options granted under the 1997 Incentive Plan cannot be less than 100
percent of the fair market value of such stock on the date of grant. The
restricted stock grants in 1999 and 1998 referred to above were made under the
1997 Incentive Plan. Related to the 1997 Incentive Plan, the Company granted
SARs as described below.
The 1997 Incentive Plan also provides that in the event of a Change in
Control of the Company, as defined below, 1) any SARs and stock options
outstanding as of the date of the Change in Control which are neither
exercisable or vested will become fully exercisable and vested (the payment
received upon the exercise of the SARs shall be equal to the excess of the fair
market value of a share of the Company's Common Stock on the date of exercise
over the grant date price multiplied by the number of SARs exercised); 2) the
restrictions applicable to restricted stock will lapse and such restricted stock
will become free of all restrictions and fully vested; and 3) all performance
units or shares will be considered to be fully earned and any other restrictions
will lapse, and such performance units or shares will be settled in cash or
stock, as applicable, within 30 days following the effective date of the Change
in Control. For purposes of subsection 3), the payout of awards subject to
performance goals will be a pro rata portion of all targeted award opportunities
associated with such awards based on the number of complete and partial calendar
months within the performance period which had elapsed as of the effective date
of the Change in Control. The Compensation Committee will also have the
authority, subject to the limitations set forth in
58
the 1997 Incentive Plan, to make any modifications to awards as determined by
the Compensation Committee to be appropriate before the effective date of the
Change in Control.
For purposes of the 1997 Incentive Plan, "Change in Control" of the
Company means, and shall be deemed to have occurred upon, any of the following
events: 1) any person (other than those persons in control of the Company as of
the effective date of the 1997 Incentive Plan, a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company)
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities; or 2) during any period of two
consecutive years (not including any period prior to the effective date), the
individuals who at the beginning of such period constitute the Board of
Directors (and any new director, whose election by the Company's stockholders
was approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was so approved), cease for any reason to
constitute a majority thereof, or 3) the stockholders of the Company approve:
(a) a plan of complete liquidation of the Company; or (b) an agreement for the
sale or disposition of all or substantially all the Company's assets; or (c) a
merger, consolidation, or reorganization of the Company with or involving any
other corporation, other than a merger, consolidation, or reorganization that
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent at least 50 percent of the combined voting
power of the voting securities of the Company (or such surviving entity)
outstanding immediately after such merger, consolidation, or reorganization. The
Company has determined that the Recapitalization did not result in such a Change
in Control.
On June 28, 2001, the Company entered into an employment agreement with C.
Michael Jacobi, its President and Chief Executive Officer. To induce Mr. Jacobi
to enter into the employment agreement, on June 28, 2001, the Compensation
Committee of the Board of Directors approved the Katy Industries, Inc. 2001
Chief Executive Officer's Plan. Under this plan, Mr. Jacobi was granted 978,572
stock options. Mr. Jacobi was also granted 71,428 stock options under the
Company's 1997 Incentive Plan.
On September 4, 2001, the Company entered into an employment agreement
with Amir Rosenthal, its Vice President, Chief Financial Officer, General
Counsel and Secretary. To induce Mr. Rosenthal to enter into the employment
agreement, on September 4, 2001, the Compensation Committee of the Board of
Directors approved the Katy Industries, Inc. 2001 Chief Financial Officer's
Plan. Under this plan, Mr. Rosenthal was granted 123,077 stock options. Mr.
Rosenthal was also granted 76,923 stock options under the Company's 1995
Incentive Plan.
In March 2004, the Company's Board of Directors approved the vesting of
all previously unvested stock options.
The following table summarizes option activity under each of the 1997
Incentive Plan, 1995 Incentive Plan, the Chief Executive Officer's Plan, the
Chief Financial Officer's Plan and the Directors Plan:
59
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Options Exercise Price Life Price
------- -------------- ----------- --------
Outstanding at December 31, 2001 1,878,650 $ 3.02 - 19.56 8.83 years $6.03
Granted 295,000 $ 3.11 - 5.15 $3.65
Exercised -- -- --
Canceled (222,900) $ 8.50 - 19.56 $12.38
----------
Outstanding at December 31, 2002 1,950,750 $ 3.02 - 19.56 8.27 years $4.94
Granted 36,000 $ 4.31 - 4.85 $4.76
Exercised -- -- --
Canceled (187,550) $ 3.11 - 19.56 $5.05
----------
Outstanding at December 31, 2003 1,799,200 $ 3.02 - 19.56 7.28 years $4.92
==========
Granted 6,000 $ 5.91 - 5.91 $5.91
Exercised (75,000) $ 4.05 - 4.05 $4.05
Canceled (4,550) $ 9.88 - 17.00 $12.70
----------
Outstanding at December 31, 2004 1,725,650 $ 3.02 - 19.56 6.25 years $4.94
==========
Vested and Exercisable at December 31, 2004 1,725,650
==========
Available to grant as of December 31, 2004 308,889
==========
The following table summarizes information about stock options outstanding at
December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Exercise Outstanding at Remaining Average Exercise Exerciseable at Average Exercise
Prices 12/31/2004 Contractual Life Price 12/31/2004 Price
--------------------------------------------------------------------------------------------------------------------------
$3.02 - 5.91 1,536,000 6.69 $ 4.05 1,536,000 $ 4.05
$8.50 - 10.50 90,800 2.7 9.34 90,800 9.34
$13.19 - 13.57 61,750 1.96 13.23 61,750 13.23
$16.13 - 19.56 37,100 4.31 17.20 37,100 17.20
------------------------------------------------------------------------------------------------
1,725,650 6.25 $ 4.94 1,725,650 $ 4.94
================================================================================================
Stock Appreciation Rights
Under the 1997 Incentive Plan, 204,473 SARs have been granted and will
become exercisable at any time up to and including January 22, 2005, the
Company's average closing stock price over a 45 calendar day period has equaled
or exceeded $53.80 per share. During 2002 and 2001, 159,745 of these SARs were
cancelled due to employee terminations; 44,728 remain outstanding. An additional
163,579 SARs have been granted and will become exercisable at such time, up to
and including January 22, 2005, the Company's average closing stock price over a
45-calendar day period has equaled or exceeded $53.80 per share. During 2001 and
2002, 127,796 of these SARS were cancelled due to employee terminations;
60
35,783 remain outstanding. All SARs which have met the performance goals above,
as the case may be, will expire December 9, 2007. As a result of the underlying
stock price, no compensation expense was recorded in 2004, 2003 or 2002. The
exercise price of each SAR is $19.56. Katy would record compensation expense for
each SAR to the extent its stock price were to exceed $19.56.
During 2002, a non-employee consultant was awarded 200,000 SARs under the
1997 Incentive Plan. As of December 31, 2004 and 2003, these SARs were
out-of-the-money, and no compensation expense related to this award was recorded
in 2004 or 2003.
On November 21, 2002, the Board of Directors approved the 2002 Stock
Appreciation Rights Plan (the "2002 SAR Plan"), authorizing the issuance of up
to 1,000,000 stock appreciation rights (SARs). Vesting of the SARs occurs
ratably over three years from the date of issue. The 2002 SAR Plan provides
limitations on redemption by holders, specifying that no more than 50% of the
cumulative number of vested SARs held by an employee could be exercised in any
one calendar year. The SARs expire ten years from the date of issue. The Board
approved grants on November 22, 2002, of 717,175 SARs to 60 individuals with an
exercise price of $3.15, which equaled the market price of Katy's stock on the
grant date. In addition, 50,000 SARs were granted to four individuals during
2003 with exercise prices ranging from $3.01 through $5.05. In 2004, 275,000
SARs were granted to fifteen individuals with exercise prices ranging from $5.20
through $6.45.
