United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO.1)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended: September 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURTIES EXCHANGE ACT OF 1934
For the transition period from_______________ to________________
Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
765 Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203)598-0397
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at November 4, 2003
Common Stock, $1 Par Value 7,961,077
EXPLANATORY NOTE
Katy Industries, Inc. ("Katy" or the "Company") is filing this Amendment
No. 1 to its Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, originally filed November 7, 2003 (the "Form 10-Q"), for the reasons
explained below. Katy has determined that the amount of the gain on sale of
discontinued businesses and the income from operations of discontinued
businesses, previously reported in the third quarter of fiscal 2003 should be
restated to reflect reductions of $3.8 million and $0.3 million, respectively,
for a tax provision allocable to each of those amounts. This revision reduced
the previously reported loss from continuing operations through a reduction of
the provision for income taxes related to continuing operations by $4.1 million.
These revisions have no effect on the Company's previously reported
balance sheet, cash flow from operations, net sales, operating income, or net
loss attributable to common shareholders (and related per share amounts). This
Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q,
or modify or update those disclosures in any way, except as required to reflect
the effects of these restatements.
This Amendment No. 1 contains changes to the following disclosures:
o Part I - Item 1. Financial Statements
o Part I - Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- 1 -
KATY INDUSTRIES, INC.
FORM 10-Q/A
September 30, 2003
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 2,3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended
September 30, 2003 (restated) and 2002 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 (restated) and 2002 5
Notes to Condensed Consolidated Financial Statements (restated) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 40
Item 4. Controls and Procedures 40
PART II OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 42
Certifications 43-46
- 2 -
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
September 30, December 31,
2003 2002
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 5,398 $ 4,842
Accounts receivable, net 70,474 58,463
Inventories 59,525 56,806
Other current assets 2,289 1,775
Current assets of discontinued operations 2,089 7,748
--------- ---------
Total current assets 139,775 129,634
--------- ---------
OTHER ASSETS:
Goodwill 10,543 10,543
Intangibles 24,988 25,536
Equity method investment 1,617 7,306
Other 10,477 12,295
Non-current assets of discontinued operations -- 4,069
--------- ---------
Total other assets 47,625 59,749
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 3,208 3,180
Buildings and improvements 16,063 14,707
Machinery and equipment 131,606 141,013
--------- ---------
150,877 158,900
Less - Accumulated depreciation (78,890) (72,306)
--------- ---------
Net property and equipment 71,987 86,594
--------- ---------
Total assets $ 259,387 $ 275,977
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2003 2002
----------- ------------
CURRENT LIABILITIES:
Accounts payable $ 39,373 $ 36,765
Accrued compensation 5,074 7,131
Accrued expenses 45,403 47,569
Current maturities of long-term debt 14,741 700
Revolving credit agreement 35,088 44,751
Current liabilities of discontinued operations 761 2,963
----------- -----------
Total current liabilities 140,440 139,879
LONG-TERM DEBT, less current maturities 1,640 --
OTHER LIABILITIES 14,296 17,526
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS 52 --
----------- -----------
Total liabilities 156,428 157,405
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 16) -- --
----------- -----------
PREFERRED INTEREST OF SUBSIDIARY -- 16,400
----------- -----------
STOCKHOLDERS' EQUITY
15% Convertible Preferred Stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 925,750 shares and 805,000
shares, respectively, liquidation value $94,972 and $85,595, respectively 90,045 80,696
Common stock, $1 par value authorized 35,000,000 shares,
issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 43,902 46,701
Accumulated other comprehensive income (loss) 26 (3,046)
Accumulated deficit (19,237) (11,773)
Treasury stock, at cost, 1,747,627
and 1,460,027 shares, respectively (21,599) (20,228)
----------- -----------
Total stockholders' equity 102,959 102,172
----------- -----------
Total liabilities and stockholders' equity $ 259,387 $ 275,977
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
- 4 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Restated Restated
(Note 2) (Note 2)
Net sales $ 125,901 $ 134,401 $ 317,814 $ 335,121
Cost of goods sold (105,675) (112,794) (269,353) (282,350)
---------- ---------- ---------- ----------
Gross profit 20,226 21,607 48,461 52,771
Selling, general and administrative expenses (15,613) (16,059) (45,595) (46,640)
Severance, restructuring and related charges (3,871) (9,486) (5,812) (15,567)
Impairments of long-lived assets (5,255) (10,986) (7,055) (13,380)
Loss on SESCO transaction -- -- -- (6,010)
---------- ---------- ---------- ----------
Operating loss (4,513) (14,924) (10,001) (28,826)
Equity in (loss) income of equity method investment (net of
impairment charge of $5.5 million in 2003) (5,478) (40) (5,689) 606
Interest, net (1,138) (1,758) (4,701) (4,662)
Other, net (601) (107) 408 (326)
---------- ---------- ---------- ----------
Loss from continuing operations before provision for income taxes (11,730) (16,829) (19,983) (33,208)
Benefit (provision) for income taxes 3,196 (430) 3,119 (1,102)
---------- ---------- ---------- ----------
Loss from continuing operations before distributions on preferred
interest of subsidiary (8,534) (17,259) (16,864) (34,310)
Distributions on preferred interest of subsidiary (net of tax) -- (328) (123) (984)
---------- ---------- ---------- ----------
Loss from continuing operations (8,534) (17,587) (16,987) (35,294)
Income from operations of discontinued businesses (net of tax) 478 1,028 2,081 4,575
Gain on sale of discontinued businesses (net of tax) 7,638 -- 7,442 --
---------- ---------- ---------- ----------
Loss before cumulative effect of a change in accounting principle (418) (16,559) (7,464) (30,719)
Cumulative effect of a change in accounting principle (net of tax) -- (4,190) -- (4,190)
---------- ---------- ---------- ----------
Net loss (418) (20,749) (7,464) (34,909)
Gain on early redemption of preferred interest of subsidiary -- -- 6,560 --
Payment in kind dividends on convertible preferred stock (3,324) (2,615) (9,349) (7,852)
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (3,742) $ (23,364) $ (10,253) $ (42,761)
========== ========== ========== ==========
Income (loss) per share of common stock - Basic and diluted
Loss from continuing operations attributable
to common stockholders $ (1.44) $ (2.41) $ (2.38) $ (5.16)
Discontinued operations 0.99 0.12 1.15 0.55
Cumulative effect of a change in accounting principle -- (0.50) -- (0.50)
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (0.45) $ (2.79) $ (1.23) $ (5.11)
========== ========== ========== ==========
Weighted average common shares outstanding (thousands):
Basic and diluted 8,237 8,362 8,314 8,372
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
- 5 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Thousands of Dollars)
(Unaudited)
2003 2002
---- ----
Restated
(Note 2)
Cash flows from operating activities:
Net loss $ (7,464) $(34,909)
Income from operations of discontinued businesses (9,523) (4,575)
-------- --------
Loss from continuing operations (16,987) (39,484)
Cumulative effect of a change in accounting principle -- 4,190
Depreciation and amortization 16,531 15,396
Impairments of long-lived assets 7,055 13,380
Write-off and amortization of debt issuance costs 2,057 1,185
(Gain) loss on sale of assets (573) 116
Loss on SESCO transaction -- 6,010
Equity in loss (income) of equity method investment (net of impairment charge
of $5.5 million in 2003) 5,689 (606)
-------- --------
13,772 187
-------- --------
Changes in operating assets and liabilities:
Accounts receivable (9,969) (17,587)
Inventories (1,095) (9,623)
Accounts payable 1,894 17,925
Accrued expenses (5,166) 7,442
Other, net (4,777) 7,755
-------- --------
(19,113) 5,912
-------- --------
Net cash (used in) provided by continuing operations (5,341) 6,099
Net cash (used in) provided by discontinued operations (4,736) 6,348
-------- --------
Net cash (used in) provided by operating activities (10,077) 12,447
-------- --------
Cash flows from investing activities:
Capital expenditures of continuing operations (7,026) (7,827)
Capital expenditures of discontinued operations (111) (406)
Acquisition of subsidiary, net of cash acquired (1,161) --
Collections of notes receivable from sales of subsidiaries 1,139 722
Proceeds from sale of subsidiaries, net 21,948 --
Proceeds from sale of assets 2,389 114
-------- --------
Net cash provided by (used in) investing activities 17,178 (7,397)
-------- --------
Cash flows from financing activities:
Net borrowings on revolving loans, prior to refinancing 7,965 3,565
Repayment of term loans prior to refinancing -- (10,994)
Repayment of borrowings under revolving loans at refinancing (52,716) --
Proceeds on initial borrowings at refinancing -- term loans 20,000 --
Proceeds on initial borrowings at refinancing -- revolving loans 43,743 --
Net repayments on revolving loans following refinancing (8,655) --
Repayments of term loans following refinancing (3,619) --
Direct costs associated with debt facilities (1,464) (547)
Redemption of preferred interest of subsidiary (9,840) --
Repayment of real estate and chattel mortgages (700) (50)
Repurchases of common stock (1,391) --
-------- --------
Net cash used in financing activities (6,677) (8,026)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 132 (52)
-------- --------
Net increase (decrease) in cash and cash equivalents 556 (3,028)
Cash and cash equivalents, beginning of period 4,842 7,836
-------- --------
Cash and cash equivalents, end of period $ 5,398 $ 4,808
======== ========
See Notes to Condensed Consolidated Financial Statements
- 6 -
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(1) Significant Accounting Policies
Consolidation Policy and Basis of Presentation
The condensed consolidated financial statements include the accounts of
Katy Industries, Inc. and subsidiaries in which it has a greater than 50%
interest, collectively "Katy" or "the Company". All significant intercompany
accounts, profits and transactions have been eliminated in consolidation.
Investments in affiliates that are not majority owned and where the Company
exercises significant influence are reported using the equity method. The
condensed consolidated financial statements at September 30, 2003 and December
31, 2002 and for the three and nine month periods ended September 30, 2003 and
2002 are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of the financial condition and results of operations of the
Company. Interim results may not be indicative of results to be realized for the
entire year. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Inventories
The components of inventories are as follows:
September 30, December 31,
2003 2002
---- ----
(Thousands of dollars)
Raw materials $ 19,878 $ 18,733
Work in process 1,614 1,539
Finished goods 43,805 42,264
Inventory reserves (5,772) (5,730)
-------- --------
$ 59,525 $ 56,806
======== ========
At September 30, 2003 and December 31, 2002, approximately 29% and 35%,
respectively, of Katy's inventories were accounted for using the last-in,
first-out ("LIFO") method of costing, while the remaining inventories were
accounted for using the first-in, first-out ("FIFO") method. Current cost, as
determined using the FIFO method, exceeded LIFO cost by $1.6 million and $1.3
million at September 30, 2003 and December 31, 2002, respectively.
Property, Plant and Equipment
As of January 1, 2003, the Company revised its estimate of the useful life
of certain manufacturing assets, specifically molds and tooling equipment used
in the manufacture of plastic products, from seven to five years. This change in
estimate was made following significant impairments to these types of assets
recorded during 2002. This change in estimate resulted in approximately $1.3
million and $4.0 million of incremental depreciation during the three and nine
month periods ended September 30, 2003, respectively, versus the amount that
would have been recorded had the useful life not been changed.
Refer to Note 6 for a discussion on impairments of long-lived assets shown
on the Condensed Consolidated Statements of Operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
143, Accounting for Asset
- 7 -
Retirement Obligations, the Company has recorded an asset and related liability
for retirement obligations associated with returning certain leased properties
to the respective lessors upon the termination of the lease agreements.
Stock Options and Other Stock Awards
The Company follows the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, regarding accounting
for stock options and other stock awards. APB Opinion No. 25 dictates a
measurement date concept in the determination of compensation expense related to
stock awards including stock options, restricted stock, and stock appreciation
rights. Katy's outstanding stock options all have established measurement dates
and therefore, fixed plan accounting is applied, generally resulting in no
compensation expense for stock option awards. However, the Company has issued
stock appreciation rights and restricted stock awards which are accounted for as
variable stock compensation awards and compensation expense has been recorded
for these awards. Compensation expense recorded relative to stock awards was
$6.5 thousand and zero for the three months ended September 30, 2003 and 2002,
respectively. Compensation expense recorded relative to stock awards was $6.5
thousand and $8.0 thousand for the nine months ended September 30, 2003 and
2002, respectively. Compensation expense recorded associated with the vesting of
stock appreciation rights was $0.2 million and zero for the three months ended
September 30, 2003 and 2002, respectively. Compensation expense recorded
associated with the vesting of stock appreciation rights was $0.6 million and
zero for the nine months ended September 30, 2003 and 2002, respectively.
Compensation expense for stock awards and stock appreciation rights is recorded
in selling, general and administrative expenses in the Condensed Consolidated
Statements of Operations.
SFAS No. 123, Accounting for Stock-Based Compensation, was issued and, if
fully adopted by the Company, would change the method for recognition of expense
related to option grants to employees. Under SFAS No. 123, compensation cost
would be recorded based upon the fair value of each option at the date of grant
using an option-pricing model that takes into account as of the grant date the
exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the expected term of the option. Options
granted during the three months ended September 30, 2003 and 2002 were 36,000,
and 275,000, respectively. Options granted during the nine months ended
September 30, 2003 and 2002 were 36,000 and 281,000, 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 an expected life of five to ten
years for all grants. 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).
