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United States
Securities and Exchange Commission
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
Amendment No. 1
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended: December 31, 2006
OR
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
75-1277589 (IRS Employer Identification No.) |
2461 South Clark Street, Suite 630, Arlington, Virginia 22202
(Address of Principal Executive Offices) (Zip Code)
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (703) 236-4300
Securities registered pursuant to Section 12(b) of the Act:
| (Title of each class) Common Stock, $1.00 par value Common Stock Purchase Rights |
(Name of each exchange on which registered) New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o NO þ
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 þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
The aggregate market value of the voting common stock held by non-affiliates of the
registrant* (based upon its closing transaction price on the New York Stock Exchange Composite
Tape on June 30, 2006), as of June 30, 2006 was $11,223,415. As of February 28, 2007, 7,951,177
shares of common stock, $1.00 par value, were outstanding, the only class of the registrant’s
common stock.
* Calculated by excluding all shares held by executive officers and directors of the registrant
without conceding that all such persons are “affiliates” of the registrant for purposes of federal
securities laws.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2007 annual meeting — Part III.
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EXPLANATORY NOTE
Restatement of Consolidated Financial Statements
We are filing this Amended Annual Report on Form 10-K/A (“Amended Filing”) to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2006 (“Original Filing”) to amend and
restate our consolidated financial statements and the related disclosures for the fiscal years
ended 2006 and 2005, as discussed in Note 2. The Original Filing was filed with the Securities and
Exchange Commission (“SEC”) on March 16, 2007.
On August 6, 2007, the Audit Committee of the Board of Directors, or the Audit Committee, of
Katy Industries, Inc. (the “Company”), in consultation with management, concluded that our
following previously issued financial statements should no longer be relied upon and should be
restated based on identified errors: 1) the consolidated financial statements as of December 31,
2006 and 2005 and for the years then ended contained in the Company’s Annual Report on Form 10-K;
and 2) the consolidated financial statements for the quarters ending March 31, 2006 and 2007, June
30, 2006, and September 30, 2006 contained in the Company’s corresponding Form 10-Qs. The
unaudited quarterly financial information included in the Company’s Annual Report on Form 10-K as
of December 31, 2006 has been updated in this Annual Report on Form 10-K, and the unaudited
quarterly financial information included in the Company’s Quarterly Reports on Form 10-Q as of
March 31, 2006, June 30, 2006 and September 30, 2006 will be updated as the Company files its
corresponding Quarterly Reports for 2007.
In the second quarter of 2007, management of the Company noted discrepancies in its physical
raw material inventory levels and the corresponding perpetual inventory records. These
discrepancies led the Company to initiate an internal investigation which resulted in the
identification of errors in the physical inventory count of raw material used for valuation
purposes at the Company’s wholly-owned subsidiary, Continental Commercial Products, LLC (“CCP”).
The Company has concluded these errors are isolated to fiscal 2005, fiscal 2006 and the three
months ended March 31, 2007.
When management became aware of the issues referenced above, the Company, including the Audit
Committee, initiated an investigation of the matter. Management has discussed the investigation,
the resolution of the problems and the strengthening of internal controls with the Audit Committee.
Based on the results of the investigation, management and the Audit Committee determined that
(a) the errors were caused by intentional acts of a CCP employee who improperly accounted for
physical quantities raw material inventory and who has since been dismissed; (b) the scope of the
errors were contained in fiscal 2005, fiscal 2006 and the three months ended March 31, 2007; and
(c) the errors were concentrated in the area discussed above.
Impact of Error on Previously filed Financial Statements
The impact of the raw material inventory error on loss from continuing operations and net loss
is approximately ($0.2) million and ($0.6) million for the years ended December 31, 2005 and 2006,
respectively. The impact of the raw material inventory error on loss from continuing operations
and net loss is approximately ($0.2) million for the three months ended March 31, 2006, ($0.2)
million and ($0.4) million for the three and six months ended June 30, 2006, ($0.2) million and
($0.6) million for the three and nine months ended September 30, 2006, and $0.1 million for the
three months ended March 31, 2007. In addition, as part of the restatement, the Company has
recorded additional items, certain of which were previously identified and determined to be
immaterial. The impact of these additional items on net loss is approximately ($0.4) million and
$0.2 million for the years ended December 31, 2005 and 2006, respectively, which is allocated
entirely to loss from continuing operations.