At December 31, 2004, Katy had 740,049 SARS outstanding at a weighted
average exercise price of $4.16. Compensation (income) expense recorded
associated with the vesting of stock appreciation rights was ($0.1 million),
$1.0 million and $13.0 thousand in 2004, 2003 and 2002, respectively. The 2002
SAR Plan also provides that in the event of a Change in Control of the Company,
all outstanding SARs may become fully vested. In accordance with the 2002 SAR
Plan, a "Change in Control" is deemed to have occurred upon any of the following
events: 1) a sale of 100 percent of the Company's outstanding capital stock, as
may be outstanding from time to time; 2) a sale of all or substantially all of
the Company's operating subsidiaries or assets; or 3) a transaction or series of
transactions in which any third party acquires an equity ownership in the
Company greater than that held by KKTY Holding Company, L.L.C. and in which
Kohlberg & Co., L.L.C. relinquishes its right to nominate a majority of the
candidates for election to the Board of Directors.
See Note 2 for a discussion of accounting for stock awards, and related
fair value and pro forma earnings disclosures.
Note 14. INCOME TAXES
The provision for income taxes from continuing operations is based on the
following pre-tax income:
2004 2003 2002
---- ---- ----
(Amounts in Thousands)
Domestic $(40,134) $(21,662) $(48,112)
Foreign 4,896 (303) 4,104
-------- -------- --------
Total $(35,238) $(21,965) $ (44,008)
======== ======== ========
The (benefit) provision for income taxes from continuing operations
consists of the following:
61
2004 2003 2002
---- ---- ----
(Amounts in Thousands)
Current tax (benefit) provision:
Federal $ (343) $ (5,084) $ (2,080)
State (204) 970 337
Foreign 2,658 956 1,466
---------- ---------- ----------
Total $ 2,111 $ (3,158) $ (277)
---------- ---------- ----------
Deferred tax (benefit) provision:
Federal -- -- 6,772
State -- -- 1,185
Foreign (1,228) -- (198)
---------- ---------- ----------
Total $ (1,228) $ -- 7,759
---------- ---------- ----------
Total (benefit) provision from continuing operations $ 883 $ (3,158) $ 7,482
========== ========== ==========
Actual income taxes reported from continuing operations are different than
would have been computed by applying the federal statutory tax rate to income
from continuing operations before income taxes. The reasons for this difference
are as follows:
2004 2003 2002
---- ---- ----
(Amounts in Thousands)
Benefit for income taxes at statutory rate $ (12,333) $ (7,688) $ (15,403)
State income taxes, net of federal benefit (133) 631 219
Foreign tax rate differential 945 1,062 --
Foreign tax credits (245) (406) --
Return to provision adjustments (991) -- --
Preferred interest of subsidiary -- -- (281)
Discontinued operations -- -- (3,638)
Cumulative effect of a change in accounting principle -- -- 1,676
Valuation allowance adjustments 13,857 6,222 24,895
Permanent items 103 -- --
Reduction of tax reserves (343) (2,837) --
Other, net 23 (142) 14
---------- ---------- ----------
Net provision (benefit) for income taxes $ 883 $ (3,158) $ 7,482
========== ========== ==========
The significant components of the Company's deferred income tax
liabilities and assets are as follows:
62
2004 2003
---- ----
(Amounts in Thousands)
Deferred tax liabilities
Waste-to-energy facility $ (4,531) $ (7,390)
Inventory costs (1,696) (2,362)
Unremitted foreign earnings (3,800) --
---------- ----------
$ (10,027) $ (9,752)
========== ==========
Deferred tax assets
Allowance for doubtful receivables $ 1,069 $ 956
Accrued expenses and other items 14,281 16,622
Difference between book and tax basis of property 19,620 8,509
Operating loss carry-forwards - domestic 28,877 26,288
Operating loss carry-forwards - foreign 335 492
Tax credit carry forwards 3,301 3,056
Estimated foreign tax credit related to unremitted earnings 3,800 --
---------- ----------
71,283 55,923
Less valuation allowance (60,028) (46,171)
---------- ----------
11,255 9,752
---------- ----------
Net deferred income tax asset (liability) $ 1,228 $ --
========== ==========
At December 31, 2004, the Company had approximately $70.7 million of
Federal net operating loss carry-forwards ("Federal NOLs"), which will expire in
years 2020 through 2024 if not utilized prior to that time. Due to tax laws
governing change in control events and their relation to the Recapitalization,
approximately $25.5 million of the Federal NOLs are subject to certain
limitations as to the amount that can be used to offset taxable income in any
single year. The remainder of the Company's domestic and foreign net operating
loss carry-forwards relate to certain U.S. operating subsidiaries, primarily
SESCO, and the Company's Canadian operations, respectively, and can only be used
to offset income from these operations. At December 31, 2004, the Company's
Canadian subsidiaries have Canadian net operating loss carry-forwards of
approximately $1.0 million that expire in the years 2005 through 2008. SESCO has
state net operating loss carry-forwards of $33.0 million at December 31, 2004
that expire in the years 2005 through 2019. The tax credit carry-forwards relate
to United States federal minimum tax credits of $1.2 million that have no
expiration date, general business credits of $0.1 million that expire in years
2011 through 2022, and foreign tax credit carryovers of $1.9 million that expire
in the years 2009 through 2014.
During 2002, the Company realized a tax benefit of $2.1 million as a
result of a change in federal tax law that governs the utilization of Federal
NOLs. The Company offset this tax benefit with an increase in its valuation
allowance.
Valuation allowances are recorded when it is considered more likely than
not that some portion or all of the deferred tax assets will not be realized. A
history of operating losses incurred by the domestic and certain foreign
subsidiaries provides significant negative evidence with respect to the
Company's ability to generate future taxable income, a requirement in order to
recognize deferred tax assets. For this reason, the Company was unable to
conclude that it was more likely that not that certain deferred tax assets would
be utilized in the future. The valuation allowance relates to federal, state and
foreign net operating loss carry-forwards, foreign and domestic tax credits, and
certain other deferred tax assets to the extent they exceed deferred tax
liabilities with the exception of deferred tax assets of certain foreign
subsidiaries which are considered realizable.
Deduction for Qualified Domestic Production Activities
On October 22, 2004, the President signed the American Jobs Creation Act
of 2004 (the "Act"). The Act provides a deduction for income from qualified
domestic production activities, which will be phased in from 2005 through 2010.
In return, the Act also provides for a two-year phase-out of the existing
63
extra-territorial income exclusion (ETI) for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. The
Company expects that due to its net operating loss carry forwards and its full
valuation allowance the phase out of the ETI and the phase in of this new
deduction to have no effect on its effective tax rate for fiscal years 2005 and
2006.
Repatriation of Foreign Earnings
The American Jobs Creation Act of 2004 provides for a special one-time
elective dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer (Repatriation Provision). The Company has completed
its review of the Repatriation Provision and has concluded that it will not
benefit from the Act because of the Company's current tax position. As a result,
the Repatriation Provision did not have any impact on income tax expense during
fiscal 2004.
During 2004, the Company provided U.S. federal and foreign withholding tax
on approximately $7.0 million of its Canadian subsidiary earnings which we
intend to repatriate in 2005. The Company provided no federal and foreign
withholding tax on the undistributed earnings of its UK subsidiary as these
earnings are intended to be re-invested indefinitely. It is not practicable to
determine the amount of income tax liability that would result had such earnings
actually been repatriated.
Note 15. LEASE OBLIGATIONS
The Company, a lessee, has entered into non-cancelable leases for
manufacturing and data processing equipment and real property with lease terms
of up to ten years. Future minimum lease payments as of December 31, 2004 are as
follows:
2005 $ 8,170
2006 5,853
2007 5,222
2008 4,887
2009 1,367
Later years 3,857
--------
Total minimum payments $ 29,356
========
Liabilities totaling $3.6 million were recorded on the Consolidated
Balance Sheet at December 31, 2004, related to leased facilities that have been
fully or partially abandoned and available for sub-lease. These facilities were
abandoned as cost saving measures as a result of efforts to restructure the
Company's operations. These liabilities are stated at fair value (i.e.,
discounted), and include estimates of sub-lease revenue. See Note 21 for further
detail on accrued amounts in both current and long-term liabilities related to
non-cancelable, abandoned, leased facilities.
Rental expense for 2004, 2003 and 2002 for operating leases was $11.4
million, $10.0 million and $12.5 million, respectively. Also, $2.4 million of
rent was paid and charged against liabilities in 2004 for non-cancelable leases
at facilities abandoned as a result of restructuring initiatives. In 2004, the
Company bought out the remaining obligation for its non-cancelable lease at the
Warson Road facility for $2.3 million. In 2003, the Company bought out the
remaining obligation for its non-cancelable lease at the Earth City facility for
$3.4 million.