- 8 -
Three Months Nine Months
nded September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss attributable to common stockholders, as reported $ (3,742) $(23,364) $(10,253) $(42,761)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (103) (92) (294) (172)
-------- -------- -------- --------
Pro forma net loss $ (3,845) $(23,456) $(10,547) $(42,933)
======== ======== ======== ========
Loss per share
Basic and diluted - as reported $ (0.45) $ (2.79) $ (1.23) $ (5.11)
Basic and diluted - pro forma $ (0.47) $ (2.81) $ (1.27) $ (5.13)
(2) Restatement
Katy has restated its unaudited consolidated financial statements to
correct the intraperiod tax allocation between loss from continuing operations,
income from discontinued businesses and gain on sale of discontinued businesses.
This restatement has no effect on the Company's previously reported
balance sheet, cash flow from operations, net sales, operating income, or net
loss attributable to common shareholders (and related per share amounts). The
table below summarizes the effect of the restatement.
(Thousands of dollars except per share data)
Three Months ended Nine Months Ended
September 30, 2003 September 30, 2003
---------------------------- ----------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes $ (11,730) $ (11,730) $ (19,983) $ (19,983)
(Provision) benefit for income taxes (905) 3,196 (1,844) 3,119
----------- ----------- ----------- -----------
Loss from continuing operations $ (12,635) $ (8,534) $ (21,827) $ (16,864)
=========== =========== =========== ===========
Discontinued operations
Income from operations of discontinued businesses $ 736 $ 478 $ 3,201 $ 2,081
Gain on sale of discontinued businesses 11,481 7,638 11,285 7,442
----------- ----------- ----------- -----------
Income from discontinued operations $ 12,217 $ 8,116 $ 14,486 $ 9,523
=========== =========== =========== ===========
Income (loss) per share of common stock - Basic and diluted
Loss from continuing operations attributable to common
stockholders $ (1.93) $ (1.44) $ (2.97) $ (2.38)
Discontinued operations 1.48 0.99 1.74 1.15
----------- ----------- ----------- -----------
$ (0.45) $ (0.45) $ (1.23) $ (1.23)
=========== =========== =========== ===========
(3) New Accounting Pronouncements
In April 2002, the FASB released SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds and makes technical corrections regarding
various topics, including early extinguishments of debt and sale-leaseback
transactions. The statement is effective for fiscal years beginning after May
15, 2002. The Company adopted SFAS No. 145 on January 1, 2003. SFAS No. 145
requires that certain costs and losses associated with early extinguishments of
debt be reported as interest
- 9 -
expense as a component of income from continuing operations, whereas the prior
accounting guidance provided for classification of these costs and losses as
extraordinary items, reported separately on a tax-effected basis after income
from continuing operations. As a result of the refinancing of our borrowing
facility in February 2003, the Company wrote off approximately $1.2 million
(pre-tax) of unamortized debt costs, during the first quarter of 2003. These
costs have been reported as interest expense, a component of income from
continuing operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146
replaces EITF Issue No. 94-3. The new standard is effective for exit or
restructuring activities initiated after December 31, 2002. Katy has initiated
since January 1, 2003 and is further considering a number of restructuring and
exit activities, including plant closings and consolidation of facilities. Since
these activities have been or will be initiated after December 31, 2002, this
statement could have a significant impact on the timing of the recognition of
these costs in the statements of operations, tending to spread the costs out as
opposed to recognition of a large portion of the costs at the time Katy commits
to and communicates such restructuring and exit plans. Katy's operating plans
call for additional restructuring and facility consolidation activity during the
remainder of 2003 and 2004, concerned mainly with further consolidation of St.
Louis, Missouri plastics manufacturing facilities, and restructuring and
consolidation of certain abrasives manufacturing facilities. Katy has adopted
the provisions of SFAS No. 146 for all restructuring activities initiated after
December 31, 2002.
In January 2003, the FASB released FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.
FIN 46 clarifies issues regarding the consolidation of entities which may have
features that make it unclear whether consolidation or equity method accounting
is appropriate. The effective date of FIN 46 has been delayed until the fourth
quarter of 2003 for variable interest entities created prior to February 1,
2003. Katy is currently evaluating FIN 46 to determine any potential impact on
its financial reporting.
In April 2003, the FASB released SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. Katy does not currently use
derivative instruments or participate in hedging activities and therefore, does
not expect SFAS No. 149 to impact its financial reporting. If Katy were to
utilize derivative instruments or participate in hedging activities, it would
follow the provisions of SFAS No. 149.
In May 2003, the FASB released SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity. SFAS No.
150 establishes standards for how certain financial instruments with
characteristics of both liabilities and equity are to be classified and
measured. It requires that certain financial instruments within its scope be
classified as a liability (or an asset in some circumstances), while many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for the third quarter of 2003. Katy has determined that SFAS No. 150
does not impact its financial reporting.
(4) Goodwill and Intangible Assets
During 2002, Katy completed the transition to SFAS No. 142, Goodwill and
Other Intangible Assets. As a result, amortization of goodwill ceased as of
January 1, 2002. There have been no changes to goodwill during the nine months
ended September 30, 2003.
Following is detailed information regarding Katy's intangible assets (in
thousands):
- 10 -
September 30, December 31,
2003 2002
---- ----
Tradenames $ 9,168 $ 9,022
Customer lists 21,887 21,447
Patents 4,793 4,305
Non-compete agreements 1,000 1,000
-------- --------
Subtotal 36,848 35,774
Accumulated amortization (11,860) (10,238)
-------- --------
Intangible assets, net $ 24,988 $ 25,536
======== ========
The increase in gross intangibles from December 31, 2002 to September 30,
2003 can be primarily attributed to tradenames ($0.1 million) and customer lists
($0.4 million) acquired in connection with the purchase of Spraychem (see Note
8), patents purchased ($0.1 million), as well as the impact of exchange rates on
patents ($0.4 million).
Katy recorded the following amounts of amortization expense on intangible
assets: $0.5 million and $0.9 million in the three-month periods ending
September 30, 2003 and 2002, respectively, and $1.6 million and $1.9 million for
the nine-month periods ending September 30, 2003 and 2002, respectively.
Estimated aggregate amortization expense related to intangible assets is
(in thousands):
2003 $2,160
2004 1,794
2005 1,794
2006 1,791
2007 1,786
Intangible 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 of these assets, the carrying value is reduced to the fair
value. The carrying value of goodwill and intangible assets is reviewed by the
Company annually in the fourth quarter in accordance with SFAS No. 142.
(5) Discontinued Operations
Three of Katy's operations have been classified as discontinued operations
as of September 30, 2003, and for all periods shown, in accordance with SFAS No.
144, Accounting for the Impairments or Disposal of Long Lived Assets. The
Company adopted SFAS No. 144 on January 1, 2002.
Duckback Products, Inc. (Duckback) was sold on September 16, 2003, with
Katy collecting net proceeds of $15.8 million (including $1.4 million of net
proceeds received subsequent to September 30, 2003). The proceeds were used to
pay down a portion of the Company's term loans and revolving credit loans. A
gain (net of tax) of $7.6 million was recognized in the third quarter of 2003 as
a result of the Duckback sale (restated - see Note 2).
GC/Waldom Electronics, Inc. (GC/Waldom) was held for sale at December 31,
2002 and was sold on April 2, 2003, with Katy collecting net proceeds of $7.5
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 loans. 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.
Hamilton Precision Metals, L.P. (Hamilton) was sold on October 31, 2002,
with Katy collecting net proceeds of $12.4 million. These proceeds were used
primarily to pay off the remaining balance of the Company's then outstanding
term debt. The Company may receive additional payments dependent upon the
occurrence of certain events associated with Hamilton's financial performance in
2003 and 2004. These contingent amounts have not been recorded as
- 11 -
receivables on the Condensed Consolidated Balance Sheets. A gain (net of tax) of
$3.3 million was recognized in the fourth quarter of 2002 as a result of the
Hamilton sale.
Duckback has historically been presented as part of the Maintenance
Products Group for segment reporting purposes, while both Hamilton and GC/Waldom
have historically been 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 Condensed Consolidated Statements of Operations and the
related assets and liabilities have been separately identified on the Condensed
Consolidated Balance Sheets.
Following is a summary of the major asset and liability categories for the
discontinued operations (in thousands):
September 30, December 31,
2003 2002
------------- ------------
Current assets
Trade accounts receivable, net $ -- $ 2,188
Inventories -- 5,325
Other current assets 2,089 235
------------ ------------
$ 2,089 $ 7,748
============ ============
Non-current assets
Goodwill $ -- $ 668
Intangibles, net -- 2
Net property and equipment -- 3,399
------------ ------------
$ -- $ 4,069
============ ============
Current liabilities
Accounts payable $ 12 $ 1,708
Accrued expenses 749 1,255
------------ ------------
$ 761 $ 2,963
============ ============
Non-current liabilities $ 52 $ --
============ ============
Selected financial data for the discontinued operations is summarized as
follows (restated - see Note 2) (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 3,578 $ 12,006 $ 18,896 $ 39,184
========= ========= ========= =========
Net income, including gain or loss on sale $ 8,116 $ 1,028 $ 9,523 $ 4,575
========= ========= ========= =========
Katy anticipates that SFAS No. 144 will likely continue to have a future
impact on its financial reporting as 1) Katy is considering further divestitures
of certain businesses and exiting of certain facilities and operational
activities, 2) the statement broadens the presentation of discontinued
operations, and 3) the Company anticipates that impairments of long-lived assets
may be necessitated as a result of the above contemplated actions. If certain
divestitures occur, they may qualify as discontinued operations under SFAS No.
144, whereas they would have not met the requirements of discontinued operations
treatment under APB Opinion No. 30. However, the Company does not believe that
it is probable that these divestitures will occur within one year, and notes
that significant changes to plans or intentions may occur. Therefore, these
operations have not presently been classified as discontinued operations.
- 12 -
(6) Impairments of Long-Lived Assets
During the third quarter of 2003, Katy recorded a $3.7 million impairment
charge related to certain assets at its Contico business unit. This charge
included $2.0 million and $1.6 million for idled manufacturing assets at the
Hazelwood, Missouri operation (Hazelwood) and Bridgeton, Missouri facility
(Bridgeton), respectively. In addition, a charge of $0.1 million was recorded at
Contico's now closed Santa Fe Springs, California (Santa Fe Springs) metals
facility. In addition, Katy recorded a $1.2 million impairment related to the
closure of its abrasives facilities in Pineville, North Carolina and Lawrence,
Massachusetts, as well as certain idled assets at its Wrens, Georgia facility.
Also, certain obsolete molds and tooling totaling $0.3 million were written off
at Contico's plastics operation in the United Kingdom.
During the second quarter of 2003, certain manufacturing assets at the
Contico business unit were evaluated and determined to be impaired, resulting in
charges of $1.8 million. These impairments were the result of management's
conclusion that the carrying values of the assets would not be recovered by
future cash flows. The assets are primarily injection molding machines at
Hazelwood.
During the third quarter of 2002, Katy recorded impairments of long-lived
assets of $11.0 million which included impairment charges for certain molds and
tooling at Contico of $7.0 million, a customer list intangible at Contico for
$2.6 million, certain machinery and equipment at the Wilen business unit for
$1.2 million and $0.2 million for equipment at Earth City.
During the second quarter of 2002, the Company recorded an impairment
charge of $2.4 million for machinery and equipment at the Warson Road facility.
(7) Impairment of Equity Method Investment
During the third quarter of 2003, Katy reduced the carrying value of its
43% equity investment in Sahlman Holding Company, Inc. (Sahlman), resulting in a
charge to operations of $5.5 million.
Sahlman is in the business of harvesting shrimp off the coast of South
America, and farming shrimp in Nicaragua. Sahlman's 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 year to date in 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, and therefore a charge of $5.5 million was
recorded to reduce the carrying value of the investment.
(8) Acquisitions
During the second quarter of 2003, Katy's Contico Manufacturing Limited
subsidiary acquired Spraychem, Limited (Spraychem), a United Kingdom distributor
of spray bottles and related products. The purchase price for Spraychem was
approximately $1.2 million, net of cash acquired of $0.3 million. Spraychem's
annual revenues were approximately $2.6 million. In connection with the
acquisition, Katy allocated the purchase price to the acquired net
- 13 -
tangible assets, customer lists and tradenames at their estimated fair values.
Refer to Note 4 for further discussion of intangible assets acquired in
connection with the Spraychem acquisition. The Spraychem acquisition is not
material for presentation of pro forma information.
(9) Sale of Assets
During the first quarter of 2003, Katy's Woods Industries, Inc. (Woods
U.S.) subsidiary sold its wire fabrication facility in Moorseville, Indiana
(Moorseville). The assets sold consisted of land, building and equipment. The
sale of the Moorseville facility followed the shut down by Woods U.S. in
December 2002 of all manufacturing facilities in the U.S. Gross proceeds from
the sale were $1.9 million. Proceeds were used to pay off a $0.7 million
mortgage debt payable on the Moorseville property, with the remainder reducing
Katy's outstanding debt obligations. Katy recognized a gain on the sale of $0.8
million.
During the third quarter of 2003, Katy's Woods Industries (Canada), Inc.
subsidiary (Woods Canada) sold real estate for proceeds of $0.1 million.
Proceeds were used to further reduce outstanding debt obligations. Katy
recognized a loss on the sale of $0.2 million.