Internal Control Considerations
In connection with the Company’s evaluation of the restatement described above, management has
concluded that the restatement is the result of previously unidentified material weaknesses in the
Company’s internal control over financial reporting, as discussed in Item 9A. A material weakness
is a control deficiency, or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim consolidated financial statements
will not be prevented or detected. Management has also determined that the Company’s disclosure
controls and procedures were ineffective as of December 31, 2005 and 2006, March 31, 2006 and 2007,
June 30, 2006, and September 30, 2006.
These control deficiencies resulted in the restatement of the Company’s consolidated financial
statements for December 31, 2005 and 2006, March 31, 2006 and 2007, June 30, 2006, and September
30, 2006. Additionally, these control deficiencies could result in further misstatements to the
Company’s financial statements, which could result in a material misstatement to the annual or
interim consolidated financial statements that would not be prevented or detected. Accordingly,
management determined that these control deficiencies represented material weaknesses in internal
control over financial reporting.
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We have not amended any of our other previously filed annual reports on Form 10-K for the
periods affected by the restatement other than this Amended Filing. For this reason, the
consolidated financial statements and related financial information contained in such previously
filed reports should no longer be relied upon. All of the information in this Amended Filing does
not reflect events occurring after the Original Filing.
For the convenience of the reader, this Amended Filing sets forth the Original Filing in its
entirety, as modified and superseded where necessary to reflect the restatement. The following
items have been amended principally as a result of, and to reflect, the restatement, and no other
information in the Original Filing is amended hereby as a result of the restatement:
Part I — Item 1: Business;
Part I — Item 1A: Risk Factors;
Part II — Item 6: Selected Financial Data;
Part II — Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part III — Item 8: Financial Statements and Supplementary Data;
Part III — Item 9A: Controls and Procedures; and
Part IV — Item 15: Exhibits, Financial Statements and Schedules.
Part I — Item 1A: Risk Factors;
Part II — Item 6: Selected Financial Data;
Part II — Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part III — Item 8: Financial Statements and Supplementary Data;
Part III — Item 9A: Controls and Procedures; and
Part IV — Item 15: Exhibits, Financial Statements and Schedules.
In accordance with applicable SEC rules, this amended Annual Report on Form 10-K/A includes
current dated certifications from our Chief Executive Officer and Chief Financial Officer.
The remaining items contained within this Amended Filing consist of all other Items originally
contained in the Form 10-K and are included for the convenience of the reader. The sections of the
Form 10-K which were not amended are unchanged and continue in full force and effect as originally
filed. This Amended Filing speaks of the date of the original filing on the Form 10-K and has not
been updated to reflect events occurring subsequent to the original filing date.
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PART I
Item 1. BUSINESS
Katy Industries, Inc. (“Katy” or the “Company”) was organized as a Delaware corporation in
1967 and has an even longer history of successful operations, with some of its predecessor
companies having been established for as long as 75 years. We are organized into two operating
groups, Maintenance Products and Electrical Products, and a corporate group. Each majority-owned
company in the two groups operates within a broad framework of policies and corporate goals.
Katy’s corporate group is responsible for overall planning, financial management, acquisitions,
dispositions, and other related administrative and corporate matters.
Recapitalization
On June 28, 2001, we completed a recapitalization of the Company following an agreement dated
June 2, 2001 with KKTY Holding Company, L.L.C. (“KKTY”), an affiliate of Kohlberg Investors IV,
L.P. (“Kohlberg”) (“the Recapitalization”). Under the terms of the Recapitalization, KKTY
purchased 700,000 shares of newly issued preferred stock, $100 par value per share (the
“Convertible Preferred Stock”), which is convertible into 11,666,666 common shares, for an
aggregate purchase price of $70.0 million. More information regarding the Convertible Preferred
Stock can be found in Note 12 to the Consolidated Financial Statements of Katy included in Part
II, Item 8. The Recapitalization allowed us to retire obligations we had under the then-current
revolving credit agreement. Since the Recapitalization, the Company’s management has been focused
on various restructuring and cost reduction initiatives. Currently, the Company’s focus has
shifted to sustaining revenue growth and managing raw material costs. Our future cost reductions,
if any, will continue to come from process improvements (such as Lean Manufacturing and Six
Sigma), value engineering products, improved sourcing/purchasing and lean administration.
Operations
Selected operating data for each operating group can be found in Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in Part II, Item 7.
Information regarding foreign and domestic operations and export sales can be found in Note 17 to
the Consolidated Financial Statements of Katy included in Part II, Item 8. Set forth below is
information about our operating groups and investments and about our business in general.