Note 16. RELATED PARTY TRANSACTIONS
In connection with the CCP (formerly Contico International, L.L.C.)
acquisition on January 8, 1999, the Company entered into building lease
agreements with Newcastle. Lester Miller, the former owner of CCP, and a Katy
director from 1999 to 2000, is the majority owner of Newcastle. Since the
acquisition of CCP, several additional properties utilized by CCP are leased
directly from Lester Miller. Rental expense for these properties approximates
historical market rates. Related party rental payments for
64
the years ending December 31, 2004, 2003 and 2002 were approximately $0.5
million, $0.5 million and $0.8 million, respectively.
The Company paid Newcastle $0.1 million and $1.3 million of preferred
dividends for the years ended December 31, 2003 and 2002, respectively, on the
preferred units of CCP held by Newcastle. The decreases in dividends were due to
the early redemption (at a 40% discount) of the remainder of the preferred
units. See Note 11.
Kohlberg, whose affiliate holds all 1,131,551 shares of our Convertible
Preferred Stock, provides ongoing management oversight and advisory services to
Katy. We paid $0.5 million annually for such services in 2004, 2003 and 2002,
respectively, and expect to pay $0.5 million annually in future years. Such
amounts are recorded in selling, general and administrative expenses in the
Consolidated Statements of Operations.
Note 17. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company is organized into two operating segments: Maintenance Products
and Electrical Products. The activities of the Maintenance Products Group
include the manufacture and distribution of a variety of commercial cleaning
supplies and consumer home and automotive storage products. The Electrical
Products Group is a distributor of consumer electrical corded products.
Principal geographic markets are in the United States, Canada, and Europe and
include the sanitary maintenance, foodservice, mass merchant retail, home
improvement and automotive, markets. During 2004, Wal*Mart and Lowe's accounted
for 17% and 12%, respectively, of consolidated net sales. Sales to Wal*Mart are
made by six separate business units (Woods US, Consumer Plastics, Abrasives,
Woods Canada, Textiles and JanSan Plastics). Sales to Lowe's are made by two
separate business units (Woods US and Consumer Plastics). A significant loss of
business at either of these retail outlets could have a material adverse impact
on the Company's results. The table below and the narrative that follows
summarize the key factors in the year-to-year changes in operating results.
65
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
(Thousands of dollars)
Maintenance Products Group
Net external sales $ 278,888 $ 285,289 $ 300,336
Operating (loss) income (2,717) 9,339 11,705
Operating (deficit) margin (1.0%) 3.3% 3.9%
Depreciation and amortization 12,714 20,162 17,625
Capital expenditures 13,205 12,366 9,228
Total assets 154,635 176,214 195,121
Electrical Products Group
Net external sales $ 178,754 $ 151,121 $ 144,242
Operating income 16,809 15,557 8,505
Operating margin 9.4% 10.3% 5.9%
Depreciation and amortization 1,327 1,217 1,484
Capital expenditures 671 833 601
Total assets 57,698 51,353 48,228
Net sales - Operating segments $ 457,642 $ 436,410 $ 444,578
- Other [a] -- -- 1,177
---------- ---------- ----------
Total $ 457,642 $ 436,410 $ 445,755
========== ========== ==========
Operating (loss) income - Operating segments $ 14,092 $ 24,896 $ 20,210
- Other [a] -- -- (772)
- Unallocated corporate (10,341) (13,789) (10,918)
- Impairments of long-lived assets (30,831) (11,880) (21,204)
- Severance, restructuring and related charges (3,505) (8,132) (19,155)
- Loss on SESCO joint venture transaction -- -- (6,010)
---------- ---------- ----------
Total $ (30,585) $ (8,905) $ (37,849)
========== ========== ==========
Depreciation and amortization - Operating segments $ 14,041 $ 21,379 $ 19,109
- Unallocated corporate 225 575 150
---------- ---------- ----------
Total $ 14,266 $ 21,954 $ 19,259
========== ========== ==========
Capital expenditures - Operating segments $ 13,876 $ 13,199 $ 9,829
- Unallocated corporate -- 125 158
- Discontinued operations -- 111 132
---------- ---------- ----------
Total $ 13,876 $ 13,435 $ 10,119
========== ========== ==========
Total assets - Operating segments 212,333 227,567 $ 243,349
- Other [a] 1,624 1,627 7,626
- Unallocated corporate 10,507 12,514 13,185
- Discontinued operations -- -- 11,817
---------- ---------- ----------
Total $ 224,464 $ 241,708 $ 275,977
========== ========== ==========
[a] Amounts shown as "other" represent items associated with SESCO and
Sahlman.
The Company operates businesses in the United States and foreign
countries. The operations for 2004, 2003 and 2002 of businesses within major
geographic areas are summarized as follows:
66
United Europe
(Thousands of Dollars) States Canada U.K. (Excluding U.K.) Other Consolidated
---------------------- ------ ------ ---- ---------------- ----- ------------
2004:
Sales to unaffiliated customers 364,209 $ 47,555 $ 36,453 $ 5,214 $ 4,211 $457,642
Total assets 170,166 $ 23,513 $ 30,227 $ 558 $ -- $224,464
2003:
Sales to unaffiliated customers 351,796 $ 42,765 $ 32,333 $ 5,167 $ 4,349 $436,410
Total assets 191,599 $ 23,260 $ 26,615 $ -- $ 234 $241,708
2002:
Sales to unaffiliated customers 367,427 $ 40,486 $ 28,121 $ 5,376 $ 4,345 $445,755
Total assets 235,802 $ 16,616 $ 23,559 $ -- $ -- $275,977
Net sales for each geographic area include sales of products produced in
that area and sold to unaffiliated customers, as reported in the Consolidated
Statements of Operations.
Note 18. COMMITMENTS AND CONTINGENCIES
General Environmental Claims
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions are involved in remedial
activities at certain present and former locations and have been identified by
the United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. Based on its estimate of allocation of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent,
public companies, will fully pay the costs apportioned to them, currently
available information concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company has
recorded and accrued for environmental liabilities in amounts that it deems
reasonable. The ultimate costs will depend on a number of factors and the amount
currently accrued represents management's best current estimate of the total
costs to be incurred. The Company expects this amount to be paid over the next
several years.
W.J. Smith Wood Preserving Company ("W.J. Smith")
The most significant environmental matter in which the Company is
currently involved relates to the W.J. Smith site. The W. J. Smith matter
originated in the 1980s when the United States and the State of Texas, through
the Texas Water Commission, initiated environmental enforcement actions against
W.J. Smith alleging that certain conditions on the W.J. Smith property in
Denison, Texas (the "Property") violated environmental laws. In order to resolve
the enforcement actions, W.J. Smith engaged in a series of cleanup activities on
the Property and implemented a groundwater monitoring program.
In 1993, the United States Environmental Protection Agency (EPA) initiated
a proceeding under Section 7003 of the Resource Conservation and Recovery Act
(RCRA) against W.J. Smith and Katy. The proceeding sought certain actions at the
site and at certain off-site areas, as well as development and implementation of
additional cleanup activities to mitigate off-site releases. In December 1995,
W.J. Smith, Katy and the EPA agreed to resolve the proceeding through an
Administrative Order on Consent
67
under Section 7003 of RCRA. W. J. Smith and Katy have completed the cleanup
activities required by the Order.
In addition to the administrative claim specifically identified above, a
purported class action lawsuit was filed by twenty individuals in federal court
in the Marshall Division of the Eastern District of Texas, on behalf of
"landowners and persons who reside and/or work in" an identified geographical
area surrounding the Property. The lawsuit purported to allege claims under
state law for negligence, trespass, nuisance and assault and battery. It sought
damages for personal injury and property damage, as well as punitive damages.
The named defendants were Union Pacific Corporation, Union Pacific Railroad
Company, Katy Industries and W.J. Smith. On June 10, 2002, Katy and W.J. Smith
filed a motion to dismiss the case for lack of federal jurisdiction, or in the
alternative, to transfer the case to the Sherman Division. In response,
plaintiffs filed a motion for leave to amend the complaint to add a federal
claim under the Resource Conservation and Recovery Act. On July 30, 2002, the
court dismissed plaintiffs' lawsuit in its entirety.