(10) SESCO Partnership
On April 29, 2002, Katy and SESCO, an indirect wholly owned subsidiary,
entered into a partnership agreement with Montenay Power Corporation and its
affiliates (Montenay) that turned over the operation of SESCO's waste-to-energy
facility to the partnership. The Company entered into this agreement as a result
of evaluations of SESCO's business. First, Katy determined that SESCO was not a
core component of the Company's long-term business strategy. Moreover, Katy did
not feel it had the management expertise to deal with certain risks and
uncertainties presented by the operation of SESCO's business, given that SESCO
was the Company's only waste-to-energy facility. Katy had explored options for
divesting SESCO for a number of years, and management felt that this transaction
offered a reasonable strategy to exit this business.
The partnership, with Montenay's leadership, assumed SESCO's position in
various contracts relating to the facility's operation. Under the 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
will maintain a 99% interest as a limited partner, Montenay will have most of
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 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 payments of $1.0 million and $0.8 million in July 2003
and 2002, respectively, on the $6.6 million note. The table below schedules the
remaining payments as of September 30, 2003 which are reflected in accrued
expenses and other liabilities in the Condensed Consolidated Balance Sheet (in
thousands):
2004 $ 1,000
2005 1,050
2006 1,100
2007 1,100
2008 550
-------
$ 4,800
=======
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
- 14 -
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 September 30, 2003, this amount was $35.8 million. Accordingly,
the amounts owed to and due from SESCO have been netted for financial reporting
purposes and are not shown on the Condensed Consolidated Balance Sheet.
In addition to SESCO retaining its liabilities under the loan agreement,
to induce the required parties to consent to the partnership transaction, Katy
also continues to guarantee the obligations of the partnership under the service
agreement. The partnership is liable for liquidated damages under the service
agreement if it fails to accept the minimum amount of waste or to meet other
performance standards under the service agreement. The liquidated damages, an
off balance sheet risk for Katy, are equal to the amount of the 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) as of September 30, 2003 (in thousands):
2003 $ 5,385
2004 6,765
2005 8,370
2006 15,300
--------
Total $ 35,820
========
(11) Indebtedness
On February 3, 2003, the Company refinanced its indebtedness (the
Refinancing) and entered into a new credit facility agented by Fleet Capital
Corporation (the Fleet Credit Agreement). The new $110 million facility, which
is comprised of a $20 million term loan (Term Loan) and $90 million of revolving
credit (Revolving Credit Facility), involves a syndicate of banks, all of whom
had participated in the credit facility that was refinanced (the Deutsche Bank
Credit Agreement). The Fleet Credit Agreement is an asset-based lending
agreement, and is generally on similar terms to those found in the Deutsche Bank
Credit Agreement.
Below is a summary of the sources and uses associated with the funding of
the Fleet Credit Agreement (in thousands):
- 15 -
Sources:
Term borrowings under the Fleet Credit Agreement $ 20,000
Revolving borrowings under the Fleet Credit Agreement 43,743
---------
$ 63,743
=========
Uses:
Payment of principal and interest under the Deutsche Bank Credit Agreement $ 52,895
Purchase of the remaining preferred interest of subsidiary at a discount 9,840
Payment of accrued distributions on one-half of preferred interest of subsidiary 122
Certain costs associated with the Fleet Credit Agreement 886
---------
$ 63,743
=========
Under the Fleet Credit Agreement, the Term Loan originally had a final
maturity date of February 3, 2008 and quarterly repayments of $0.7 million, two
of which have been made to date. However, the net proceeds received from the
GC/Waldom and Duckback sales were used to prepay the Term Loan, which is now
scheduled to be repaid in its entirety by 2005. The Term Loan is collateralized
by the Company's property, plant and equipment. The Revolving Credit Facility
has an expiration date of February 3, 2008. The borrowing base of the Revolving
Credit Facility is determined by eligible inventory and accounts receivable.
Unused borrowing availability on the Revolving Credit Facility of $37.3
million at September 30, 2003 was temporarily higher due to the application of
proceeds from the Duckback sale (see below). In accordance with the Fleet Credit
Agreement, the net proceeds from an asset sale are first used to pay down the
Term Loan to the extent of Term Loan collateral (real estate and equipment)
sold, then proceeds are applied to the Revolving Credit Facility to the extent
of Revolving Credit collateral (accounts receivable and inventory) sold, and
subsequently to pay down the Term Loan (to the extent of the outstanding Term
Loan) and finally to the Revolving Credit Facility until all proceeds are
applied. In connection with the Duckback sale, all of the net proceeds were
initially used to pay down the Revolving Credit Facility as there was
uncertainty (pending finalization of a balance sheet as of the date of the sale)
as to the amount of underlying Revolving Credit collateral sold. Subsequent to
September 30, 2003, based on the process for applying proceeds, the Term Loan
was reduced by $11.9 million by funding received from the Revolving Credit
Facility. Had the net proceeds been applied to the Term Loan on or before
September 30, 2003, unused borrowing availability would have been $25.4 million
at September 30, 2003.
All extensions of credit under the Fleet Credit Agreement are
collateralized by a first priority perfected security interest in and lien upon
the capital stock of each material domestic subsidiary (65% of the capital stock
of each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions apply under
the Fleet Credit Agreement, with which the Company was in compliance at
September 30, 2003. Until June 30, 2003, interest accrued on Revolving Credit
Facility borrowings at 225 basis points over applicable LIBOR rates and at 250
basis points over LIBOR for Term Loan borrowings. Subsequent to June 30, 2003,
and in accordance with the terms of the Fleet Credit Agreement, margins dropped
an additional 25 basis points for both revolving and term loans based on the
achievement of a financial covenant target. Interest accrues at higher margins
on prime rates for swing loans, the amounts of which were nominal as of
September 30, 2003.
As a result of the Refinancing, Katy's borrowing capacity was reduced from
$140 million under the Deutsche Bank Credit Agreement to $110 million under the
Fleet Credit Agreement, a reduction of 21%. Therefore, proportionate shares of
previously capitalized debt costs, amounting to approximately $1.2 million, were
written off to interest expense during the first quarter of 2003. The remainder
of the previously capitalized costs, along with the newly capitalized costs from
the Fleet Credit Agreement of $1.5 million, is being amortized over the life of
the Fleet Credit Agreement through January 2008.
Long-term debt consists of the following:
- 16 -
September 30, December 31,
2003 2002
------------- ------------
(Thousands of Dollars)
Term loan payable under Fleet Credit Agreement, interest based on
LIBOR and Prime Rates (3.38% - 5.00%), due through 2008 $ 16,381 $ --
Revolving loans payable under Fleet Credit Agreement, interest based on
LIBOR and Prime Rates (3.13 - 5.00%) 35,088 --
Revolving loans payable under Deutsche Bank Credit Agreement, interest
based on Eurodollar and Prime Rates (3.75 - 5.50%) -- 44,751
Real estate and chattel mortgages, with interest at fixed rates (7.14%),
due through 2003 -- 700
-------- --------
Total debt 51,469 45,451
Less revolving loans, classified as current (see below) (35,088) (44,751)
Less current maturities (14,741) (700)
-------- --------
Long-term debt $ 1,640 $ --
======== ========
Aggregate remaining scheduled maturities of the Term Loan as of September
30, 2003 (see discussion of borrowing availability above) are as follows (in
thousands):
2003 $12,598
2004 2,857
2005 926
The Revolving Credit Facility under the Fleet 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 Fleet Credit Agreement, cause the
Revolving Credit Facility to be classified as a current liability, per guidance
in the Emerging Issues Task Force (EITF) Issue No. 95-22, Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that
Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement.
However, the Company does not expect to repay, or be required to repay, within
one year, the balance of the Revolving Credit Facility classified as a current
liability. The MAE clause, which is a fairly typical requirement in commercial
credit agreements, allows the lender to require the loan to become due if it
determines there has been a material adverse effect on its operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the Revolving Credit Facility as a current liability is a result only of the
combination of the two aforementioned factors: the lockbox agreements and the
MAE clause. The Revolving Credit Facility does not expire or have a maturity
date within one year, but rather has a final expiration date of January 31,
2008. Also, the Company was in compliance with the applicable financial
covenants at September 30, 2003. The lender had not notified Katy of any
indication of a MAE at September 30, 2003, and to management's knowledge, the
Company was not in violation of any provision of the Fleet Credit Agreement at
September 30, 2003.
(12) Preferred Interest in Subsidiary
Coincident with the refinancing of Katy's debt obligations discussed in
Note 11, the Company redeemed early, at a discount, the remaining preferred
interest in Contico, plus accrued distributions thereon, which had a stated
value of $16.4 million. Katy utilized approximately $10.0 million of the
proceeds from the Fleet Credit Agreement for this purpose, with $9.8 million
applied toward the preferred interest and the remainder applied toward accrued
distributions through the date of the redemption. The difference between the
amount paid on redemption and the stated value of preferred interest redeemed
($6.6 million pre-tax) was recognized as an increase to stockholders' equity on
the Condensed Consolidated Balance Sheets, and is an addition to earnings
available to common stockholders in the calculation of basic earnings per share
during 2003.
- 17 -
(13) Income Taxes
As of December 31, 2002, the Company had deferred tax assets, net of
deferred tax liabilities, of $42.8 million. Domestic net operating loss (NOL)
carry forwards comprised $22.8 million of the deferred tax assets. Katy's
history of operating losses provides significant negative evidence with respect
to the Company's ability to generate future taxable income, a requirement in
order to recognize deferred tax assets on the Condensed Consolidated Balance
Sheets. For this reason, the Company was unable at September 30, 2003 and
December 31, 2002 to conclude that NOLs and other deferred tax assets would be
utilized in the future. As a result, valuation allowances were recorded as of
such dates for the full amount of deferred tax assets, net of the amount of
deferred tax liabilities.
The provision for income taxes reflected on the Condensed Consolidated
Statements of Operations for the three months and nine months ended September
30, 2003 and 2002 represents current tax expense associated with state and
foreign taxes.
(14) Commitments and Contingencies
As set forth more fully in the Company's 2002 Annual Report on Form 10-K,
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 (EPA), state environmental agencies and
private parties as potentially responsible parties (PRPs) at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. Based on its estimate of allocation of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent,
public companies, will fully pay the costs apportioned to them, currently
available information concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company has
recorded and accrued for indicated environmental liabilities amounts that it
deems reasonable and believes that any liability with respect to these matters
in excess of the accruals will not be material. The ultimate costs will depend
on a number of factors and the amount currently accrued represents management's
best current estimate of the total costs to be incurred. The Company expects
this amount to be substantially paid over the next one to four years.
The most significant environmental matter in which the Company is
currently involved relates to the W.J. Smith site. In 1993, the EPA initiated a
Unilateral Administrative Order Proceeding under Section 7003 of the Resource
Conservation and Recovery Act (RCRA) against W.J. Smith and Katy. The proceeding
requires certain actions at the W.J. Smith site and certain off-site areas, as
well as development and implementation of additional cleanup activities to
mitigate off-site releases. In December 1995, W.J. Smith, Katy and the EPA
agreed to resolve the proceeding through an Administrative Order on Consent
under Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is currently
implementing a cleanup to mitigate off-site releases.
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of Katy, and against certain past and
then-present officers and directors and former owners of Woods, alleging that
the defendants participated in a violation of the Racketeer Influenced and
Corrupt Organizations (RICO) Act involving allegedly fraudulently obtained loans
from Mexican banks, including the plaintiff, and "money laundering" of the
proceeds of the illegal enterprise. All of the foregoing is alleged to have
occurred prior to Katy's purchase of Woods. The plaintiff also alleged that it
made loans to an entity controlled by certain past officers and directors of
Woods based upon fraudulent representations. The plaintiff seeks to hold Woods
liable for its alleged damages directly, and under principles of respondeat
superior and successor liability. The plaintiff is claiming damages in excess of
$24.0 million and is requesting treble damages under RICO. Because certain
threshold procedural and jurisdictional issues have not yet been fully
adjudicated in this litigation, it is not possible at this time for the Company
to reasonably determine an outcome or accurately estimate the range of potential
exposure. Katy may have recourse against the former owner of Woods and others
for, among other things, violations of covenants, representations and warranties
under the purchase agreement through which Katy acquired Woods, and under state,
federal and common law. In addition, the purchase
- 18 -
price under the purchase agreement may be subject to adjustment as a result of
the claims made by Banco del Atlantico or other issues relating to the
litigation. The extent or limit of any such adjustment cannot be predicted at
this time. An adverse judgment in this matter could have a material impact on
Katy's liquidity and financial position if the Company were not able to exercise
recourse against the former owner of Woods.
Katy also has a number of product liability and workers' compensation
claims pending against it and its subsidiaries. Many of these claims are
proceeding through the litigation process and the final outcome will not be
known until a settlement is reached with the claimant or the case is
adjudicated. The Company estimates that it can take up to 10 years from the date
of the injury to reach a final outcome on certain claims. With respect to the
product liability and workers' compensation claims, Katy has provided for its
share of expected losses beyond the applicable insurance coverage, including
those incurred but not reported to the Company or its insurance providers, which
are developed using actuarial techniques. Such accruals are developed using
currently available claim information, and represent management's best
estimates. The ultimate cost of any individual claim can vary based upon, among
other factors, the nature of the injury, the duration of the disability period,
the length of the claim period, the jurisdiction of the claim and the nature of
the final outcome.
Since 1998, Woods Canada has used the NOMA 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, the trademark license
agreement is no longer in effect. Woods Canada is in discussions with Gentek to
enter into a new trademark license agreement. However, there is no guarantee
that a new license agreement with Gentek will be reached, in which case Woods
Canada would lose the right to brand certain of its product with the NOMA
trademark. Approximately 45% of Woods Canada's sales are of NOMA - branded
products. Should it lose the right to use the NOMA trademark, Woods Canada would
seek to replace those sales with sales of other products. However, there is no
guarantee that Woods Canada will be able to replace the lost sales of NOMA -
branded products.