We have restructured many of our operations in order to maintain a low cost structure, which
is essential for us to be competitive in the markets we serve. These restructuring efforts
include consolidation of facilities, headcount reductions, and evaluation of sourcing strategies
to determine the lowest cost method for obtaining finished product. Costs associated with these
efforts include expenses for recording liabilities for non-cancelable leases at facilities that
are abandoned, severance and other employee termination costs and other exit costs that may be
incurred not only with consolidation of facilities, but potentially the complete shut down of
certain manufacturing and distribution operations. We have incurred significant costs in this
respect, approximately $47 million since the beginning of 2001. As our post-Recapitalization
restructuring plan approaches completion, we expect to incur additional costs of approximately
$1.1 million in 2007, mostly related to the consolidation of the Washington, Georgia facility into
the Wrens, Georgia facility. Additional details regarding severance, restructuring and related
charges can be found in Note 19 to the Consolidated Financial Statements of Katy included in Part
II, Item 8.
Maintenance Products Group
The Maintenance Products Group’s principal business is the manufacturing and distribution of
commercial cleaning products as well as consumer home products. Commercial cleaning products are
sold primarily to janitorial/sanitary and foodservice distributors that supply end users such as
restaurants, hotels, healthcare facilities and schools. Consumer home products are primarily sold
through major home improvement and mass market retail outlets. Total revenues and operating
income for the Maintenance Products Group during 2006 were $208.4 million and $5.6 million,
respectively. The group accounted for 53% of the Company’s revenues in 2006. Total assets for
the group were $95.1 million at December 31, 2006. The business units in this group are:
Continental Commercial Products, LLC (“CCP”) is the successor entity to Contico
International, L.L.C. (“Contico”) and includes as divisions all the former business units of
Contico (Continental, Contico, and Container), as well as the following business units: Disco,
Glit and Wilen. CCP is headquartered in Bridgeton, Missouri near St. Louis, has additional
operations in California and Georgia, and was created mainly for the purpose of simplifying our
business transactions and improving our customer relationships by allowing customers to order
products from any CCP division on one purchase order.
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The Continental business unit is a plastics manufacturer and a distributor of
products for the commercial janitorial/sanitary maintenance and food service markets.
Continental products include commercial waste receptacles, buckets, mop wringers, janitorial
carts, and other products designed for commercial cleaning and food service. Continental
products are sold under the following brand names: Continental®, Kleen Aire™, Huskee™,
SuperKan™, KingKan®, Unibody®, and Tilt-N-Wheel™.
The Contico business unit is a plastics manufacturer and distributor of home storage
products, sold primarily through major home improvement and mass market retail outlets.
Contico products include plastic home storage units such as domestic storage containers,
shelving and hard plastic gun cases and are sold under the following brand names: Contico®
and Tuffbin®.
The Container business unit is a plastics manufacturer and distributor of industrial
storage drums and pails for commercial and industrial use. Products are sold under the
Contico® brand name.
The Disco business unit is a manufacturer and distributor of filtration, cleaning
and specialty products sold to the restaurant/food service industry. Disco products include
fryer filters, oil stabilizing powder, grill cleaning implements and other food service
items and are sold under the Disco® name as well as BriteSorb®, and the Brillo® line of
cleaning products. BriteSorb® is a registered trademark used under license from PQ
Corporation, and Brillo® is a registered trademark used under license from Church & Dwight
Company.
The Glit business unit is a manufacturer and distributor of non-woven abrasive
products for commercial and industrial use and also supplies materials to various original
equipment manufacturers (the “OEMs”). The Glit unit’s products include floor maintenance
pads, hand pads, scouring pads, specialty abrasives for cleaning and finishing and roof
ventilation products. Products are sold primarily in the commercial sanitary maintenance,
food service and construction markets. Glit products are sold under the following brand
names: Glit®, Glit Kleenfast®, Glit/Microtron®, Fiber Naturals®, Big Boss II®, Blue Ice®,
Brillo®, BAB-O®, Old Dutch® and Twister™ brand names. Brillo® is a registered trademark
used under license from Church & Dwight Company, Old Dutch® is a registered trademark used
under license from Dial Brands, Inc., and BAB-O® is a registered trademark used under
license from Fitzpatrick Bros., Inc. Twister™ is a trademark of HTC Industries, Inc.
This unit’s primary manufacturing facilities are in Wrens, Georgia, and Washington, Georgia.
The Washington facility is expected to close during 2007 and its operations consolidated
into the Wrens facility.
The Wilen business unit is a manufacturer and distributor of professional cleaning
products that include mops, brooms, brushes, and plastic cleaning accessories. Wilen
products are sold primarily through commercial sanitary maintenance and food service
markets, with some products sold through consumer retail outlets. Products are sold under
the following brand names: Wax-o-matic™, Wilen® and Rototech®.