On July 31, 2002, plaintiffs filed a new lawsuit against the same
defendants, again in the Marshall Division of the Eastern District of Texas,
alleging property damage class action claims under the federal Comprehensive
Environmental Response Compensation & Liability Act (CERCLA), as well as state
common law theories. The Company deposed all of the proposed class
representatives and on October 31, 2003, filed a motion for summary judgment on
the grounds that the court lacks jurisdiction and that Plaintiffs' claims are
barred by the applicable statute of limitations. Plaintiffs filed a motion for
class certification on the property damage claims on that date as well. By
Memorandum Opinion and Order dated June 8, 2004, the Court granted the Company's
Motion for Summary Judgment on the federal jurisdictional claim and dismissed
the case. The Company has not been notified of an appeal and the time for
appealing the decision has passed.
Since 1990, the Company has spent in excess of $7.0 million undertaking
cleanup and compliance activities in connection with this matter. While ultimate
liability with respect to the WJ Smith matter is not easy to determine, the
Company has recorded and accrued amounts that it deems reasonable for
prospective liabilities with respect to this matter.
Asbestos Claims
A. The Company has recently been named as a defendant in four lawsuits filed in
state court in Alabama by a total of approximately 24 individual plaintiffs.
There are over 100 defendants named in each case. In all four cases, the
plaintiffs claim that they were exposed to asbestos in the course of their
employment at a former U.S. Steel plant in Alabama and, as a result, contracted
mesothelioma, asbestosis, lung cancer or other illness. They claim that they
were exposed to asbestos in products in the plant which were manufactured by
each defendant. In three of the cases, plaintiffs also assert wrongful death
claims. The Company will vigorously defend the claims against it in these
matters.
B. Sterling Fluid Systems (USA) has tendered over 1,500 cases pending in
Michigan, New Jersey, Illinois, Nevada, Mississippi, Wyoming, Louisiana,
Massachusetts and California to the Company for defense and indemnification.
Sterling bases its tender of the complaints on the provisions contained in a
1993 Purchase Agreement between the parties whereby Sterling purchased the
LaBour Pump business and other assets from the Company. Sterling has not filed a
lawsuit against Katy in connection with these matters.
The tendered complaints all purport to state claims against Sterling and
its subsidiaries. The Company and its current subsidiaries are not named as
defendants. The plaintiffs in the cases also allege that they were exposed to
asbestos and products containing asbestos in the course of their employment.
Each complaint names as defendants many manufacturers of products containing
asbestos, apparently because plaintiffs came into contact with a variety of
different products in the course of their employment. Plaintiffs' claim that
LaBour Pump and/or Sterling may have manufactured some of those products.
68
With respect to many of the tendered complaints, the Company has taken the
position that Sterling has waived its right to indemnity by failing to timely
request it as required under the 1993 Purchase Agreement. With respect to the
balance of the tendered complaints, the Company has elected not to assume the
defense of Sterling in these matters.
C. LaBour Pump Company, a former subsidiary of the Company, has been named as a
defendant in over 280 similar cases in New Jersey. These cases have also been
tendered by Sterling. The Company has elected to defend these cases, many of
which have been dismissed or settled for nominal sums.
While the ultimate liability of the Company related to the asbestos
matters above cannot be determined at this time, the Company has recorded and
accrued amounts that it deems reasonable for prospective liabilities with
respect to this matter.
Non-Environmental Litigation - Banco del Atlantico, S.A.
In December 1996, Banco del Atlantico ("plaintiff"), a bank located in
Mexico, filed a lawsuit in Texas against Woods US, a subsidiary of Katy, and
against certain past and/or then present officers, directors and former owners
of Woods US (collectively, "defendants"). The plaintiff alleges that the
defendants participated in violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO") involving, among other things, allegedly fraudulently
obtained loans from Mexican banks (including the plaintiff) and "money
laundering" of the proceeds of the illegal enterprise. The plaintiff alleges
that it made loans to a Mexican corporation controlled by certain past officers
and directors of Woods US based upon fraudulent representations and guarantees.
The plaintiff also alleges violations of the Indiana RICO and Crime Victims Act,
common law fraud and conspiracy, fraudulent transfer claims, and seeks recovery
upon certain alleged guarantees purportedly executed by Woods Wire Products,
Inc., a predecessor company from which Woods US purchased certain assets in 1993
(prior to Woods US's ownership by Katy, which began in December 1996). The
primary legal theories under which the plaintiff seeks to hold Woods liable for
its alleged damages are respondeat superior, conspiracy, successor liability, or
a combination of the three.
After several years of procedural disputes, this lawsuit has become more
active recently. In 2003, by order of the Southern District of Texas court, the
case was transferred to the Southern District of Indiana on the ground that
Indiana has a closer relationship to this case than Texas. The case is currently
pending in the Southern District of Indiana. In December 2003, the plaintiff
filed an Amended Complaint. There have been various motions to dismiss filed by
the defendants. These motions have been denied by the court or have become
mooted by subsequent filings by the plaintiff.
In September 2004, the plaintiff and HSBC Mexico, S.A. (collectively,
"plaintiffs"), an additional owner of the Amended Complaint's claims against the
defendants, filed a Second Amended Complaint, which includes new allegations and
seeks additional relief from the defendants. The Second Amended Complaint also
adds new defendants (none of which is affiliated with the Company) and claims,
although the fundamental nature of the lawsuit, described above, remains the
same.
The Defendants filed motions to dismiss the Second Amended Complaint on
November 8, 2004. These motions sought dismissal of plaintiffs' Second Amended
Complaint on grounds of, among other things, forum non conveniens and failure to
state a claim. The plaintiffs have responded to defendants' motions and the
defendants have replied. A new Case Management Plan has also been entered in the
case, which ties further case deadlines, including the date for close of
discovery and trial of this action, to the Court's "last ruling" on the pending
motions to dismiss. Discovery is continuing.
The plaintiffs' Second Amended Complaint claims damages in excess of
$24 million and is requesting that damages be trebled under Indiana and federal
RICO, and/or the Indiana Crime Victims Act. The Second Amended Complaint also
requests that the Court void certain transactions and asset sales as purported
"fraudulent transfers," including the 1993 Woods Wire Products, Inc. - Woods US
asset sale, and seeks other relief. Because various jurisdictional and
substantive issues have not yet been fully adjudicated, it is not possible at
this time for the Company to reasonably determine an outcome or
69
accurately estimate the range of potential exposure. Katy may also have recourse
against the former owners of Woods US and others for, among other things,
violations of covenants, representations and warranties under the purchase
agreement through which Katy acquired Woods US, and under state, federal and
common law. Woods US may also have indemnity claims against the former officers
and directors. In addition, there is a dispute with the former owners of Woods
US regarding the final disposition of amounts withheld from the purchase price,
which may be subject to further adjustment as a result of the claims by the
plaintiff. The extent or limit of any such adjustment cannot be predicted at
this time. While the ultimate liability of the Company related to this matter
cannot be determined at this time, the Company has recorded and accrued amounts
that it deems reasonable for prospective liabilities with respect to this
matter.
Note 19. SEVERANCE, RESTRUCTURING AND RELATED CHARGES
The Company has initiated several cost reduction and facility
consolidation initiatives since the Recapitalization, resulting in severance,
restructuring and related charges since 2001. A summary (by major initiative) is
as follows:
2004 2003 2002
---- ---- ----
(Amounts in Thousands)
Consolidation of St. Louis manufacturing/distribution facilities $ 1,460 $ 3,731 $ 11,698
Shutdown of Woods Canada manufacturing 841 1,497 --
Consolidation of Abrasives facilities 791 1,151 --
Consolidation of administrative functions for CCP 215 314 205
Shutdown of Woods U.S. manufacturing 38 503 2,447
Senior management transition and headcount rationalization -- 645 670
Consultant - outsourcing -- 84 3,588
Corporate office relocation -- -- 260
Other 160 207 287
--------- --------- ---------
Total severance, restructuring and related costs $ 3,505 $ 8,132 $ 19,155
========= ========= =========
Consolidation of St. Louis manufacturing/distribution facilities -
Starting in 2001, the Company developed a plan to consolidate the manufacturing
and distribution of the four CCP facilities in the St. Louis area. Charges in
2004 related to adjustments to previously established non-cancelable lease
liabilities for abandoned facilities ($1.1 million) and costs for the movement
of inventory and equipment ($0.3 million). In 2003, costs of $3.7 million
related to the establishment of and adjustments to non-cancelable lease
liabilities for abandoned facilities ($2.3 million), the movement of inventory
and equipment to other facilities ($1.0 million) and severance ($0.4 million).