Although management believes that these actions individually and in the
aggregate are not likely to have a material adverse effect on the Company's
financial position, results of operations or cash flows, further costs could be
significant and will be recorded as a charge to operations when such costs
become probable and reasonably estimable.
(15) Stock Repurchase Program
On April 20, 2003, the Company announced a plan to spend up to $5.0
million to repurchase shares of its common stock. As of September 30, 2003, the
Company had spent $1.4 million in acquiring 289,100 shares in accordance with
the plan.
(16) Industry Segment Information
The Company is a manufacturer and distributor of a variety of industrial
and consumer products, including sanitary maintenance supplies, coated
abrasives, and electrical components. Principal markets are the United States,
Canada and Europe, and include the sanitary maintenance, restaurant supply,
retail, electronic and automotive markets. These activities are grouped into two
industry segments: Electrical Products and Maintenance Products.
The following table sets forth information by segment:
- 19 -
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Thousands of dollars) (Thousands of dollars)
Maintenance Products Group
Net external sales $ 72,403 $ 78,641 $ 213,509 $ 227,655
Operating loss (5,984) (16,499) (6,286) (17,287)
Operating deficit (8.3%) (21.0%) (2.9%) (7.6%)
Severance, restructuring and related charges 2,676 9,134 4,013 12,275
Impairments of long-lived assets 5,255 10,986 7,055 13,380
Depreciation and amortization 5,245 4,784 15,111 14,211
Capital expenditures 2,212 1,303 6,580 7,132
Electrical Products Group
Net external sales $ 53,498 $ 55,784 $ 104,305 $ 106,289
Operating income 4,939 4,495 6,409 2,492
Operating margin 9.2% 8.1% 6.1% 2.3%
Severance, restructuring and related charges 1,179 278 1,404 2,707
Depreciation and amortization 331 404 893 1,074
Capital expenditures 155 319 432 541
Total
Net external sales - Operating segments $ 125,901 $ 134,425 $ 317,814 $ 333,944
- Other [a] -- (24) -- 1,177
--------- --------- --------- ---------
Total $ 125,901 $ 134,401 $ 317,814 $ 335,121
========= ========= ========= =========
Operating income (loss) - Operating segments $ (1,045) $ (12,004) $ 123 $ (14,795)
- Other [a] -- (283) -- (6,979)
- Unallocated corporate (3,468) (2,637) (10,124) (7,052)
--------- --------- --------- ---------
Total $ (4,513) $ (14,924) $ (10,001) $ (28,826)
========= ========= ========= =========
Severance, restructuring and related charges - Operating segments $ 3,855 $ 9,412 $ 5,417 $ 14,982
- Unallocated corporate 16 74 395 585
--------- --------- --------- ---------
Total $ 3,871 $ 9,486 $ 5,812 $ 15,567
========= ========= ========= =========
Impairments of long-lived assets - Operating segments $ 5,255 $ 10,986 $ 7,055 $ 13,380
--------- --------- --------- ---------
Total $ 5,255 $ 10,986 $ 7,055 $ 13,380
========= ========= ========= =========
Depreciation and amortization - Operating segments $ 5,576 $ 5,188 $ 16,004 $ 15,285
- Unallocated corporate (200) 33 527 111
--------- --------- --------- ---------
Total $ 5,376 $ 5,221 $ 16,531 $ 15,396
========= ========= ========= =========
Capital expenditures - Operating segments $ 2,367 $ 1,622 $ 7,012 $ 7,673
- Unallocated corporate -- 20 14 154
- Discontinued operations 28 95 111 406
--------- --------- --------- ---------
Total $ 2,395 $ 1,737 $ 7,137 $ 8,233
========= ========= ========= =========
September 30, December 31,
2003 2002
------------- ------------
Total assets - Maintenance Products Group $ 180,616 $ 195,121
- Electrical Products Group 62,952 48,228
- Other [a] 1,624 7,626
- Unallocated corporate 12,106 13,188
- Discontinued operations 2,089 11,814
--------- ---------
Total $ 259,387 $ 275,977
========= =========
[a] Amounts shown as "Other" represent items associated with the SESCO
partnership and an equity investment in a shrimp harvesting and farming
operation.
- 20 -
(17) Severance, Restructuring and Related Charges
During the third quarter of 2003, the Company recorded $3.9 million for
severance, restructuring and related charges. Such charges include $2.0 million
related to the establishment of and adjustments to non-cancelable lease
liabilities for abandoned facilities, primarily as a result of the consolidation
of the facilities at the Contico business unit. Katy also recorded severance
costs of $1.1 million related to the announced closure of the Woods Canada
manufacturing facility in Toronto. Manufacturing operations will cease in the
fourth quarter of 2003, as Katy will implement a third-party sourcing plan
similar to that implemented at the Woods U.S. operation in the fourth quarter of
2002. As a result of the shut down, approximately 100 employees will be
terminated. In addition, Katy incurred costs of $0.7 million associated with the
consolidation efforts at Contico, including severance and moving inventory and
equipment. Katy also recorded charges of $0.1 million associated with the
restructuring of its abrasives business.
During the first and second quarters of 2003, the Company recorded $0.2
million and $1.7 million, respectively, for severance, restructuring and related
charges. These costs related to equipment moves, adjustments to non-cancelable
lease liabilities for abandoned facilities, severance, and related charges
associated with consolidation of facilities and administrative functions.
Included in these costs were severance charges related to five administrative
and fifteen operations employees at Contico's Santa Fe Springs facility. Costs
were also incurred related to plastics manufacturing facilities at Warson Road,
and the abrasives manufacturing facility in Wrens, Georgia (Wrens).
During the fourth quarter of 2002, the Company recorded $2.4 million of
severance and other exit costs associated with the shut down of the Woods
manufacturing facilities in Indiana. Manufacturing operations were ceased in
order to implement a more cost-effective procurement of finished goods inventory
through sourcing with third party suppliers. As a result of this shut down, 361
employees were terminated. Woods incurred $1.5 million in severance, pension,
and other employee-related costs associated with the employee terminations.
Woods also incurred a charge for the creation of a liability for non-cancelable
lease costs at abandoned production facilities of $0.8 million. An additional
$0.1 million of other exit costs were incurred related to facility repairs and
other minor expenses. Woods also incurred $0.9 million of inventory write-offs
related to raw and packaging materials that will not be utilized efficiently
with the change-over to a fully sourced inventory strategy. Contico incurred
restructuring costs of $0.6 million in the fourth quarter of 2002 associated
with costs of revaluing their non-cancelable lease liability at the Warson Road
and Earth City, Missouri (Earth City) facilities, and $0.3 million of costs in
moving inventory and equipment from the Warson Road facility to the Bridgeton
facility, as discussed below. Each of these facilities is in the St. Louis,
Missouri area.
During the third quarter of 2002, the Company recorded $9.5 million of
severance, restructuring and related charges. During the third quarter, the
Company committed to a plan to abandon the Earth City facility and to
consolidate its operations into the Bridgeton facility. As a result, a $7.1
million charge was recorded to accrue a liability for non-cancelable lease
payments associated with the Earth City facility. Also during the third quarter,
the Contico business recorded a $1.4 million charge related to rent and other
facility costs associated with its Warson Road facility, whose operations are
also being consolidated into the Bridgeton facility. A charge of $1.8 million
was recorded in the second quarter of 2002 for the Warson Road facility, and the
additional amount of $1.4 million was recorded after consideration of the market
for sub-leasing and to accrue costs to refurbish the facility. The Contico
business recorded related charges of $0.2 million incurred in moving inventory
and equipment from the Warson Road facility to the Bridgeton facility, and $0.2
million in severance costs. The Corporate group recorded a $0.1 million charge
for non-cancelable lease payments related to the former corporate headquarters.
Also in the third quarter of 2002, a charge of $0.5 million was recorded for
payments for consultants working with the Company on sourcing and other
manufacturing and production efficiency initiatives.
During the second quarter of 2002, the Company recorded $3.8 million of
severance, restructuring and related charges. Approximately $1.6 million of the
charges related to accruals for payments for consultants working with the
Company on sourcing and other manufacturing and production efficiency
initiatives. Additionally, net non-cancelable rental payments of $1.8 million
associated with the shut down of Contico's Warson Road facility were charged to
operations, as well as involuntary termination benefits of $0.1 million. The
Warson Road facility shutdown involved a reduction in workforce of nineteen
employees. The remaining $0.3 million (for involuntary termination benefits)
related to SESCO and for various integration costs in the consolidation of
administrative functions into St. Louis, Missouri, from various operating
divisions in the Maintenance Products group.
- 21 -
During the first quarter of 2002, the Company recorded $2.3 million of
severance, restructuring and related charges. Approximately $1.9 million of the
charges related to accruals for payments for consultants working with the
Company on sourcing and other manufacturing and production efficiency
initiatives. Approximately $0.3 million related to involuntary termination
benefits for two management employees whose positions were eliminated, and $0.1
million were costs associated with the consolidation of administrative and
operational functions.
Certain assumptions have been made regarding potential future sub-lease
revenue at rented facilities that have been, or will be, abandoned as a result
of restructuring and consolidation activities. If the Company is unable to
achieve its estimated sub-lease revenue estimates, charges could be recognized
in future periods to update the estimated liability and cost to Katy for these
facilities.
The table below details activity in restructuring reserves since December
31, 2002 (in thousands).
One-time Contract
Termination Termination
Total Benefits [a] Costs [b] Other [c]
-------- ------------ --------- ---------
Restructuring liabilities at December 31, 2002 $ 14,499 $ 2,085 $ 10,885 $ 1,529
Additions to restructuring liabilities 5,812 2,230 2,538 1,044
Payments on restructuring liabilities (12,010) (2,818) (6,708) (2,484)
-------- -------- -------- --------
Restructuring liabilities at September 30, 2003 $ 8,301 $ 1,497 $ 6,715 $ 89
======== ======== ======== ========
The table below summarizes the remaining future obligations for severance
and restructuring charges detailed above as of September 30, 2003 (in
thousands):
2003 $ 2,054
2004 3,350
2005 1,469
2006 668
2007 380
Thereafter 380
----------
Total Payments $ 8,301
==========
[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 potential 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
- 22 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 versus Three Months Ended September 30,
2002
The table below and the narrative that follows summarize the key factors
in the year-to-year changes in operating results.
Three months ended September 30, Percentage
2003 2002 Variance
---- ---- --------
(Thousands of dollars)
Maintenance Products Group [a]
Net external sales $ 72,403 $ 78,641 (7.9%)
Operating loss (5,984) (16,499) 63.7%
Operating deficit (8.3%) (21.0%) N/A
Severance, restructuring and related charges 2,676 9,134 (70.7%)
Impairments of long-lived assets 5,255 10,986 (52.2%)
Depreciation and amortization 5,245 4,784 9.6%
Capital expenditures 2,212 1,303 69.8%
Electrical Products Group [b]
Net external sales $ 53,498 $ 55,784 (4.1%)
Operating income 4,939 4,495 9.9%
Operating margin 9.2% 8.1% N/A
Severance, restructuring and related charges 1,179 278 324.1%
Depreciation and amortization 331 404 (18.1%)
Capital expenditures 155 319 (51.4%)
Total Company [c]
Net external sales [d] $ 125,901 $ 134,401 (6.3%)
Operating loss [d] (4,513) (14,924) 69.8%
Operating deficit [d] (3.6%) (11.1%) N/A
Severance, restructuring and related charges 3,871 9,486 (59.2%)
Impairments of long-lived assets [d] 5,255 10,986 (52.2%)
Depreciation and amortization [d] 5,376 5,221 3.0%
Capital expenditures [e] 2,395 1,737 37.9%
September 30, December 31, Percentage
2003 2002 Variance
---- ---- --------
Total assets
Maintenance Products Group $ 180,616 $ 195,121 (7.4%)
Electrical Products Group 62,952 48,228 30.5%
Corporate, other and discontinued operations 15,819 32,628 (51.5%)
--------- ---------
$ 259,387 $ 275,977 (6.0%)
========= =========
[a] Includes Contico, Continental Manufacturing, Contico U.K., Disco, Gemtex,
Glit/Mictrotron, Loren Products, and Wilen Products.
[b] Includes Woods U.S. and Woods Canada.
- 23 -
[c] Included in "Total Company" are certain amounts in addition to those shown
for the Maintenance Products and Electrical Products segments, including amounts
associated with 1) unallocated corporate expenses, 2) our equity investment in a
shrimp harvesting and farming operation, and 3) our waste-to-energy facility
(SESCO). See Note 16 to the Condensed Consolidated Financial Statements for
detailed reconciliations of segment information to the Consolidated Financial
Statements.
[d] Excludes 2002 transitional goodwill impairment charges of $2.6 million in
the Maintenance Products group and $1.6 million in the Electrical Products
group.
[e] Includes discontinued operations.
Sales in the Maintenance Products group decreased from $78.6 million to
$72.4 million, a decrease of $6.2 million or 7.9%. The most significant sales
shortfalls to prior year were realized at Contico's metal truck box and consumer
plastic businesses, principally due to the loss of certain business at a major
retail customer. Sales were also lower at Contico's janitorial/sanitation
plastics (Jan/San) business, as we believe that this business continues to be
impacted by the slow economy and reduced demand for cleaning products, due to
commercial real estate vacancy rates and reduced demand in the travel and
hospitality industries. In addition, sales were lower at the Gemtex business
unit, which sells abrasive products mainly to industrial customers, primarily
due to increased foreign competition.