The Maintenance Products Group also has operations in Canada and the United Kingdom (the
“U.K.”).
The CCP Canada business unit, headquartered in Etobicoke, Ontario, Canada, is a
distributor of primarily plastic products for the commercial and sanitary maintenance markets in
Canada.
The Gemtex business unit is headquartered in Etobicoke, Ontario, Canada, and is a
manufacturer and distributor of resin fiber disks and other coated abrasives for the OEMs,
automotive, industrial, and home improvement markets. The most prominent brand name under which
the product is sold is Trim-Kut®.
The Contico Manufacturing, Ltd. (“CML”) business unit is a distributor of a wide
range of cleaning equipment, storage solutions and washroom dispensers for the commercial and
sanitary maintenance and food service markets primarily in the U.K.
Electrical Products Group
The Electrical Products Group’s principal business is the design and distribution of consumer
electrical corded products. Products are sold principally to national home improvement and mass
merchant retailers, who in-turn sell to consumer end-users. Total revenues and operating income
for the Electrical Products Group during 2006 were $187.7 million and $8.7 million, respectively.
The group accounted for 47% of the Company’s revenues in 2006. Total assets for the group were
$74.0 million at December 31, 2006. Woods Industries, Inc. (“Woods US”) and Woods Industries
(Canada), Inc. (“Woods Canada”) are both subject to seasonal sales trends in connection with the
holiday shopping season, with stronger sales and profits realized in the third and early fourth
quarters. The business units in this group are:
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The Woods US business unit is headquartered in Indianapolis, Indiana, and distributes
consumer electrical corded products and electrical accessories. Examples of Woods US products are
outdoor and indoor extension cords, work lights, surge protectors, and power strips. Woods US
products are sold under the following brand names: Woods®, Yellow Jacket®, Tradesman®,
SurgeHawk®, and AC/Delco®. AC/Delco® is a registered trademark of The General Motors Corporation.
These products are sold primarily through national home improvement and mass merchant retail
outlets in the United States. Woods US’ products are sourced primarily from Asia.
The Woods Canada business unit is headquartered in Toronto, Ontario, Canada, and
distributes consumer electrical corded products and electrical accessories. In addition to the
products listed above for Woods US, Woods Canada’s primary product offerings include garden
lighting and timers. Woods Canada products are sold under the following brand names: MoonRays®,
Intercept®, and Pro Power®. These products are sold primarily through major home improvement and
mass merchant retail outlets in Canada. Woods Canada’s products are sourced primarily from Asia.
See Licenses, Patents and Trademarks below for further discussion regarding the trademarks
used by Katy companies.
Other Operations
Katy’s other operations include a 45% equity investment in a shrimp farming operation,
Sahlman Holding Company, Inc. (“Sahlman”), and a 100% interest in Savannah Energy Systems Company
(“SESCO”), the limited partner in a waste-to-energy facility.
Sahlman, which owns shrimp farming operations in Nicaragua, has a number of competitors, some
of which are larger and have greater financial resources. Katy’s interest in Sahlman is an equity
investment. During 2006, the Company did not recognize any equity in income from the Sahlman
investment. Katy concluded that $2.2 million continues to be a reasonable estimate of the value
of its investment in Sahlman. See Note 6 to the Consolidated Financial Statements of Katy
included in Part II, Item 8.
In 2006, the Company sold 100% of its partnership interest in Montenay Savannah Limited
Partnership, which was held by SESCO in Savannah, Georgia. The general partner of the partnership
is an affiliate of Montenay Power Corporation (“Montenay”). In 2006, Montenay purchased the
Company’s limited partnership interest for $0.1 million and a reduction of approximately $0.6
million in the face amount due to Montenay as agreed upon in the original partnership agreement.
In addition, Montenay removed the Company as the performance guarantor under the service agreement.
As a result of the above transaction, the Company recorded a gain of $0.4 million within
continuing operations during the year ended December 31, 2006 given the reduction in the face
amount due to Montenay as agreed upon in the original partnership interest purchase agreement. In
addition, the Company recorded a gain on the sale of the partnership interest of approximately $0.1
million as reflected within continuing operations. See Note 8 to the Consolidated Financial
Statements of Katy included in Part II, Item 8.
Discontinued Operations
In 2006, we identified and sold certain business units that we considered non-core to the
future operations of the Company. The Metal Truck Box business unit, a manufacturer and
distributor of aluminum and steel automotive storage products located in Winters, Texas was sold
on June 2, 2006 for net proceeds of $3.6 million, including a note receivable of $1.2 million. A
loss of $50 thousand was recognized in 2006 as a result of the Metal Truck Box sale. The Metal
Truck Box business unit was formerly part of the Maintenance Products Group.