During 2002, costs were incurred related to the establishment of non-cancelable
lease liabilities for abandoned facilities ($10.9 million), the movement of
equipment from Warson to Bridgeton ($0.5 million), and severance and other costs
($0.3 million).
Shutdown of Woods Canada manufacturing - In December 2003, Woods Canada
closed its manufacturing facility in Toronto, Ontario, after a decision was made
to source all of its products from Asia. In 2004, Woods Canada incurred a charge
of $0.8 million for a non-cancelable lease accrual associated with a
sale/leaseback transaction and idle capacity as a result of the shutdown of
manufacturing. Also in 2004, Woods Canada recorded less than $0.1 million for
additional severance. In 2003, a charge was recorded for $1.5 million of
severance payments to approximately 100 terminated employees.
Consolidation of abrasives facilities - In 2003, the Company initiated a
plan to consolidate the manufacturing facilities of its abrasives business in
order to implement a more competitive cost structure. It is expected that the
Lawrence, Massachusetts and the Pineville, North Carolina facilities will be
closed in 2005 and those operations will be consolidated into the recently
expanded Wrens, Georgia facility. Costs were incurred in 2004 related to
severance for expected terminations at the Lawrence facility ($0.4 million), the
closure of the Pineville facility ($0.3 million) and expenses for the
preparation of the Wrens
70
facility ($0.1 million). Costs were incurred in 2003 related to preparation
activities at Wrens ($0.7 million) and severance for expected terminations at
the Lawrence facility ($0.4 million).
Consolidation of administrative functions for CCP - Katy has incurred
various costs (mostly system conversions and the consolidation of administrative
personnel) over the past three years for the integration of back office and
administrative functions into Bridgeton, Missouri from certain businesses within
the Maintenance Products Group. The most significant project is the
centralization of the customer service functions for the JanSan Plastics,
Abrasives, Textiles and Filters and Grillbricks business unit.
Shutdown of Woods US manufacturing - During 2002 a major restructuring
occurred at the Woods business unit. After significant study and research into
different sourcing alternatives, Katy decided that Woods would source all of its
products from Asia. In December 2002, Woods shut down all U.S. manufacturing
facilities, which were in suburban Indianapolis and in southern Indiana. During
2004, a charge of $0.3 million was recorded for the shutdown and relocation of a
procurement office in Asia and was offset by a credit of $0.3 million to reverse
a non-cancelable lease accrual based on a change in usage of a leased facility
that was previously impaired. In 2003, Woods incurred costs of $0.5 million
primarily for an adjustment to a non-cancelable lease accrual due to a change in
sub-lease assumptions. During 2002, costs of $2.4 million were incurred for
severance and other exit costs, including severance, pension, and other
employee-related costs associated with the employee terminations ($1.5 million),
the creation of a liability for non-cancelable lease costs at abandoned
production facilities ($0.8 million) and other exit costs related to facility
repairs and other minor expenses ($0.1 million).
Senior management transition and headcount rationalization - From the
Recapitalization in 2001 through 2003, the Company has performed an evaluation
and rationalization of management talent. In 2003, severance costs were incurred
for the elimination of certain employees at corporate ($0.3 million) and in the
Maintenance Products Group ($0.3 million). The amounts recorded in 2002
principally relate to headcount reductions across the Maintenance Products
Group.
Consultant - outsourcing - In order to achieve a more competitive cost
structure, the Company has worked with consultants on sourcing and other
manufacturing and production efficiency initiatives. During 2003 and 2002, fees
were paid to a consultant for initiatives related primarily to sourcing products
for the Woods US and Woods Canada businesses and the Textiles business unit.
Corporate office relocation - Following the Recapitalization, the Company
closed the former corporate headquarters in Englewood, Colorado and an adjunct
corporate office in Chicago, Illinois. The costs incurred in 2002 primarily
related to non-cancelable lease accruals, moving expenses and employee
relocations.
Other - During 2004, costs were incurred for the closure of CCP's metals
facility in Santa Fe Springs, California ($0.1 million) and for the closure of
CCP's facility in Canada and the subsequent consolidation into the Woods Canada
facility ($0.1 million). All costs in 2003 relate to the closure of CCP's metals
facility in Santa Fe Springs, California. During 2002, costs were incurred for
legal fees and involuntary termination benefits related to SESCO.
The table below details activity in restructuring and related reserves
since December 31, 2002.
71
One-time Contract
Termination Termination
Total Benefits [a] Costs [b] Other [c]
---------- ------------ ----------- ----------
Restructuring and related liabilities at December 31, 2002 $ 14,499 $ 2,085 $ 10,885 $ 1,529
Additions 8,190 3,313 3,040 1,837
Reductions (58) -- (58) --
Payments (14,743) (3,828) (7,604) (3,311)
---------- ---------- ---------- ----------
Restructuring and related liabilities at December 31, 2003 $ 7,888 $ 1,570 $ 6,263 $ 55
Additions 3,974 753 2,439 782
Reductions (469) (10) (459) --
Payments (7,032) (1,508) (4,687) (837)
Currency Translation 93 2 91 --
---------- ---------- ---------- ----------
Restructuring and related liabilities at December 31, 2004[d] $ 4,454 $ 807 $ 3,647 $ --
========== ========== ========== ==========
[a] Includes severance, benefits, and other employee-related costs associated
with the employee terminations.
[b] Includes charges related to non-cancelable lease liabilities for abandoned
facilities, net of estimated sub-lease revenue.
[c] Includes charges associated with moving inventory, machinery and equipment,
consolidation of administrative and operational functions, and consultants
working on sourcing and other manufacturing and production efficiency
initiatives.
[d] Katy expects to substantially complete its restructuring program in 2005.
The remaining capital expenditures, and severance, restructuring and related
costs for these initiatives are expected to be in the range of $1.5 million to
$2.5 million.
The table below details activity in restructuring and related reserves by
operating segment since December 31, 2002.