The Maintenance Products group's operating results improved from an
operating loss of ($16.5) million in the third quarter of 2002 to an operating
loss of ($6.0) million in the third quarter of 2003, a difference of 63.7%.
Operating loss was impacted in both years by severance, restructuring and
related charges, as well as by impairments of long-lived assets. Excluding these
items, operating income decreased by $1.7 million, or 46.5%. Results were
negatively impacted by the reduction in volumes at Contico's metal truck box,
consumer plastics and Jan/San businesses, as well as rising resin costs and
isolated manufacturing inefficiencies. In addition, operating results were
negatively impacted by $1.3 million of incremental depreciation related to the
revision of the estimated useful lives of certain manufacturing assets related
to plastic products. Results were positively impacted at both the consumer and
Jan/San businesses of Contico in the U.S. from the implementation of cost
reduction strategies.
The Maintenance Products group recorded severance, restructuring and
related charges of $2.7 million during the third quarter of 2003 and $9.1
million during the third quarter of 2002. The costs in the third quarter of 2003
were related primarily to the establishment of and adjustments to non-cancelable
lease liabilities for abandoned facilities ($1.9 million), costs associated with
the consolidation efforts at Contico, including severance and moving inventory
and equipment ($0.7 million), and charges associated with the restructuring of
its abrasives business ($0.1 million). The 2002 costs consisted primarily of net
non-cancelable lease rentals and severance related to the Warson Road facility,
as well as consultant fees associated with the company-wide sourcing project,
and integration costs associated with consolidation of administrative functions.
During the third quarter of 2003, the group also recorded impairments of
long-lived assets of $5.3 million, and included $3.7 million of idle and
obsolete equipment and leasehold improvements at Warson Road, Hazelwood and
Bridgeton, $1.2 million related to the closure of abrasives facilities in
Lawrence, Massachusetts and Pineville, North Carolina and the subsequent
consolidation into the Wrens facility, and $0.3 million of obsolete molds and
tooling at Contico's plastics operation in the United Kingdom. The group
recorded impairments of long-lived assets of $11.0 million during the third
quarter of 2002, which included impairment charges of $7.0 million for certain
molds and tooling at Contico, a customer list intangible at Contico for $2.6
million, certain machinery and equipment at the Wilen Products business unit for
$1.2 million and $0.2 million for equipment at Earth City.
Sales in the Electrical Products group decreased from $55.8 million to
$53.5 million, a decline of 4.1%. The decrease was primarily attributable to
lower sales at Woods U.S. as a result of an usually strong third quarter in
2002. The 2002 sales benefited from a significant restocking of inventory at a
major retail outlet consumer.
The Electrical Products group's operating income improved from $4.5
million in the third quarter of 2002 to $4.9 million in the third quarter of
2003, an increase of 9.9%. Operating income was impacted in both years by
severance, restructuring and related charges. Excluding these items, operating
income increased by $1.3 million, or 28.2%. Operating income was higher at both
Woods U.S. and Woods Canada. Cost reduction strategies implemented, which have
focused on increased sourcing of product from third party manufacturers, have
reduced the cost structures of both businesses, thereby improving margins and
profitability.
The Electrical Products group recorded severance, restructuring and
related charges of $1.2 million in the third
- 24 -
quarter of 2003 and $0.3 million in the third quarter of 2002. The 2003 costs
relate primarily to severance for Woods Canada in connection with the announced
shutdown of their manufacturing facility in the fourth quarter of 2003. For
2002, these charges consisted of consulting fees incurred by both Woods U.S. and
Woods Canada related to the third party manufacturer sourcing project that has
been largely completed.
Equity in income of equity method investment was lower by $5.4 million
almost entirely due to the write down of the Sahlman joint venture. See further
discussion relating to the financial results of Sahlman in Note 7 to the
Condensed Consolidated Financial Statements.
Interest expense decreased from $1.8 million in the third quarter of 2002
to $1.1 million in the third quarter of 2003. The decrease is due mainly to
lower average borrowings and to a lesser extent, lower interest rates. Other,
net was unfavorable primarily as a result of expenses associated with the
attempt to sell the Woods businesses and a loss on the sale of real estate at an
idle facility in Canada in the current year quarter.
Total Company assets between December 31, 2002 and September 30, 2003 were
impacted primarily by reductions in assets of discontinued operations, which
were reduced from $11.8 million to $2.1 million. The reduction in discontinued
operations assets is due to the assets of GC/Waldom and Duckback being included
in assets of discontinued operations at December 31, 2002, but excluded at
September 30, 2003 due to the sale of those businesses in 2003 (see Note 5 to
the Condensed Consolidated Financial Statements). In addition, assets are lower
at September 30, 2003, primarily due to impairments of property and equipment of
$7.1 million and the write down of the investment of Sahlman of $5.5 million.
- 25 -
Nine Months Ended September 30, 2003 versus Nine Months Ended September 30, 2002
The table below and the narrative that follows summarize the key factors
in the year-to-year changes in operating results.
Nine months ended September 30, Percentage
2003 2002 Variance
---- ---- --------
(Thousands of dollars)
Maintenance Products Group [a]
Net external sales $ 213,509 $ 227,655 (6.2%)
Operating loss (6,286) (17,287) (63.6%)
Operating deficit (2.9%) (7.6%) N/A
Severance, restructuring and related charges 4,013 12,275 (67.3%)
Impairments of long-lived assets 7,055 13,380 (47.3%)
Depreciation and amortization 15,111 14,211 6.3%
Capital expenditures 6,580 7,132 (7.7%)
Electrical Products Group [b]
Net external sales $ 104,305 $ 106,289 (1.9%)
Operating income 6,409 2,492 157.2%
Operating margin 6.1% 2.3% N/A
Severance, restructuring and related charges 1,404 2,707 (48.1%)
Depreciation and amortization 893 1,074 (16.9%)
Capital expenditures 432 541 (20.1%)
Total Company [c]
Net external sales [d] $ 317,814 $ 335,121 (5.2%)
Operating loss [d] (10,001) (28,826) (65.3%)
Operating deficit [d] (3.1%) (8.6%) N/A
Severance, restructuring and related charges 5,812 15,567 (62.7%)
Impairments of long-lived assets [d] 7,055 13,380 (47.3%)
Depreciation and amortization [d] 16,531 15,396 7.4%
Capital expenditures [e] 7,137 8,233 (13.3%)
[a] Includes Contico, Continental Manufacturing, Contico U.K., Disco, Gemtex,
Glit/Mictrotron, Loren Products, and Wilen Products.
[b] Includes Woods U.S. and Woods Canada.
[c] Included in "Total Company" are certain amounts in addition to those shown
for the Maintenance Products and Electrical Products segments, including amounts
associated with 1) unallocated corporate expenses, 2) our equity investment in a
shrimp harvesting and farming operation, and 3) our waste-to-energy facility
(SESCO). See Note 16 to Condensed Consolidated Financial Statements for detailed
reconciliations of segment information to the Consolidated Financial Statements.
[d] Excludes 2002 transitional goodwill impairment charges of $2.6 million in
the Maintenance Products group and $1.6 million in the Electrical Products
group.
[e] Includes discontinued operations.
Sales in the Maintenance Products group decreased from $227.7 million to
$213.5 million, a decrease of $14.2 million or 6.2%. The most significant sales
shortfalls to the prior year were realized in the businesses that sell to
commercial customers, including Contico's Jan/San business. We believe that this
business continues to be impacted by the slow economy and reduced demand for
cleaning products, due to commercial real estate vacancy rates and reduced
demand in the travel and hospitality industries. Sales were lower at Contico's
metal truck box and consumer plastics businesses due to the loss of certain
business at a major outlet customer. Sales were also lower at the Loren Products
- 26 -
division, primarily because a major customer increased their supplier base in
2003. Sales were also lower at Gemtex, primarily due increased foreign
competition.
The Maintenance Products group's operating results improved from a loss of
$17.3 million for the nine months ended September 30, 2002 to a loss of $6.3
million for the nine months ended September 30, 2003, a change of 63.6%.
Operating results were impacted in each year by severance, restructuring and
related charges, as well as the impairment of long-lived assets. Excluding these
items, operating loss decreased by $3.6 million, or 42.9%. Profitability was
lower at Contico's metal truck box business, Loren and Gemtex due to
volume-related issues, while the Contico consumer plastic business in the U.S.
and in the U.K. was negatively impacted by top-line pricing pressures, an
unfavorable mix of lower margin products and rising resin costs. These
shortfalls were partially offset by improved results at the Contico Jan/San
business which benefited from the implementation of cost reduction strategies.
In addition, operating results were negatively impacted by $4.0 million of
incremental depreciation related to the revision of the estimated useful lives
of certain manufacturing assets related to plastic products.
The Maintenance Products group recorded severance, restructuring and
related charges of $4.0 million during the nine months ended September 30, 2003,
and $12.3 million during the nine months ended September 30, 2002. The 2003
costs related primarily to the establishment of and adjustments to
non-cancelable lease liabilities for abandoned facilities ($2.4 million), costs
associated with the consolidation efforts at Contico, including severance and
moving inventory and equipment ($1.1 million) and charges associated with the
restructuring of the abrasives business ($0.5 million). The 2002 severance,
restructuring and related charges were comprised of non-cancelable rental
payments on the Earth City and Warson Road facilities of $10.3 million,
severance costs of $0.8 million, consulting costs related to sourcing and other
manufacturing and production efficiencies initiatives of $0.8 million, costs
associated with moving inventory and equipment of $0.2 million, and various
integration costs for the consolidation of administrative functions of $0.2
million. The group recorded impairments of long-lived assets of $7.1 million
during the nine months ended September 30, 2003 and $13.4 million during the
same period of 2002. Charges in 2003 included $5.5 million related to idle and
obsolete equipment and leasehold improvements at Warson Road, Hazelwood and
Bridgeton, $1.2 million related to the closure of abrasives facilities in
Lawrence, Massachusetts and Pineville, North Carolina and the subsequent
consolidation into the Wrens facility, and $0.3 million of obsolete molds and
tooling at Contico's plastics operation in the United Kingdom. Impairment
charges in 2002 included $7.0 million for certain molds and tooling at Contico,
a customer list intangible at Contico for $2.6 million, certain machinery and
equipment at Warson Road for $2.4 million, certain machinery and equipment at
the Wilen Products business unit for $1.2 million and $0.2 million for equipment
at Earth City.
Sales in the Electrical Products group decreased from $106.3 million to
$104.3 million, a decline of 1.9%. The decrease was primarily attributable to
lower sales at Woods U.S. as a result of certain promotions at a major retail
customer in 2002 that did not repeat in 2003, as well as a strong third quarter
of 2002 resulting from significant restocking of inventory for a certain
customer. This decrease was offset by higher sales at Woods Canada, principally
due to the impact of currency translation.
The Electrical Products group's operating income improved from $2.5
million to $6.4 million, an increase of 157.2%. Operating income was impacted in
both years by severance, restructuring and related charges. Excluding these
items, operating income increased by $2.6 million, or 50.3%. Operating income
was higher at both Woods U.S and Woods Canada, driven primarily by higher sales
volumes and cost reductions at Woods Canada and by cost reductions at Woods U.S.
The Electrical Products group recorded severance, restructuring and
related charges of $1.4 million in the nine month period ending September 30,
2003, compared to $2.7 million recorded during the same period of 2002. The
costs in 2003 are mostly related to severance for Woods Canada in connection
with the announced shutdown of their manufacturing facility in the fourth
quarter of 2003 and to a lesser degree, consulting fees for resourcing projects.
The 2002 costs all related to consulting fees for resourcing projects. The
resourcing initiative has had a significant positive impact on the operations of
both Woods U.S. and Woods Canada.
Equity in income of equity method investment was lower by $6.3 million
almost entirely due to the write down of the Sahlman joint venture in 2003,
offset by equity income from Sahlman in 2002. See further discussion relating to
the financial results of Sahlman in Note 7 to the Condensed Consolidated
Financial Statements.
- 27 -
Interest, net was essentially the same for the first nine months of 2003
as compared to the first nine months of 2002. During the first quarter of 2003,
we wrote off $1.2 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. Excluding the write-off, interest, net decreased by $1.1
million, or 23.4%, due mainly to lower average borrowings and to a lesser
extent, lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity was negatively impacted in the first nine months of 2003 by
lower operating cash flow during the first quarter. We used $10.1 million of
operating cash flow during the first nine months of 2003 compared to operating
cash flow generated during the first nine months of 2002 of $12.4 million. Debt
obligations increased from December 31, 2002 by $6.0 million. However, $9.8
million of the increase in debt obligations related to the early redemption of
higher-interest preferred units of a subsidiary, which were redeemed at a
discount coincident with the refinancing of our debt obligations in February
2003 (see discussion below). Excluding the impact of this factor on debt
obligations, debt decreased by $3.8 million during the first nine months of
2003. Net proceeds from the sales of the GC/Waldom and Duckback businesses were
used to reduce debt by $21.9 million, and were offset by working capital
changes, primarily higher accounts receivable due largely to seasonality at the
Woods' businesses and payments on previously recorded restructuring liabilities.