Also, in 2006, we sold the Contico Europe Limited (“CEL”) business unit, a manufacturer and
distributor of plastic consumer storage and home products sold primarily to major retail outlets
in the U.K. The business unit was sold on November 27, 2006 for net proceeds of $3.0 million. A
loss (net of tax) of $5.4 million was recognized in 2006. CEL was formerly part of the
Maintenance Products Group.
Customers
We have several large customers in the mass merchant/discount/home improvement retail
markets. Two customers, Lowe’s Companies, Inc. (“Lowe’s”) and Wal-Mart Stores, Inc. (“Wal-Mart”),
accounted for approximately 16% and 14%, respectively, of consolidated net sales. Sales to Lowe’s
are made by the Woods US and Contico business units. Sales to Wal-Mart are made by the Woods US,
Contico, Glit, Woods Canada, Wilen, and Continental business units. A significant loss of
business from either of these customers could have a material adverse impact on our business,
results of operations or prospects.
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Backlog
Maintenance Products:
Our aggregate backlog position for the Maintenance Products Group was $3.1 million and $5.5
million as of December 31, 2006 and 2005 respectively. The orders placed in 2006 are believed to
be firm, and based on historical experience, substantially all orders are expected to be shipped
during 2007.
Electrical Products:
Our aggregate backlog position for the Electrical Products Group was $17.6 million and $8.6
million as of December 31, 2006 and 2005, respectively. The orders placed in 2006 are believed to
be firm, and based on historical experience, substantially all orders are expected to be shipped
during 2007. The increase in 2006 primarily relates to the timing of a major customer’s ordering
levels.
Markets and Competition
Maintenance Products:
We market a variety of commercial cleaning products and supplies to the commercial
janitorial/sanitary maintenance and foodservice markets. Sales and marketing of these products is
handled through a combination of direct sales personnel, manufacturers’ sales representatives, and
wholesale distributors.
The commercial distribution channels for our commercial cleaning products are highly
fragmented, resulting in a large number of small customers, mainly distributors of janitorial
cleaning products. The markets for these commercial products are highly competitive. Competition
is based primarily on price and the ability to provide superior customer service in the form of
complete and on-time product delivery. Other competitive factors include brand recognition and
product design, quality and performance. We compete for market share with a number of different
competitors, depending upon the specific product. In large part, our competition is unique in
each product line area of the Maintenance Products Group. We believe that we have established
long standing relationships with our major customers based on quality products and service, and
our ability to offer a complete line of products. While each product line is marketed under a
different brand name, they are sold as complementary products, with customers able to access all
products through a single purchase order. We also continue to strive to be a low cost provider in
this industry; however, our ability to remain a low cost provider in the industry is highly
dependent on the price of our raw materials, primarily resin (see discussion below). Being a low
cost producer is also dependent upon our ability to reduce and subsequently control our cost
structure, which has benefited from our nearly completed restructuring efforts.
We market branded plastic home storage units, and to a lesser extent, abrasive products and
mops and brooms, to mass merchant and discount club retailers in the U.S. Sales and marketing of
these products is generally handled by direct sales personnel and external representative groups.
The consumer distribution channels for these products, especially the in-home products, are highly
concentrated, with several large mass merchant retailers representing a very significant portion
of the customer base. We compete with a limited number of large companies that offer a broad
array of products and many small companies with niche offerings. With few consumer storage
products enjoying patent protection, the primary basis for competition is price. Therefore,
efficient manufacturing and distribution capability is critical to success. Ultimately, our
ability to remain competitive in these consumer markets is dependent upon our position as a low
cost producer, and also upon our development of new and innovative products. We continue to
pursue new markets for our products. Our ability to remain a low cost provider in the industry is
highly dependent on the price of our raw materials, primarily resin (see discussion below). Being
a low cost producer is also dependent upon our ability to reduce and subsequently control our cost
structure, which has benefited from our nearly completed restructuring efforts. Our restructuring
efforts have and will include consolidation of facilities and headcount reductions.
We also market certain of our products to the construction trade, and resin fiber disks and
other abrasive disks to the OEM trade.
Electrical Products:
We market branded electrical products primarily in North America through a combination of
direct sales personnel and manufacturers’ sales representatives. Our primary customer base
consists of major national retail chains that service the home improvement, mass merchant,
hardware and electronic and office supply markets, and smaller regional concerns serving a similar
customer base.