Maintenance Electrical
Products Products
Total Group Group Corporate
--------- ----------- ---------- ---------
Restructuring and related liabilities at December 31, 2002 $ 14,499 $ 10,684 $ 3,312 $ 503
Additions 8,190 5,754 2,084 352
Reductions (58) (58) -- --
Payments (14,743) (10,399) (3,647) (697)
--------- --------- --------- ---------
Restructuring and related liabilities at December 31, 2003 $ 7,888 $ 5,981 $ 1,749 $ 158
Additions 3,974 2,637 1,337 --
Reductions (469) (12) (457) --
Payments (7,032) (5,221) (1,653) (158)
Currency Translation 93 -- 93 --
--------- --------- --------- ---------
Restructuring and related liabilities at December 31, 2004 $ 4,454 $ 3,385 $ 1,069 $ --
========= ========= ========= =========
The table below summarizes the future obligations for severance,
restructuring and other related charges by operating segment detailed above:
72
Maintenance Electrical
Products Products
Total Group Group
-------- ----------- ----------
2005 $ 2,103 $ 1,682 $ 421
2006 788 574 214
2007 423 249 174
2008 384 201 183
2009 321 244 77
Thereafter 435 435 --
-------- -------- --------
Total Payments $ 4,454 $ 3,385 $ 1,069
======== ======== ========
Note 20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---- ------- ------- ------- -------
Net sales $ 99,895 $ 100,522 $ 135,426 $ 121,799
========== ========== ========== ==========
Gross profit $ 16,630 $ 13,261 $ 17,857 $ 13,286
========== ========== ========== ==========
Net loss (income) $ (1,781) $ (1,283) $ 876 $ (33,933)
---------- ---------- ---------- ----------
Payment in kind of dividends on convertible preferred stock (3,462) (3,462) (3,822) (4,003)
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (5,243) $ (4,745) $ (2,946) $ (37,936)
========== ========== ========== ==========
Loss per share of common stock - Basic and diluted [a] $ (0.67) $ (0.60) $ (0.37) $ (4.80)
========== ========== ========== ==========
During 2004, the Company recorded the following quarterly pre-tax charges
for severance, restructuring and related charges and impairments of long-lived
assets:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Severance, restructuring and related charges (income) 1,898 (109) 167 1,549
Impairments of long-lived assets -- -- -- 30,831
2003 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---- ------- ------- ------- -------
Net sales $ 90,452 $ 101,461 $ 125,901 $ 118,596
========== ========== ========== ==========
Gross profit $ 14,286 $ 13,949 $ 20,226 $ 22,386
========== ========== ========== ==========
Net loss $ (1,844) $ (5,202) $ (418) $ (1,900)
---------- ---------- ---------- ----------
Gain on early redemption of preferred interest of subsidiary 6,560 -- -- --
Payment in kind of dividends on convertible preferred stock (3,014) (3,011) (3,324) (3,462)
---------- ---------- ---------- ----------
Net income (loss) attributable to common stockholders $ 1,702 $ (8,213) $ (3,742) $ (5,362)
========== ========== ========== ==========
Income (loss) per share of common stock - Basic and diluted [a]
Income (loss) from continuing operations
attributable
to common stockholders $ 0.08 $ (1.02) $ (1.44) $ (0.68)
Discontinued operations (net of tax) 0.12 0.04 0.99 $ --
---------- ---------- ---------- ----------
Net income (loss) attributable to common stockholders $ 0.20 $ (0.98) $ (0.45) $ (0.68)
========== ========== ========== ==========
73
During 2003, the Company recorded the following quarterly pre-tax charges
for severance, restructuring and related charges and impairments of long-lived
assets:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
Severance, restructuring and related charges $ 228 $ 1,713 $ 3,871 $ 2,320
Impairments of long-lived assets $ -- $ 1,800 $ 5,255 $ 4,825
[a] The sum of basic and diluted loss per share of common stock does not total
to the basic and diluted loss per share reported in the Consolidated Statement
of Operations or Note 9 due to the fluctuation of shares outstanding throughout
the years ending December 31, 2004 and 2003.
NOTE 21. SUPPLEMENTAL BALANCE SHEET INFORMATION
The following table provides detail regarding other assets shown on the
Consolidated Balance Sheets:
December 31,
------------------------
2004 2003
---- ----
Debt issuance costs, net $ 4,721 $ 4,313
Equity method investment in unconsolidated affiliate 1,617 1,617
Notes and other receivables - sales of subsidiaries 106 994
Other 3,502 3,428
--------- ---------
Total $ 9,946 $ 10,352
========= =========
The following table provides detail regarding accrued expenses shown on
the Consolidated Balance Sheets:
December 31,
------------------------
2004 2003
---- ----
Contingent liabilities $ 14,054 $ 15,735
Advertising and rebates 13,551 10,440
SESCO note payable to Montenay 1,050 1,000
Non-cancelable lease liabilities - restructuring 1,023 2,424
Professional services 839 796
Other restructuring 807 1,622
Other 8,615 8,221
--------- ---------
Total $ 39,939 $ 40,238
========= =========
Contingent liabilities consist of accruals for estimated losses associated
with environmental issues, the uninsured portion of general and product
liability and workers' compensation claims, and a purchase price adjustment
associated with the purchase of a subsidiary.
The following table provides detail regarding other liabilities shown on
the Consolidated Balance Sheets:
December 31,
------------------------
2004 2003
---- ----
Deferred compensation $ 3,974 $ 4,960
Non-cancelable lease liabilities - restructuring 2,624 4,427
SESCO note payable to Montenay 2,441 3,304
Other 3,816 3,353
--------- ---------
Total $ 12,855 $ 16,044
========= =========
74
NOTE 22. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the year for interest and income taxes is as
follows:
Years Ended December 31,
------------------------------------------
2004 2003 2002
---- ---- ----
Interest $ 2,411 $ 2,688 $ 4,733
========== ========== ==========
Income taxes $ 759 $ 2,924 $ (416)
========== ========== ==========
Significant non-cash transactions include the accrual of PIK dividends on
the Convertible Preferred Stock of $14.7 million in 2004, $12.8 million in 2003,
and $11.1 million in 2002. The PIK dividends are recorded at fair value. In this
case, each convertible preferred share is translated to its common equivalent
(16.6667 common shares per each convertible preferred share) and multiplied by
$6.00, which is the value of each common share equivalent given the proceeds
from the issuance of the Convertible Preferred Stock. Also during 2003, a gain
of $6.6 million was realized on the early redemption of the preferred interest
in a subsidiary (see Note 11).
Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our SEC filings is reported within
the time periods specified in the SEC's rules, and that such information is
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. We have investments in certain unconsolidated
entities. As we do not control or manage these entities, the disclosure controls
and procedures with respect to such entities are necessarily more limited than
those we maintain with respect to our consolidated subsidiaries.
Pursuant to Rule 13a--15(b) under the Securities Exchange Act of 1934,
Katy carried out an evaluation, under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (pursuant to Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period of our report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b) Change in Internal Controls
Our Abrasives facility in Wrens, Georgia lacks a perpetual inventory
system and relies on quarterly physicals to value inventory. Throughout 2004, we
adjusted our material cost of sales estimate (for preparation of non-quarter-end
interim financial statements) to reflect rising material cost of sales.
75
Also during 2004, the Wrens facility experienced significant personnel
turnover, consolidation of other operations (consistent with our strategy of
consolidating our abrasives operations into the Wrens facility), and
manufacturing disruption events such as the production interruption caused by
the air handling system fire in October 2004. Management determined that key
inventory processes such as receiving, production reporting, scrap, and shipping
required improvement.
In light of the above developments, our management requested that our
independent auditor, PricewaterhouseCoopers LLP (PwC), perform a comprehensive
analysis of the Wrens inventory process controls. As part of the analysis, PwC
conducted an on-site review of the operations and inventory-related process
controls of the Wrens facility as well as related certain back-office processes
conducted in St. Louis, Missouri.
The PwC review concluded that inventory process controls were inadequate.
Among the inadequacies identified were those relating to shipping and receiving
controls, bills of material and routings, security measures, and systems
implementation (we are in the process of re-implementing a new ERP system). As a
result of its review, PwC recommended that we take certain corrective actions,
including the establishment of a perpetual inventory system. In response to each
of PwC's detailed recommendations, management developed an itemized corrective
action plan and has discussed that plan with our Audit Committee, Board of
Directors and PwC. As of the date of this Annual Report on Form 10-K, we believe
that the action plan developed by our management will correct the inadequacies
in our internal control over financial reporting as they relate to our inventory
process at our Wrens facility. We also believe that despite these inadequacies,
the quarterly physical inventory process at this facility has provided us with
an accurate inventory valuation.
Except as discussed above, there have been no changes in Katy's internal
control over financial reporting during the quarter ended December 31, 2004 that
has materially affected, or is reasonably likely to materially affect Katy's
internal control over financial reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be
required to furnish an internal controls report of management's assessment of
the effectiveness of our internal controls as part of our Annual Report on Form
10-K. If our public float exceeds $75 million at June 30, 2005, we will be
required to furnish this report for the year ending December 31, 2005, otherwise
we will be required to furnish this report for the year ending December 31,
2006. Our public float as of June 30, 2004 was approximately $22.9 million.
Section 404 will also require our auditors to attest to, and report on, our
assessment. In order to issue our report, our management must document both the
design of our internal controls and the testing processes that support
management's evaluation and conclusion. Our management has begun the necessary
processes and procedures for issuing its report on our internal controls.