In February 2003, we funded a new credit agreement, agented by Fleet
Capital Corporation (Fleet Credit Agreement), which replaced the credit
agreement entered into at the time of the recapitalization in June of 2001
(Deutsche Bank Credit Agreement). The new $110 million facility, which is
comprised of a $20 million term loan (Term Loan) and $90 million of revolving
credit (Revolving Credit Facility), involves a syndicate of banks, all of whom
had participated in the Deutsche Bank Credit Agreement. The Fleet Credit
Agreement is an asset-based lending agreement, and is generally on similar terms
to those found in the Deutsche Bank Credit Agreement.
In September 2003, we sold the Duckback business for net proceeds of $15.8
million, of which $1.4 million was received subsequent to September 30, 2003 as
a result of a post-closing working capital adjustment. In April 2003, we sold
the GC/Waldom business for net proceeds of $7.5 million. The proceeds of these
sales resulted in a positive impact to cash flows from investing activities for
the nine months ended September 30, 2003, and allowed us to reduce our debt
obligations. A gain (net of tax) of $7.6 million was recorded on the sale of
Duckback (see Note 2 to the Condensed Consolidated Financial Statements for
effect of restatement) while a loss (net of tax) of $0.2 million was recognized
on the sale of GC/Waldom.
The Fleet Credit Agreement allows us to more efficiently leverage our
entire asset base, and to create more borrowing room under our Revolving Credit
Facility, which is based on the liquidation values of accounts receivable and
inventories. The Term Loan is collateralized by real and personal property.
Below is a summary of the sources and uses associated with the funding of the
Fleet Credit Agreement (in thousands):
Sources:
Term borrowings under the Fleet Credit Agreement $ 20,000
Revolving borrowings under the Fleet Credit Agreement 43,743
---------
$ 63,743
=========
Uses:
Payment of principal and interest under the Deutsche Bank Credit Agreement $ 52,895
Purchase of the remaining preferred interest of subsidiary at a discount 9,840
Payment of accrued distributions on one-half of preferred interest of subsidiary 122
Certain costs associated with the Fleet Credit Agreement 886
---------
$ 63,743
=========
As a result of the refinance with the new Fleet Credit Agreement, we were
able to redeem at a 40% discount the remaining preferred interest that the
former owner of Contico had held. This balance sheet liability, which had a
carrying
- 28 -
value of $16.4 million immediately prior to redemption, was redeemed for $9.8
million in February 2003. The excess of carrying value over redemption price is
an addition to stockholders' equity, and favorably impacts earnings per share.
This will result in a reduction of preferred cash distributions by approximately
$1.3 million annually, which had accrued at an annual rate of 8%. After giving
effect to the interest cost incurred by the Company to fund the redemption, the
net decrease in financing cost for the Company will be approximately $1.0
million annually.
Under the Fleet Credit Agreement, the Term Loan originally had a final
maturity date of February 3, 2008 and quarterly repayments of $0.7 million, two
of which were made on April 1 and July 1, 2003, respectively. However, the net
proceeds received from the GC/Waldom and Duckback sales (see above), were used
to prepay the Term Loan, which is now scheduled to be repaid in its entirety by
2005. The Revolving Credit Facility has an expiration date of February 3, 2008.
Unused borrowing availability on the Revolving Credit Facility of $37.3
million at September 30, 2003, was temporarily higher due to the application of
the proceeds of the Duckback sale (see below). In accordance with the Fleet
Credit Agreement, the net proceeds from an asset sale are first used to pay down
the Term Loan to the extent of Term Loan collateral (real estate and equipment)
sold, then proceeds are applied to the Revolving Credit Facility to the extent
of Revolving Credit collateral (accounts receivable and inventory) sold, and
subsequently to pay down the Term Loan (to the extent of the outstanding Term
Loan) and finally to the Revolving Credit Facility until all proceeds are
applied. In connection with the Duckback sale, all of the net proceeds were
initially used to pay down the Revolving Credit Facility as there was
uncertainty (pending finalization of a balance sheet as of the date of the sale)
as to the amount of underlying Revolving Credit collateral sold. Subsequent to
September 30, 2003, based on the process for applying proceeds, the Term Loan
was reduced by $11.9 million from funding received from the Revolving Credit
Facility. Had the net proceeds been applied to the Term Loan on or before
September 30, 2003, unused borrowing availability would have been $25.4 million
at September 30, 2003.
Our borrowing base under the Fleet Credit Agreement is reduced by the
outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom 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 September 30,
2003, total outstanding letters of credit were $9.3 million.
All extensions of credit under the Fleet Credit Agreement are
collateralized by a first priority perfected security interest in and lien upon
the capital stock of each material domestic subsidiary (65% of the capital stock
of each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary financial covenants and restrictions apply under
the Fleet Credit Agreement, and we were in compliance with these covenants as of
September 30, 2003. Until June 30, 2003, interest accrued on revolving
borrowings at 225 basis points over applicable LIBOR rates, and at 250 basis
points over LIBOR for term borrowings. Subsequent to June 30, 2003 and in
accordance with the Fleet Credit Agreement, Katy's margins dropped an additional
25 basis points from the pre-June 30 levels on both the Revolving Credit
Facility and the Term Loan based on the achievement of a financial covenant
target. Interest accrues at higher margins on prime rates for swing loans, the
amounts of which were nominal at September 30, 2003.
Katy has incurred $1.5 million in debt issuance costs associated with the
Fleet Credit Agreement. Additionally, at the time of the inception of the Fleet
Credit Agreement, Katy had approximately $5.6 million of unamortized debt
issuance costs associated with the Deutsche Bank Credit Agreement. Based on the
pro rata reduction in borrowing capacity from the Deutsche Bank Credit Agreement
to the Fleet Credit Agreement, Katy charged to expense $1.2 million of the
Deutsche Bank Credit Agreement unamortized debt issuance costs. The remainder of
the previously capitalized costs, along with the newly capitalized costs from
the Fleet Credit Agreement of $0.9 million, is being amortized over the life of
the Fleet Credit Agreement through January 2008.
The Revolving Credit Facility under the Fleet Credit Agreement requires
lockbox agreements which 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 Fleet Credit Agreement, causes the
Revolving Credit Facility to be classified as a current liability, per guidance
in the Emerging Issues Task Force (EITF) Issue No. 95-22, Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that
Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement.
However, the Company does not expect to repay, or be required to
- 29 -
repay, within one year, the balance of the Revolving Credit Facility classified
as a current liability. The MAE clause, which is a fairly typical requirement in
commercial credit agreements, allows the lender to require the loan to become
due if it determines there has been a material adverse effect on our operations,
business, properties, assets, liabilities, condition or prospects. The
classification of the Revolving Credit Facility as a current liability is a
result only of the combination of the two aforementioned factors: the lockbox
agreements and the MAE clause. The Revolving Credit Facility does not expire or
have a maturity date within one year, but rather has a final expiration date of
January 31, 2008. Also, we were in compliance with the applicable financial
covenants at September 30, 2003. The lender had not notified us of any
indication of a MAE at September 30, 2003, and to our knowledge, we were not in
default of any provision of the Fleet Credit Agreement at September 30, 2003.
The Fleet Credit Agreement, and the additional borrowing ability on
revolving credit obtained by incurring new term debt, results in three important
benefits related to the long-term strategy of Katy: 1) it allowed us to redeem
early at a discount a preferred interest obligation of Contico, 2) it provides
borrowing power to invest in capital expenditures key to our strategic
direction, and 3) it provides working capital flexibility to build inventory
when necessary to accommodate lower cost outsourced finished goods inventory. We
believe that our operations and the Fleet Credit Agreement provide sufficient
liquidity for our operations going forward.
We require cash to fund working capital needs, make payments on previously
recorded restructuring liabilities (see schedule of Contractual Obligations
below), and fund capital expenditures. These requirements are expected to be met
principally through cash flows from operations and available borrowings under
the Fleet Credit Agreement. Capital expenditures for 2003 are expected to
approximate the levels in 2002 and 2001, mainly for investments planned for the
restructuring of the abrasives businesses and the various Contico facilities.
These restructuring and consolidation activities are important steps in reducing
our cost structure to a competitive level.
We are continually evaluating alternatives relating to divestitures of
certain of our businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
On September 16, 2003, we announced the sale of our Duckback business with total
net proceeds of $15.8 million, which were used to reduce our debt obligations.
On April 2, 2003, we announced the sale of GC/Waldom with net proceeds of $7.5
million, which were also used to reduce our debt obligations. On February 3,
2003, we announced that we sold a Woods manufacturing facility in Mooresville,
Indiana. Gross proceeds were $1.9 million, of which $0.7 million was used to
repay a mortgage loan payable on the property. The remainder of the proceeds
reduced our debt obligations.
We have recorded valuation allowances of $42.8 million on deferred tax
assets as of December 31, 2002. These deferred tax assets include $22.8 million
of domestic net operating loss carry forwards. To the extent we generate taxable
income in future years, these net operating loss carry forwards will be
available to reduce future income tax liabilities.
On April 20, 2003, we announced a plan to repurchase up to $5.0 million of
our common stock. This repurchase is being funded through our credit facility.
As of September 30, 2003, we had spent $1.4 million to repurchase 289,100 shares
of our common stock on the open market.
OFF-BALANCE SHEET ARRANGEMENTS
On April 29, 2002, Katy and SESCO, an indirect wholly owned subsidiary,
entered into a partnership agreement with Montenay Power Corporation and its
affiliates (Montenay) that turned over the operation of SESCO's waste-to-energy
facility to the partnership. The Company entered into this agreement as a result
of evaluations of SESCO's business. First, we determined that SESCO was not a
core component of our long-term business strategy. Moreover, we did not feel the
Company had the management expertise to deal with certain risks and
uncertainties presented by the operation of SESCO's business, given that SESCO
was the Company's only waste-to-energy facility. We had explored options for
divesting SESCO for a number of years, and management felt that this transaction
offered a reasonable strategy to exit this business.
The partnership, with Montenay's leadership, assumed SESCO's position in
various contracts relating to the facility's operation. Under the partnership
agreement, SESCO contributed its assets and liabilities (except for its
liability under the loan agreement with the Resource Recovery Development
Authority (the Authority) of the City of Savannah
- 30 -
and the related receivable under the service agreement) to the partnership.
While SESCO will maintain a 99% partnership interest as a limited partner,
Montenay will have most of the day to day responsibility for administration,
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 may purchase SESCO's interest in the
partnership at that time. Katy has not recorded any amounts receivable or other
assets relating to amounts that may be received at the time the service
agreement expires, given their uncertainty. The Company recognized in the first
quarter of 2002 a charge of $6.0 million, consisting of 1) the discounted value
of the $6.6 million note, which is payable over seven years, 2) the carrying
value of certain assets contributed to the partnership, consisting primarily of
machinery spare parts, and 3) costs to close the transaction. All of SESCO's
long-lived assets were reduced to a zero value at December 31, 2001, so no
additional impairment was required. Going forward, Katy would expect that income
statement activity associated with its involvement in the partnership will not
be material, and Katy's balance sheet will carry the liability mentioned above.
In 1984, the Authority issued $55.0 million of Industrial Revenue Bonds
and lent the proceeds to SESCO, under the loan agreement, for the acquisition
and construction of the waste-to-energy facility that has now been transferred
to the partnership. The funds required to repay the loan agreement come from the
monthly disposal fee paid by the Authority to SESCO under the service agreement
for certain waste disposal services, a component of which is for debt service.
To induce the required parties to consent to the SESCO partnership transaction,
SESCO retained its liability under the loan agreement. In connection with that
liability, SESCO also retained its right to receive the debt service component
of the monthly disposal fee.
Based on an opinion from outside legal counsel, SESCO has a legally
enforceable right to offset amounts it owes to the Authority under the loan
agreement against amounts that are owed from the Authority under the service
agreement. At September 30, 2003, this amount was $35.8 million. Accordingly,
the amounts owed to and due from SESCO have been netted for financial reporting
purposes and are not shown on the consolidated balance sheets.
In addition to SESCO retaining its liabilities under the loan agreement,
to induce the required parties to consent to the partnership transaction, Katy
also continues to guarantee the obligations of the partnership under the service
agreement. The partnership is liable for liquidated damages under the service
agreement if it fails to accept the minimum amount of waste or to meet other
performance standards under the service agreement. The liquidated damages, an
off balance sheet risk for Katy, are equal to the amount of the Industrial
Revenue Bonds outstanding, less $4.0 million maintained in a debt service
reserve trust. We do not expect non-performance by the other parties.
Additionally, Montenay has agreed to indemnify Katy for any breach of the
service agreement by the partnership.
Following are scheduled principal repayments on the loan agreement (and
the Industrial Revenue Bonds) as of September 30, 2003 (in thousands):
2003 $ 5,385
2004 6,765
2005 8,370
2006 15,300
-------
Total $35,820
=======
We also enter into operating lease agreements in the ordinary course of
business, and many of our facilities are leased. Contractual obligations
associated with these leases are listed in the table under the following section
entitled "Contractual Obligations and Commercial Obligations."