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Electrical products sold by the Company are generally used by consumers and include such
items as outdoor and indoor extension cords, work lights, surge protectors, power strips, garden
lighting and timers. We have entered into license agreements pursuant to which we market certain
of our products using certain other companies’ proprietary brand names. Overall demand for our
products is highly correlated with the number of suburban homes and the consumer demand for
appliances, computers, home entertainment equipment, and other electronic equipment.
The markets for our electrical products are highly competitive. Competition is based
primarily on price and the ability to provide a high level of customer service in the form of
inventory management, high fill rates and short lead times. Other competitive factors include
brand recognition, a broad product offering, product design, quality and performance. Foreign
competitors, especially from Asia, provide an increasing level of competition. Our ability to
remain competitive in these markets is dependent upon continued efforts to remain a low-cost
provider of these products. Woods US and Woods Canada source all of their products almost
entirely from international suppliers.
Raw Materials
Our operations have not experienced significant difficulties in obtaining raw materials,
fuels, parts or supplies for their activities during the most recent fiscal year, but no
prediction can be made as to possible future supply problems or production disruptions resulting
from possible shortages. Our Electrical Products businesses are highly dependent upon products
sourced from Asia, and therefore remain vulnerable to potential disruptions in that supply chain.
We are also subject to uncertainties involving labor relations issues at entities involved in our
supply chain, both at suppliers and in the transportation and shipping area. Our Continental and
Contico business units (and some others to a lesser extent) use polyethylene, polypropylene and
other thermoplastic resins as raw materials in a substantial portion of their plastic products.
Prices of plastic resins, such as polyethylene and polypropylene increased steadily from the
latter half of 2002 through 2005 with prices in 2006 being relatively stable. Management has
observed that the prices of plastic resins are driven to an extent by prices for crude oil and
natural gas, in addition to other factors specific to the supply and demand of the resins
themselves. We are equally exposed to price changes for copper at our Woods US and Woods Canada
business units. Prices for copper began to increase in early 2003 and continued through 2006
until stabilizing at the end of 2006. Prices for corrugated packaging material and other raw
materials have also accelerated over the past few years. We have not employed an active hedging
program related to our commodity price risk, but are employing other strategies for managing this
risk, including contracting for a certain percentage of resin needs through supply agreements and
opportunistic spot purchases. We were able to reduce the impact of some of these increases
through supply contracts, opportunistic buying, vendor negotiations and other measures. In
addition, some price increases were implemented when possible. In a climate of rising raw
material costs (and especially in the last three years), we experience difficulty in raising
prices to shift these higher costs to our consumer customers for our plastic and electrical
products. Our future earnings may be negatively impacted to the extent further increases in costs
for raw materials cannot be recovered or offset through higher selling prices. We cannot predict
the direction our raw material prices will take during 2007 and beyond.
Employees
As of December 31, 2006, we employed 1,172 people, of which 304 were members of various
unions. Our labor relations are generally satisfactory and there have been no strikes in recent
years. In January 2007, one of our expiring union contracts was renewed for a term of three
years, covering approximately 77 employees. The next union contract set to expire, covering
approximately 227 employees, will expire in December, 2007. Our operations can be impacted by
labor relations issues involving other entities in our supply chain.
Regulatory and Environmental Matters
We do not anticipate that federal, state or local environmental laws or regulations will have
a material adverse effect on our consolidated operations or financial position. We anticipate
making additional capital expenditures of $0.2 million for environmental matters during 2007, in
accordance with terms agreed upon with the United States Environmental Protection Agency and
various state environmental agencies. See Note 18 to the Consolidated Financial Statements in
Part II, Item 8.
Licenses, Patents and Trademarks
The success of our products historically has not depended largely on patent, trademark and
license protection, but rather on the quality of our products, proprietary technology, contract
performance, customer service and the technical competence and innovative ability of our personnel
to develop and introduce salable products. However, we do rely to a certain extent on patent
protection, trademarks and licensing arrangements in the marketing of certain products. Examples
of key licensed and protected trademarks include Yellow Jacket®, Woods®, Tradesman®, and AC/Delco®
(Woods US); Contico®; Continental®; Glit®, Microtron®, Brillo®, and Kleenfast® (Glit); Wilen™; and
Trim-Kut® (Gemtex). The business units most reliant upon patented products and technology are
CCP, Woods US, Woods Canada and Gemtex. Further,
we are renewing our emphasis on new product development, which will increase our reliance on
patent and trademark protection across all business units.