Item 9B. OTHER INFORMATION
Third Amendment to the Amended and Restated Loan Agreement
Katy entered into the Third Amendment to Amended and Restated Loan
Agreement dated as of April 13, 2005 with Fleet Capital Corporation (the Third
Amendment). The Third Amendment eliminates the maximum Consolidated Leverage
Ratio and the Minimum Consolidated EBITDA and adjusts the Minimum Availability
such that our eligible collateral must exceed the sum of Katy's outstanding
borrowings and letters of credit under the Revolving Credit Facility by at least
$5 million from the effective date of the Third Amendment through September 29,
2005 and by at least $7.5 million from September 30, 2005 until the date Katy
delivers its financial statements for the first quarter of 2006 to its lenders.
Subsequent to the delivery of the financial statements for the first quarter of
2006, the Third Amendment reestablishes the minimum Fixed Charge Coverage Ratio
as originally set forth in the Bank of America Credit Agreement. The Third
Amendment also reduces the maximum allowable capital expenditures for 2005 from
$15 million to $10 million, and increases the interest rate margins on all of
the Katy's outstanding borrowings and letters of credit to the largest margins
set forth in the Amended and Restated Loan Agreement. Interest rate margins will
return to levels set forth in the Bank of America Credit Agreement subsequent to
the delivery of Katy's financial statements for the first quarter of 2006 to its
lenders.
Executive Compensation
The following base salaries effective April 11, 2005 for the named
executive officers of Katy were approved at the April 8, 2005 meeting of the
Compensation Committee of the Katy Board of Directors.
C. Michael Jacobi $565,000
Amir Rosenthal $315,000
David S. Rahilly $250,000
David C. Cooksey $170,000
Michael C. Paul $169,700
As part of his or her annual compensation, each of the named executive
officers is also eligible for a cash bonus in accordance with the terms of the
Katy Industries, Inc. Executive Bonus Plan, which is set forth as Exhibit 10.18
in this Annual Report on Form 10-K. In addition to the foregoing, the Company
pays automobile and other allowances, certain club memberships, all or a portion
of the premiums for group term life insurance policies for each of the executive
officers and contributes matching amounts to each of the executives under the
Katy's 401(k) plan.
76
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of Katy is incorporated herein by
reference to the information set forth under the section entitled "Election of
Directors" in the Proxy Statement of Katy Industries, Inc. for its 2005 Annual
Meeting.
Information regarding executive officers of Katy is incorporated herein by
reference to the information set forth under the section entitled "Information
Concerning Directors and Executive Officers" in the Proxy Statement of Katy
Industries, Inc. for its 2005 Annual Meeting.
Information regarding compliance with Section 16 of the Securities
Exchange Act of 1934 is incorporated herein by reference to the information set
forth under the Section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" for its 2005 Annual Meeting.
Information regarding Katy's Code of Ethics is incorporated herein by
reference to the information set forth under the Section entitled "Code of
Ethics" in the Proxy Statement of Katy Industries, Inc. for its 2005 Annual
Meeting.
Item 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers is incorporated
herein by reference to the information set forth under the section entitled
"Executive Compensation" in the Proxy Statement of Katy Industries, Inc. for its
2005 Annual Meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of stock by certain beneficial
owners and by management of Katy is incorporated by reference to the information
set forth under the section "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management" in the Proxy Statement of Katy
Industries, Inc. for its 2005 Annual Meeting.
77
Equity Compensation Plan Information
Number of Securities
Remaining Available for
Number of Securities to Weighted-average Future Issuances Under Equity
Be Issued on Exercise of Exercise Price of Compensation Plans
Outstanding Option, Outstanding Options, (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
----------------------- ------------------------ -------------------- -----------------------------
(a) (b) (c)
Equity Compensation
Plans Approved by
Stockholders 925,262 $7.33 308,889
Equity Compensation
Plans Not Approved by
Stockholders 1,841,698 $4.16 --
Equity Compensation Plans Not Approved by Stockholders
On June 28, 2001, the Company entered into an employment agreement with C.
Michael Jacobi, President and Chief Executive Officer. To induce Mr. Jacobi to
enter into the employment agreement, on June 28, 2001, the Compensation
Committee of the Board of Directors approved the Katy Industries, Inc. 2001
Chief Executive Officer's Plan. Under this plan, Mr. Jacobi was granted 978,572
stock options. Pursuant to approval by the Katy Board of Directors, the stock
options granted to Mr. Jacobi under this plan were vested in March 2004.
On September 4, 2001, the Company entered into an employment agreement
with Amir Rosenthal, Vice President, Chief Financial Officer, General Counsel
and Secretary. To induce Mr. Rosenthal to enter into the employment agreement,
on September 4, 2001, the Compensation Committee of the Board of Directors
approved the Katy Industries, Inc. 2001 Chief Financial Officer's Plan. Under
this plan, Mr. Rosenthal was granted 123,077 stock options. Pursuant to approval
by the Katy Board of Directors, the stock options granted to Mr. Rosenthal under
this plan were vested in March 2004.
On November 21, 2002, the Board of Directors approved the 2002 Stock
Appreciation Rights Plan (the "2002 SAR Plan"), authorizing the issuance of up
to 1,000,000 stock appreciation rights (SARs). Vesting of the SARs occurs
ratably over three years from the date of issue. The 2002 SAR Plan provides
limitations on redemption by holders, specifying that no more than 50% of the
cumulative number of vested SARs held by an employee could be exercised in any
one calendar year. The SARs expire ten years from the date of issue. The Board
approved grants on November 22, 2002, of 717,175 SARs to 60 individuals with an
exercise price of $3.15, which equaled the market price of Katy's stock on the
grant date. In addition, 50,000 SARs were granted to four individuals during
2003 and 275,000 SARs were granted to fifteen individuals during 2004. At
December 31, 2004, Katy had 740,049 SARS outstanding at a weighted average
exercise price of $4.16. Compensation (income) expense associated with the
vesting of stock appreciation rights was ($0.1 million), $1.0 million and $13.0
thousand in 2004, 2003 and 2002, respectively. The 2002 SAR Plan also provides
that in the event of a Change in Control of the Company, all outstanding SARs
may become fully vested. In accordance with the 2002 SAR Plan, a "Change in
Control" is deemed to have occurred upon any of the following events: 1) a sale
of 100 percent of the Company's outstanding capital stock, as may be outstanding
from time to time; 2) a sale of all or substantially all of the Company's
operating subsidiaries or assets; or 3) a transaction or series of transactions
in which any third party acquires an equity ownership in the Company greater
than that held
78
by KKTY Holding Company, L.L.C. and in which Kohlberg & Co., L.L.C. relinquishes
its right to nominate a majority of the candidates for election to the Board of
Directors.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management is incorporated herein by reference to the information set forth
under the section entitled "Executive Compensation" in the Proxy Statement of
Katy Industries, Inc. for its 2005 Annual Meeting.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is
incorporated herein by reference to the information set forth under the section
entitled "Proposal 2 - Ratification of the Independent Public Auditors" in the
Proxy Statement of Katy Industries, Inc. for its 2005 Annual Meeting.
79
Part IV
Item 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) 1. Financial Statements
The following financial statements of Katy are set forth in Part II, Item
8, of this Form 10-K:
- Consolidated Balance Sheets as of December 31, 2004 and 2003
- Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002
- Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004, 2003 and 2002
- Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
- Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The financial statement schedule filed with this report is listed on the
"Index to Financial Statement Schedules" on page 86 of this Form 10-K.
3. Exhibits
The exhibits filed with this report are listed on the "Exhibit Index."
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 2005 KATY INDUSTRIES, INC.
Registrant
/S/ C. Michael Jacobi
---------------------
C. Michael Jacobi
President and Chief Executive Officer
/S/ Amir Rosenthal
------------------
Amir Rosenthal
Vice President, Chief Financial Officer
General Counsel and
Secretary
80
POWER OF ATTORNEY
Each person signing below appoints C. Michael Jacobi and Amir Rosenthal,
or either of them, his attorneys-in-fact for him in any and all capacities, with
power of substitution, to sign any amendments to this report, and to file the
same with any exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of this 14th day of April, 2005.