Contractual Obligations and Commercial Obligations
Katy's obligations as of September 30, 2003 are summarized below:
(In thousands of dollars)
- 31 -
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] $ 35,088 $ -- $ -- $ 35,088 $ --
Term loans 16,381 14,741 1,640 0 0
Operating leases [b] 43,071 11,516 16,849 12,322 2,384
Severance and restructuring [b] 8,301 4,766 2,773 464 298
SESCO payable to Montenay [c] 4,800 1,000 2,050 1,750 --
------------ ------------ ------------ ------------ ------------
Total Contractual Obligations $ 107,641 $ 32,023 $ 23,312 $ 49,624 $ 2,682
============ ============ ============ ============ ============
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 $ 892 $ 892 $ -- $ -- $ --
Stand-by letters of credit 8,380 8,380 -- -- --
Guarantees [d] 35,820 5,385 15,135 15,300 --
------------ ------------ ------------ ------------ ------------
Total Commercial Commitments $ 45,092 $ 14,657 $ 15,135 $ 15,300 $ --
============ ============ ============ ============ ============
[a] As discussed in the Liquidity and Capital Resources section above, the
entire Fleet Revolving Credit Facility is classified as a current liability on
the Condensed Consolidated Balance Sheets as a result of the combination in the
Fleet Credit Agreement of 1) lockbox agreements on Katy's depository bank
accounts and 2) a subjective Material Adverse Effect (MAE) clause. The revolving
credit agreement expires in January of 2008.
[b] These "Severance and restructuring" obligations represent liabilities
associated with restructuring activities, other than liabilities for
non-cancelable lease rentals. Future non-cancelable lease rentals are included
in the line entitled "Operating leases." Our balance sheet at September 30, 2003
includes $6.7 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
above and in Note 10 to the Condensed Consolidated Financial Statements. $1.0
million of this obligation is classified in the Condensed Consolidated Balance
Sheets as an Accrued Expense in Current Liabilities, while the remainder is
included in Other Liabilities, recorded on a discounted basis.
[d] As discussed in the Off-Balance Sheet Arrangements section above, SESCO, an
indirect wholly-owned subsidiary of Katy, is party to a partnership that
operates a waste-to-energy facility, and has certain contractual obligations,
for which Katy provides certain guarantees. If the partnership is not able to
perform its obligations under the contracts, under certain circumstances SESCO
and Katy could be subject to damages equal to the amount of Industrial Revenue
Bonds outstanding (which financed construction of the facility) less amounts
held by the partnership in debt service reserve funds. Katy and SESCO do not
anticipate non-performance by parties to the contracts. See the Off-Balance
Sheet Arrangements section above and Note 10 to Condensed Consolidated Financial
Statements.
SEVERANCE, RESTRUCTURING AND RELATED CHARGES
During the third quarter of 2003, we recorded $3.9 million for severance,
restructuring and related charges pursuant to SFAS No. 146. Such charges include
$2.0 million related to the establishment of and adjustments to non-cancelable
lease liabilities for abandoned facilities, primarily as a result of the
consolidation of the facilities at the Contico business units. We also recorded
severance costs of $1.1 million related to the announced closure of the Woods
Canada manufacturing facility in Toronto. Manufacturing operations will cease in
the fourth quarter of 2003, as Katy will implement a third-party sourcing plan
similar to that implemented at the Woods U.S. operation in the fourth quarter of
2002. As of result of the shut down, approximately 100 employees will be
terminated. In addition Katy incurred costs of $0.7 million associated with the
consolidation efforts at Contico, including severance and moving inventory and
equipment. Katy also recorded charges of $0.1 million associated with the
restructuring of its abrasives business.
- 32 -
During the first and second quarters of 2003, we recorded $0.2 million and
$1.7 million, respectively, for severance, restructuring and related charges.
These costs related to equipment moves, adjustments to non-cancelable lease
liabilities for abandoned facilities, severance, and related charges associated
with consolidation of facilities and administrative functions. Included in these
costs were severance charges related to five administrative and fifteen
operations employees at Contico's Santa Fe Springs facility. Costs were also
incurred related to plastics manufacturing facilities at Warson Road, and the
abrasives manufacturing facility in Wrens.
During the fourth quarter of 2002, we recorded $2.4 million of severance
and other exit costs associated with the shut down of the Woods manufacturing
facilities in Indiana. Manufacturing operations were ceased in order to
implement a more cost-effective procurement of finished goods inventory through
sourcing with third party suppliers. As a result of this shut down, 361
employees were terminated. Woods incurred $1.5 million in severance, pension,
and other employee-related costs associated with the employee terminations.
Woods also incurred a charge for the creation of a liability for non-cancelable
lease costs at abandoned production facilities of $0.8 million. An additional
$0.1 million of other exit costs were incurred related to facility repairs and
other minor expenses. Woods also incurred $0.9 million of inventory write-offs
related to raw and packaging materials that will not be utilized efficiently
with the change-over to a fully sourced inventory strategy. Contico incurred
restructuring costs of $0.6 million in the fourth quarter of 2002 associated
with costs of revaluing their non-cancelable lease liability at the Warson Road
and Earth City, Missouri (Earth City) facilities, and $0.3 million of costs in
moving inventory and equipment from the Warson Road facility to the Bridgeton
facility, as discussed below. Each of these facilities is in the St. Louis,
Missouri area.
During the third quarter of 2002, we recorded $9.5 million of severance,
restructuring and related charges. During the third quarter, we committed to a
plan to abandon the Earth City facility and to consolidate its operations into
the Bridgeton facility. As a result, a $7.1 million charge was recorded to
accrue a liability for non-cancelable lease payments associated with the Earth
City facility. Also during the third quarter, the Contico business recorded a
$1.4 million charge related to rent and other facility costs associated with its
Warson Road facility, whose operations are also being consolidated into the
Bridgeton facility. A charge of $1.8 million was recorded in the second quarter
of 2002 for the Warson Road facility, and the additional amount of $1.4 million
was recorded after consideration of the market for sub-leasing and to accrue
costs to refurbish the facility. The Contico business recorded related charges
of $0.2 million incurred in moving inventory and equipment from the Warson Road
facility to the Bridgeton facility, and $0.2 million in severance costs. The
Corporate group recorded a $0.1 million charge for non-cancelable lease payments
related to the former corporate headquarters. Also in the third quarter of 2002,
a charge of $0.5 million was recorded for payments for consultants working with
the Company on sourcing and other manufacturing and production efficiency
initiatives.
During the second quarter of 2002, we recorded $3.8 million of severance,
restructuring and related charges. Approximately $1.6 million of the charges
related to accruals for payments for consultants working with us on sourcing and
other manufacturing and production efficiency initiatives. Additionally, net
non-cancelable rental payments of $1.8 million associated with the shut down of
Contico's Warson Road facility were charged to operations during the quarter, as
well as involuntary termination benefits of $0.1 million. The Warson Road
facility shutdown involved a reduction in workforce of nineteen employees. The
remaining $0.3 million (for involuntary termination benefits) related to SESCO
and for various integration costs in the consolidation of administrative
functions into St. Louis, Missouri, from various operating divisions in the
Maintenance Products group.
During the first quarter of 2002, we recorded $2.3 million of severance,
restructuring and related charges. Approximately $1.9 million of the charges
related to accruals for payments for consultants working with us on sourcing and
other manufacturing and production efficiency initiatives. Approximately $0.3
million related to involuntary termination benefits for two management employees
whose positions were eliminated, and $0.1 million were costs associated with the
consolidation of administrative and operational functions.
Certain assumptions have been made regarding potential future sub-lease
revenue at rented facilities that have been, or will be, abandoned as a result
of restructuring and consolidation activities. If we are unable to achieve its
estimated sub-lease revenue estimates, charges could be recognized in future
periods to update the estimated liability and cost to Katy for these facilities.
The table below details activity in restructuring reserves since December
31, 2002 (in thousands).
- 33 -
One-time Contract
Termination Termination
Total Benefits [a] Costs [b] Other [c]
-------- ------------ ----------- ---------
Restructuring liabilities at December 31, 2002 $ 14,499 $ 2,085 $ 10,885 $ 1,529
Additions to restructuring liabilities 5,812 2,230 2,538 1,044
Payments on restructuring liabilities (12,010) (2,818) (6,708) (2,484)
-------- -------- -------- --------
Restructuring liabilities at September 30, 2003 $ 8,301 $ 1,497 $ 6,715 $ 89
======== ======== ======== ========
The table below summarizes the future obligations for severance and
restructuring charges detailed above as of September 30, 2003 (in thousands):
2003 $ 2,054
2004 3,350
2005 1,469
2006 668
2007 380
Thereafter 380
----------
Total Payments $ 8,301
==========
[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 potential 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.
OUTLOOK FOR 2003
We anticipate a continuation of the difficult economic conditions and
business environment in 2003, which will present challenges in maintaining net
sales. In particular, we expect to see softness continue in the restaurant,
travel and hotel markets to which we sell cleaning products. We have seen
continued strong sales performance from the Woods U.S. and Woods Canada retail
electrical corded products business, but we do not expect to see the same level
of year-over-year top line growth from those businesses in 2003 as we
experienced in 2002. We have a significant concentration of customers in the
mass-market retail, discount and do-it-yourself market channels. Our ability to
maintain and increase our sales levels depends in part on our ability to retain
and improve relationships with these customers. We face the continuing challenge
of recovering or offsetting cost increases for raw materials.
Gross margins have been improving and are expected to continue to improve
for the remainder of 2003 as we realize the benefits of various profit-enhancing
strategies begun in 2001 and 2002. These strategies include sourcing previously
manufactured products, as well as locating new sources for products already
sourced outside of our facilities. We have significantly reduced headcount, and
continue to examine issues related to excess facilities. Cost of goods sold is
subject to variability in the prices for certain raw materials, most
significantly thermoplastic resins used by Contico in the manufacture of plastic
products. Prices of plastic resins, such as polyethylene and polypropylene,
increased during the early months of 2003, but have fallen and stabilized by the
end of the third quarter. Management has observed that the prices of plastic
resins are driven to an extent by prices for crude oil and natural gas, in
addition to other factors specific to the supply and demand of the resins
themselves. We cannot predict the direction resin prices will take during the
remainder of 2003 and beyond. We are also exposed to price changes for copper (a
primary material in many of the products sold by Woods U.S. and Woods Canada),
aluminum (a primary material in production of truck boxes), corrugated packaging
material and other raw materials. We have not employed an active hedging program
- 34 -
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 supplementing these agreements with
opportunistic spot purchases. In a climate of rising raw material costs, we
experience difficulty in raising prices to shift these higher costs to our
customers.
Depreciation expense will continue to be higher during 2003 as a result of
the reduction in depreciable lives for certain assets used in Contico's
manufacturing process, effective January 1, 2003. The estimated amount of
incremental depreciation expense during 2003 as a result of this reduction in
depreciable lives is approximately $5.4 million. However, many of these assets
will become fully depreciated during 2003 since the Contico acquisition occurred
in early 1999. Therefore, depreciation expense related to these assets is
expected to reduce again in 2004 and subsequent years. Our total depreciation
expense in 2004 and subsequent years will depend on changes in the level of
depreciable assets.
Selling, general and administrative expenses have remained stable and are
expected to continue to remain stable as a percentage of sales from 2002 levels.
Cost reduction efforts are ongoing throughout the Company. Our corporate office
was relocated in 2001 and we expect to maintain modest headcount and rental
costs for that office. We have completed the process of transferring most
back-office functions of our Wilen subsidiary from Atlanta, Georgia to St.
Louis, Missouri, the headquarters of Contico. We are nearly complete with the
process of transferring most back-office functions of the Glit/Microtron
subsidiary in Wrens, Georgia to St. Louis, Missouri. We will continue to
evaluate the possibility of further consolidation of administrative processes at
our subsidiaries.
We have announced or committed to several restructuring plans involving
our operations. During the second and third quarters of 2002, respectively, we
announced plans to consolidate the Warson Road and Earth City facilities of
Contico into the Bridgeton facility. All of these facilities are located in the
St. Louis, Missouri area. The move from our Warson Road facility is complete.
Subsequent to September 30, 2003, the move from our Earth City facility will
require approximately an additional $0.5 million of capital expenditures. The
significant charges recorded during 2002 and 2003 related to these facilities
were mainly to accrue non-cancelable lease payments for these facilities (i.e.,
non-incremental cash). We also intend to reduce the capacity of Contico's
Hazelwood facility, which currently provides injection molding of plastic
products for the janitorial/sanitation and consumer plastics businesses.
Hazelwood will continue to operate on a satellite basis, but with reduced
capacity. Certain molding machines will be transferred to the Bridgeton
facility, and excess machinery will be sold. Capital expenditures of $1.3
million will be required at Bridgeton to accommodate the former Hazelwood
capacity, and some additional severance and restructuring expenses will be
incurred during the last quarter of 2003 to accommodate this move. We expect the
Contico business unit to benefit from lower overhead costs in 2003 and beyond as
a result of these consolidations. Further facility consolidations with respect
to the Contico operations are under review.
During September 2003, we announced the planned closure of the Woods
Canada manufacturing facility in Toronto, necessitated by our decision to fully
outsource its products to lower cost sources. Prior to the plant closure, Woods
Canada already sourced a portion of its finished goods from vendors. The plant
closure will take place in December 2003. While outsourcing of the Woods Canada
products is a cost-saving measure, Woods Canada expects to maintain higher
inventory levels, especially through mid-2004, as a result of this move.
We have committed to other restructuring alternatives as well, most of
which center around consolidation of operations into fewer facilities. Certain
of these projects will require significant levels of incremental cash for both
capital expenditures and moving and relocation costs. Capital expenditures,
severance, restructuring and related costs, and potential asset impairments,
related to these initiatives are expected to be in the range of $5 to $7
million, and will be incurred in the fourth quarter of 2003 and into the first
half of 2004.
We continue to pursue a strategy within the Maintenance Products group to
simplify our business transactions and improve our customer relationships. We
have started operating centralized customer service functions for Continental,
Glit, Wilen and Disco, allowing customers to order products from any division on
one purchase order. We believe that operating these businesses as a cohesive
unit will improve customer service because our customers' purchasing processes
will be simplified, as will follow up on order status, billing, collection and
other related functions. We expect that these steps will increase customer
loyalty and help in attracting new customers and increasing top line sales in
future years.