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Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with
the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). The public may read and copy any materials that the Company files
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at
(800) SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers, including Katy, that file
electronically with the SEC. The public can obtain documents that we file with the SEC at
http://www.sec.gov.
We maintain a website at http://www.katyindustries.com. We make available, free of charge
through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and, if applicable, all amendments to these reports as well as Section 16
reports on Forms 3, 4 and 5, as soon as reasonably practicable after such reports are filed or
furnished to the SEC. The information on our website is not, and shall not be deemed to be, a
part of this report or incorporated into any other filings we make with the SEC.
Item 1A. RISK FACTORS
In addition to other information and risk disclosures contained in this Form 10-K, the risk
factors discussed in this section should be considered in evaluating our business. We work to
manage and mitigate risks proactively. Nevertheless, the following risk factors, some of which may
be beyond our control, could materially impact our result of operations or cause future results to
materially differ from current expectations. Please also see “Cautionary Statement Pursuant to
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.”
Our inability to achieve product price increases, especially as they relate to potentially higher
raw material costs, may negatively impact our earnings.
Costs for certain raw materials used in our operations, including copper products, remain at
unprecedented high levels. In addition, prices for thermoplastic resin have demonstrated
volatility over the past few years. Increasing costs for raw material supplies will increase our
production costs and harm our margins and results of operations if we are unable to pass the higher
production costs on to our customers in the form of price increases. Further, if we are unable to
obtain adequate supplies of raw materials in a timely manner, our operations could be interrupted.
The loss of a significant customer or the financial weakness of a significant customer could
negatively impact our results of operations.
We have several large customers in the mass merchant/discount/home improvement retail markets.
Two customers accounted for approximately 30% of consolidated net sales. While no other customer
accounted for more than 10% of our total net sales in 2006, we do have other significant customers.
The loss of any of these customers, or a significant reduction in our sales to any of such
customers, could adversely affect our sales and results of operations. In addition, if any of such
customers became insolvent or otherwise failed to pay its debts, it could have an adverse affect on
our results of operations.
Increases in the cost of, or in some cases continuation of, the current price levels of plastic
resins, copper, and other raw materials may negatively impact our earnings.
Our reliance on foreign suppliers and commodity markets to secure raw materials used in our
products exposes us to volatility in the prices and availability of raw materials. In some
instances, we depend upon a single source of supply or participate in commodity markets that may be
subject to allocations by suppliers. A disruption in deliveries from our suppliers, price
increases, or decreased availability of raw materials or commodities, could have an adverse effect
on our ability to meet our commitments to customers or increase our operating costs. We believe
that our supply management practices are based on an appropriate balancing of the foreseeable risks
and the costs of alternative practices. Nonetheless, price increases or the unavailability of some
raw materials, should they occur, may have an adverse effect on our results of operations or
financial condition.
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The Company’s success depends on its ability to continuously improve productivity and streamline
operations, principally by reducing its manufacturing overhead.
We have restructured many of our operations in order to maintain a low cost structure, which
is essential for us to be competitive in the markets we serve. The Company needs to continuously
improve its manufacturing efficiencies by the use of Lean Manufacturing and other methods in order
to reduce its overhead structure. In addition, we will need to develop efficiencies within
sourcing/purchasing as well as administration. We run the risk that these programs may not be
completed substantially as planned, may be more costly to implement than expected or may not have
the positive profit enhancing impact anticipated.
Disruption of our information technology and communications systems or our failure to adequately
maintain our information technology and communications systems could have a material adverse effect
on our business and operations.
We extensively utilize computer and communications systems to operate our business and manage
our internal operations including demand and supply planning and inventory control. Any
interruption of this service from power loss, telecommunications failure, failure of our computer
system or other interruption caused by weather, natural disasters or any similar event could
disrupt our operations and result in lost sales. In addition, hackers and computer viruses have
disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage,
which could have a material adverse effect on our business and operations.
We rely on our management information systems to operate our business and to track our
operating results. Our management information systems will require modification and refinement as
we grow and our business needs change. If we experience a significant system failure or if we are
unable to modify our management information systems to respond to changes in our business needs,
our ability to properly run our business could be adversely affected.
Our inability to execute our acquisition integration and consolidation of facilities plans could
adversely affect our business and results of operations.
We had sought to grow through strategic acquisitions. In addition, we have consolidated
several manufacturing, distribution and office facilities. The success of these acquisitions and
consolidations will depend on our ability to integrate assets and personnel, apply our internal
controls processes to these businesses, and cooperate with our strategic partners. We may encounter
difficulties in integrating business units with our operations, and in managing strategic
investments. Furthermore, we may not realize the degree, or timing, of benefits we anticipate when
we first enter into these organizational changes. Any of the foregoing could adversely affect our
business and results of operations.