Signature Title
/S/ William F. Andrews Chairman of the Board and Director
---------------------------
William F. Andrews
/S/ C. Michael Jacobi President, Chief Executive Officer and Director
--------------------------- (Principal Executive Officer)
C. Michael Jacobi
/S/ Amir Rosenthal Vice President, Chief Financial Officer,
--------------------------- General Counsel and Secretary
Amir Rosenthal (Principal Financial and Accounting Officer)
/S/ Christopher Lacovara Director
---------------------------
Christopher Lacovara
/S/ Robert M. Baratta Director
---------------------------
Robert M. Baratta
/S/ James A. Kohlberg Director
---------------------------
James A. Kohlberg
/S/ Daniel B. Carroll Director
---------------------------
Daniel B. Carroll
/S/ Wallace E. Carroll, Jr. Director
---------------------------
Wallace E. Carroll, Jr.
81
/S/ Samuel P. Frieder Director
---------------------------
Samuel P. Frieder
/S/ Christopher Anderson Director
---------------------------
Christopher Anderson
82
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm 84
Schedule II - Valuation and Qualifying Accounts 85
Consent of Independent Registered Public Accounting Firm 92
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements of Katy or the Notes thereto.
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE
To the Board of Directors and Stockholders of Katy Industries, Inc.:
Our audits of the consolidated financial statements of Katy Industries, Inc. and
its subsidiaries, referred to in our report dated March 29, 2005, except for
Note 8, which is as of April 13, 2005, appearing in this Annual Report on Form
10-K, also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 29, 2005, except for Note 8,
which is as of April 13, 2005
84
KATY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Amounts in Thousands)
Balance at Additions Balance
Beginning Charged to Write-offs Other at End
Accounts Receivable Reserves of Year Expense to Reserves Adjustments of Year
---------------------------- ------- ------- ----------- ----------- -------
Year ended December 31, 2004
Trade receivables $ 3,029 $ 3,099 $ (3,092) $ (209) $ 2,827
Long-term notes receivable 105 250 -- -- 355
----------- ----------- ----------- ----------- -----------
$ 3,134 $ 3,349 $ (3,092) $ (209) $ 3,182
Year ended December 31, 2003
Trade receivables $ 2,771 $ 3,163 $ (3,113) $ 208 $ 3,029
Long-term notes receivable 1,000 105 (1,000) 105
----------- ----------- ----------- ----------- -----------
$ 3,771 $ 3,268 $ (4,113) $ 208 $ 3,134
Year ended December 31, 2002
Trade receivables $ 2,728 $ 3,732 $ (4,312) $ 623 $ 2,771
Long-term notes receivable 1,000 -- -- -- 1,000
----------- ----------- ----------- ----------- -----------
$ 3,728 $ 3,732 $ (4,312) $ 623 $ 3,771
Balance at Additions Balance
Beginning Charged to Write-offs Other at End
Inventory Reserves of Year Expense to the Reserve Adjustments of Year
------------------ ------- ------- -------------- ------------ -------
Year ended December 31, 2004 $ 5,630 $ 1,758 $ (2,766) $ 49 $ 4,671
Year ended December 31, 2003 $ 5,730 $ 1,822 $ (2,261) $ 339 $ 5,630
Year ended December 31, 2002 $ 5,862 $ 2,620 $ (3,578) $ 826 $ 5,730
Balance at Balance
Beginning Other at End
Income Tax Valuation Allowances of Year Provision Reversals Adjustments of Year
------------------------------- ------- --------- --------- ----------- -------
Year ended December 31, 2004 $ 46,171 $ 13,857 $ -- $ -- $ 60,028
Year ended December 31, 2003 $ 42,828 $ 3,343 $ -- $ -- $ 46,171
Year ended December 31, 2002 $ 13,854 $ 28,974 $ -- $ -- $ 42,828
85
KATY INDUSTRIES, INC.
INDEX OF EXHIBITS
DECEMBER 31, 2004
Exhibit
Number Exhibit Title Page
------ ------------- ----
2 Preferred Stock Purchase and Recapitalization *
Agreement, dated as of June 2, 2001 (incorporated by
reference to Annex B to the Company's Proxy Statement
on Schedule 14A filed June 8, 2001).
3.1 The Amended and Restated Certificate of Incorporation *
of the Company (incorporated by reference to Exhibit
3.1 of the Company's Current Report on Form 8-K on July
13, 2001).
3.2 The By-laws of the Company, as amended (incorporated by *
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q filed May 15, 2001).
4.1 Rights Agreement dated as of January 13, 1995 between *
Katy and Harris Trust and Savings Bank as Rights Agent
(incorporated by reference to Exhibit 2.1 of Katy's
Form 8-A filed January 17, 1995).
4.1a Amendment dated as of October 31, 1996 to the Rights *
Agreement dated as of January 13, 1995 between Katy and
Harris Trust and Savings Bank as Rights Agent
(incorporated by reference to Katy's Current Report on
Form 8-K filed November 8, 1996).
4.1b Amendment dated as of January 8, 1999 to the Rights *
Agreement dated as of January 13, 1995 between Katy and
LaSalle National Bank as Rights Agent (incorporated by
reference to Exhibit 4.1(b) of Katy's Annual Report on
Form 10-K filed March 18, 1999).
4.1c Third Amendment to Rights Agreement, dated March 30, *
2001, between the Company and LaSalle Bank, N.A., as
Rights Agent (incorporated by reference to Exhibit (e)
(3) to the Company's Solicitation/Recommendation
Statement on Schedule 14D-9 filed April 25, 2001).
10.1 Katy Industries, Inc. Long-Term Incentive Plan *
(incorporated by reference to Katy's Registration
Statement on Form S-8 filed June 21, 1995).
10.2 Katy Industries, Inc. Non-Employee Director Stock *
Option Plan (incorporated by reference to Katy's
Registration Statement on Form S-8 filed June 21, 1995).
10.3 Katy Industries, Inc. Supplemental Retirement and *
Deferral Plan effective as of June 1, 1995
(incorporated by reference to Katy's Registration
Statement on Form S-8 filed June 21, 1995)
10.4 Katy Industries, Inc. Directors' Deferred Compensation *
Plan effective as of June 1, 1995 (incorporated by
reference to Katy's Registration Statement on Form S-8
filed June 21, 1995).
10.5 Employment Agreement dated as of June 28, 2001 between *
C. Michael Jacobi and the Company (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q filed August 14, 2001).
86
10.6 Katy Industries, Inc. 2001 Chief Executive Officer's *
Plan (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q filed August
14, 2001).
10.7 Employment Agreement dated as of September 1, 2001 *
between Amir Rosenthal and the Company (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q dated November 14, 2001).
10.8 Katy Industries, Inc. 2001 Chief Financial Officer's *
Plan (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q dated November
14, 2001).
10.9 Katy Industries, Inc. 2002 Stock Appreciation Rights *
Plan, dated November 21, 2002, (incorporated by
reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K dated April 15, 2003).
10.10 Amended and Restated Loan Agreement dated as of April *
20, 2004 with Fleet Capital Corporation, (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q dated May 10, 2004).
10.11 First Amendment to Amended and Restated Loan Agreement *
dated as of June 29, 2004 with Fleet Capital
Corporation, (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q dated
August 16, 2004).
10.12 Amendment dated as of October 1, 2004 to the Employment *
Agreement dated as of June 28, 2001 between C. Michael
Jacobi and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q dated November 10, 2004).
10.13 Amendment dated as of October 1, 2004 to the Employment *
Agreement dated as of September 1, 2001 between Amir
Rosenthal and the Company (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q dated November 10, 2004).
10.14 Director Compensation Arrangements 89
10.15 Executive Officer Compensation Arrangements 90
10.16 Second Amendment to Amended and Restated Loan Agreement *
dated as of March 29, 2005 with Fleet Capital
Corporation (incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K filed
April 1, 2005)
10.17 Third Amendment to Amended and Restated Loan Agreement **
dated as of April 13, 2005 with Fleet Capital
Corporation
10.18 Katy Industries, Inc. Executive Bonus Plan dated **
December 2001
21 Subsidiaries of registrant 91
23 Consent of Independent Registered Public Accounting Firm 92
31.1 CEO Certification pursuant to Securities Exchange Act 93
Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 CFO Certification pursuant to Securities Exchange Act 94
Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 CEO Certification required by 18 U.S.C. Section 1350, 95
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
87
32.2 CFO Certification required by 18 U.S.C. Section 1350, 96
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Indicates incorporated by reference.
** Indicates filed herewith.
88