- 35 -
Our integration 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 systems integration plan was substantially completed in October
2003.
Interest expense in 2003, excluding the write-off of $1.2 million of
unamortized debt issuance costs, has been lower than the amounts reported in
2002, due primarily to lower debt balances and, to a lesser extent, lower
interest rates. We expect this trend to continue for the remained of the year.
However, we cannot predict the future levels of interest rates. In addition,
after June 30, 2003, interest rate margins on our Fleet Credit Agreement
borrowings are determined on a pricing matrix which factors operating
performance into the pricing grid. Margins drop an additional 25 basis points in
the most favorable pricing grid from the pre-June 30 levels. Our operating
performance has resulted in us obtaining the more favorable pricing for our
borrowings.
Given our history of operating losses, along with guidance provided by the
accounting literature covering accounting for income taxes, we were unable to
conclude it is more likely than not that we will be able to generate future
taxable income sufficient to realize the benefits of deferred tax assets carried
on our books. Therefore, a full valuation allowance on the net deferred tax
asset position was recorded at September 30, 2003 and December 31, 2002, and we
do not expect to record the benefit of any deferred tax assets that may be
generated in 2003. We will continue to record current expense associated with
foreign and state income taxes.
We are continually evaluating alternatives that relate to divestitures of
non-core businesses. Divestitures present opportunities to de-leverage our
financial position and free up cash for further investments in core activities.
On March 6, 2003, we announced that we were exploring the sale of the Woods and
Woods Canada businesses. However, on July 31, 2003, we announced that we have
decided not to pursue a sale of these businesses at this time. On April 2, 2003,
we announced the sale of GC/Waldom with net proceeds of $7.5 million, resulting
in a loss of $0.2 million (net of tax) on the sale. On September 16, 2003, we
announced the sale of Duckback with net proceeds of $15.8 million, resulting in
a gain of $7.6 million (net of tax).
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
This report and the information incorporated by reference in this report
contain various "forward-looking statements" as defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934, as amended.
The forward-looking statements are based on the beliefs of our management, as
well as assumptions made by, and information currently available to, our
management. We have based these forward-looking statements on current
expectations and projections about future events and trends affecting the
financial condition of our business. These forward-looking statements are
subject to risks and uncertainties that may lead to results that differ
materially from those expressed in any forward-looking statement made by us or
on our behalf, including, among other things:
- Increases in the cost of, or in some cases continuation of, the
current price levels of, plastic resins, copper, paper board
packaging, and other raw materials.
- Our inability to reduce product costs, including manufacturing,
sourcing, freight, and other product costs.
- 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.
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- Our inability to sub-lease rented facilities which have been
abandoned as a result of consolidation and restructuring
initiatives.
- Our inability to achieve product price increases, especially as they
relate to potentially higher raw material costs.
- The potential impact of losing lines of business at large retail
outlets in the discount and do-it-yourself markets.
- Competition from foreign competitors.
- The potential impact of new distribution channels, such as
e-commerce, negatively impacting us and our existing channels.
- The potential impact of rising interest rates on our LIBOR-based
Fleet Credit Agreement.
- Our inability to meet covenants associated with the Fleet Credit
Agreement.
- The potential impact of rising costs for insurance for properties
and various forms of liabilities.
- Labor issues, including union activities that require an increase in
production costs or lead to a strike, thus impairing production and
decreasing sales. We are also subject to labor relations issues at
entities involved in our supply chain, including both suppliers and
those involved in transportation and shipping.
- Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
- Our inability to sell certain assets to raise cash and de-leverage
our financial condition.
Words and phrases such as "expects," "estimates," "will," "intends,"
"plans," "believes," "anticipates" and the like are intended to identify
forward-looking statements. The results referred to in forward-looking
statements may differ materially from actual results because they involve
estimates, assumptions and uncertainties. Forward-looking statements
included herein are as of the date hereof and we undertake no obligation
to revise or update such statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated
events. All forward-looking statements should be viewed with caution.
ENVIRONMENTAL AND OTHER CONTINGENCIES
As set forth more fully in our 2002 Annual Report on Form 10-K, we and
certain of our current and former direct and indirect corporate predecessors,
subsidiaries and divisions are involved in remedial activities at certain
present and former locations and have been identified by the United States
Environmental Protection Agency (EPA), state environmental agencies and private
parties as potentially responsible parties (PRPs) at a number of hazardous waste
disposal sites under the Comprehensive Environmental Response, Compensation and
Liability Act (Superfund) or equivalent state laws and, as such, may be liable
for the cost of cleanup and other remedial activities at these sites.
Responsibility for cleanup and other remedial activities at a Superfund site is
typically shared among PRPs based on an allocation formula. Under the federal
Superfund statute, parties could be held jointly and severally liable, thus
subjecting them to potential individual liability for the entire cost of cleanup
at the site. Based on its estimate of allocation of liability among PRPs, the
probability that other PRPs, many of whom are large, solvent, public companies,
will fully pay the costs apportioned to them, currently available information
concerning the scope of contamination, estimated remediation costs, estimated
legal fees and other factors, we have recorded and accrued for indicated
environmental liabilities amounts that we deem reasonable and believe that any
liability with respect to these matters in excess of the accrual will not be
material. The ultimate costs will depend on a number of factors and the amount
currently accrued represents management's best current estimate of the total
cost to be incurred. We expect this amount
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to be substantially paid over the next one to four years.
The most significant environmental matter in which we are currently
involved relates to the W.J. Smith site. In 1993, the EPA initiated a Unilateral
Administrative Order Proceeding under Section 7003 of the Resource Conservation
and Recovery Act (RCRA) against W.J. Smith and Katy. The proceeding requires
certain actions at the W.J. Smith site and certain off-site areas, as well as
development and implementation of additional cleanup activities to mitigate
off-site releases. In December 1995, W.J. Smith, Katy and the EPA agreed to
resolve the proceeding through an Administrative Order on Consent under Section
7003 of RCRA. Pursuant to the Order, W.J. Smith is currently implementing a
cleanup to mitigate off-site releases.
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against our Woods subsidiary and against certain past and then-present
officers and directors and former owners of Woods, alleging that the defendants
participated in a violation of the Racketeer Influenced and Corrupt
Organizations (RICO) Act involving allegedly fraudulently obtained loans from
Mexican banks, including the plaintiff, and "money laundering" of the proceeds
of the illegal enterprise. All of the foregoing is alleged to have occurred
prior to Katy's purchase of Woods. The plaintiff also alleged that it made loans
to an entity controlled by certain past officers and directors of Woods based
upon fraudulent representations. The plaintiff seeks to hold Woods liable for
its alleged damages directly, and under principles of respondeat superior and
successor liability. The plaintiff is claiming damages in excess of $24.0
million and is requesting treble damages under RICO. Because certain threshold
procedural and jurisdictional issues have not yet been fully adjudicated in this
litigation, it is not possible at this time for the Company to reasonably
determine an outcome or accurately estimate the range of potential exposure.
Katy may have recourse against the former owner of Woods and others for, among
other things, violations of covenants, representations and warranties under the
purchase agreement through which Katy acquired Woods, and under state, federal
and common law. In addition, the purchase price under the purchase agreement may
be subject to adjustment as a result of the claims made by Banco del Atlantico
or other issues relating to the litigation. The extent or limit of any such
adjustment cannot be predicted at this time. An adverse judgment in this matter
could have a material impact on Katy's liquidity and financial position if the
Company were not able to exercise recourse against the former owner of Woods.
We also have a number of product liability and workers' compensation
claims pending against us and our subsidiaries. Many of these claims are
proceeding through the litigation process and the final outcome will not be
known until a settlement is reached with the claimant or the case is
adjudicated. We estimate that it can take up to 10 years from the date of the
injury to reach a final outcome on certain claims. With respect to the product
liability and workers' compensation claims, we have provided for our share of
expected losses beyond the applicable insurance coverage, including those
incurred but not reported to us or our insurance providers, which are developed
using actuarial techniques. Such accruals are developed using currently
available claim information, and represent our best estimates. The ultimate cost
of any individual claim can vary based upon, among other factors, the nature of
the injury, the duration of the disability period, the length of the claim
period, the jurisdiction of the claim and the nature of the final outcome.
Since 1998, Woods Canada has used the NOMA 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, the trademark license
agreement is no longer in effect. Woods Canada is in discussions with Gentek to
enter into a new trademark license agreement. However, there is no guarantee
that a new license agreement with Gentek will be reached, in which case Woods
Canada would lose the right to brand certain of its product with the NOMA
trademark. Approximately 45% of Woods Canada's sales are of NOMA - branded
products. Should it lose the right to use the NOMA trademark, Woods Canada would
seek to replace those sales with sales of other products. However, there is no
guarantee that Woods Canada will be able to replace the lost sales of NOMA -
branded products.
Although we believe that these actions individually and in the aggregate
are not likely to have a material adverse effect on Katy's financial position,
results of operations or cash flows, further costs could be significant and will
be recorded as a charge to operations when such costs become probable and
reasonably estimable.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds and makes technical corrections regarding
various topics, including early extinguishments of debt and sale-leaseback
transactions. The statement is effective for fiscal years beginning after May
15, 2002. We adopted SFAS No. 145 on January 1, 2003. SFAS No. 145 requires that
certain costs and losses associated with early extinguishments of debt be
reported as interest expense as a component of income from continuing
operations, whereas the prior accounting guidance provided for classification of
these costs and losses as extraordinary items, reported separately on a
tax-effected basis after income from continuing operations. As a result of the
refinancing of our borrowing facility in February 2003, we wrote off
approximately $1.2 million of debt costs, pre-tax, during the first quarter of
2003. These costs have been reported as interest expense, a component of income
from continuing operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146
replaces EITF Issue No. 94-3. The new standard is effective for exit or
restructuring activities initiated after December 31, 2002. We have initiated
since January 1, 2003 and are further considering a number of restructuring and
exit activities, including plant closings and consolidation of facilities. Since
these activities have been or will be initiated after December 31, 2002, this
statement could have a significant impact on the timing of the recognition of
these costs in our statements of operations, tending to spread the costs out as
opposed to recognition of a large portion of the costs at the time we commit to
and communicate such restructuring and exit plans. Our operating plans call for
additional restructuring and facility consolidation activity during the
remainder of 2003 and 2004, concerned mainly with further consolidation of St.
Louis, Missouri plastics manufacturing facilities, and restructuring and
consolidation of certain abrasives manufacturing facilities. We have has adopted
the provisions of SFAS No. 146 for all restructuring activities initiated after
December 31, 2002.
In January 2003, the FASB released FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.
FIN 46 clarifies issues regarding the consolidation of entities which may have
features that make it unclear whether consolidation or equity method accounting
is appropriate. The effective date of FIN 46 has been delayed until the fourth
quarter of 2003 for variable interest entities created prior to February 1,
2003. Katy is currently evaluating FIN 46 to determine any potential impact on
its financial reporting.
In April 2003, the FASB released SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. Katy does not currently use
derivative instruments or participate in hedging activities and therefore, does
not expect SFAS No. 149 to impact its financial reporting. If Katy were to
utilize derivative instruments and participate in hedging activities, it would
follow the provisions of SFAS No. 149.
In May 2003, the FASB released SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity. SFAS No.
150 establishes standards for how certain financial instruments with
characteristics of both liabilities and equity are to be classified and
measured. It requires that certain financial instruments within its scope be
classified as a liability (or an asset in some circumstances), while many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for the third quarter of 2003. Katy has determined that SFAS No. 150
does not impact its financial reporting.
CRITICAL ACCOUNTING POLICIES
We disclosed details regarding certain of our critical accounting policies
in the Management's Discussion and Analysis section of our 2002 Annual Report on
Form 10-K (Part II., Item 7). There have been no changes to policies as of
September 30, 2003.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk associated with changes in interest rates
relates primarily to our debt obligations and temporary cash investments. We
currently do not use derivative financial instruments relating to either of
these exposures. Our interest obligations on outstanding debt are indexed from
short-term Eurodollar rates. We do not believe our exposures to interest rate
risks are material to our financial position or results of operations. 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 supplementing
these agreements with opportunistic spot buyers.
Item 4. 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 the management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. We also have investments in certain
unconsolidated entities. As we do not control or manage these entities, the
disclosure controls and procedures with respect to such entities are necessarily
more limited than those we maintain with respect to our consolidated
subsidiaries.
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 in
timely alerting them to material information relating to Katy (including its
consolidated subsidiaries) required to be included in our periodic SEC filings.
(b) Change in Internal Controls
There have been no changes in Katy's internal control over financial
reporting during the quarter ended September 30, 2003 that has materially
affected, or is reasonable likely to materially affect Katy's internal control
over financial reporting.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
During the quarter for which this report is filed, there have been no
material developments in previously reported legal proceedings, and no other
cases or legal proceedings, other than ordinary routine litigation incidental to
the Company's business and other nonmaterial proceedings, brought against the
Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
- Form 8-K filed August 6, 2003, including press release and schedules
announcing results of operations for the second quarter of 2003.
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
Registrant
DATE: March 26, 2004 By /s/ C. Michael Jacobi
----------------------------------------
C. Michael Jacobi
President and Chief Executive Officer
By /s/ Amir Rosenthal
----------------------------------------
Amir Rosenthal
Vice President, Chief Financial Officer,
General Counsel and Secretary
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