Fluctuations in the price, quality and availability of certain portions of our finished goods due
to greater reliance on third parties could negatively impact our results of operations.
Because we are dependent on outside suppliers for a certain portion of our finished goods, we
must obtain sufficient quantities of quality finished goods from our suppliers at acceptable prices
and in a timely manner. We have no long-term supply contracts with our key suppliers. Unfavorable
fluctuations in the price, quality and availability of these products could negatively affect our
ability to meet demands of our customers and could result in a decrease in our sales and earnings.
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 entities
involved in transportation and shipping.
Katy’s relationships with its union employees could deteriorate. At December 31, 2006, the
Company employed approximately 1,172 persons in its various businesses of which approximately 26%
were subject to collective bargaining or similar arrangements. The next union contract set to
expire, covering approximately 227 employees, will expire in December, 2007. If Katy’s union
employees were to engage in a strike, work stoppage or other slowdown, the Company could experience
a significant disruption of its operations or higher ongoing labor costs.
Our future performance is influenced by our ability to remain competitive.
As discussed in “Business — Competition”, we operate in markets that are highly competitive
and face substantial competition in each of our product lines from numerous competitors. The
Company’s competitive position in the markets in which it participates is, in part, subject to
external factors. For example, supply and demand for certain of the Company’s products is driven
by end-use markets and worldwide capacities which, in turn, impact demand for and pricing of the
Company’s products. Many of the Company’s direct competitors are part of large multi-national
companies and may have more
resources than the Company. Any increase in competition may result in lost market share or
reduced prices, which could result in reduced gross profit margins. This may impair the ability to
grow or even to maintain current levels of revenues and earnings. If we are not as cost efficient
as our competitors, or if our competitors are otherwise able to offer lower prices, we may lose
customers or be forced to reduce prices, which could negatively impact our financial results.
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We may not be able to protect our intellectual property rights adequately.
Part of our success depends upon our ability to use and protect proprietary technology and
other intellectual property, which generally covers various aspects in the design and manufacture
of our products and processes. We own and use tradenames and trademarks worldwide. We rely upon a
combination of trade secrets, confidentiality policies, nondisclosure and other contractual
arrangements and patent, copyright and trademark laws to protect our intellectual property rights.
The steps we take in this regard may not be adequate to prevent or deter challenges, reverse
engineering or infringement or other violation of our intellectual property, and we may not be able
to detect unauthorized use or take appropriate and timely steps to enforce our intellectual
property rights to the same extent as the laws of the United States.
We have a high amount of debt, and the cost of servicing that debt could adversely affect our
ability to take actions or our liquidity or financial condition.
We have a high amount of debt for which we are required to make interest and principal
payments. As of December 31, 2006, we had $56.9 million of debt. Subject to the limits contained in
some of the agreements governing our outstanding debt, we may incur additional debt in the future.
Our level of debt places significant demands on our cash resources, which could: make it more
difficult for us to satisfy our outstanding debt obligations; require us to dedicate a substantial
portion of our cash for payments on our debt, reducing the amount of our cash flow available for
working capital, capital expenditures, acquisitions, and other general corporate purposes; limit
our flexibility in planning for, or reacting to, changes in the industries in which we compete;
place us at a competitive disadvantage compared to our competitors, some of which have lower debt
service obligations and greater financial resources than we do; limit our ability to borrow
additional funds; or increase our vulnerability to general adverse economic and industry
conditions.
If we are unable to generate sufficient cash flow to service our debt and fund our operating
costs, our liquidity may be adversely affected.
Our inability to meet covenants associated with the Company’s Amended and Restated Loan with Bank
of America, N.A. (the “Bank of America Credit Agreement”) could result in acceleration of all or a
substantial portion of our debt.
Our outstanding debt generally contains various restrictive covenants. These covenants
include, among others, provisions restricting our ability to: incur additional debt; make certain
distributions, investments and other restricted payments; limit the ability of restricted
subsidiaries to make payments to us; enter into transactions with affiliates; create certain liens;
sell assets and if sold, use of proceeds; and consolidate, merge or sell all or substantially all
of our assets.
Our secured debt also contains other customary covenants, including, among others, provisions:
relating to the maintenance of the property securing the debt, and restricting our ability to
pledge assets or create other liens.
In addition, certain covenants in our bank facilities require us and our subsidiaries to
maintain certain financial ratios. Any of the covenants described in this risk factor may restrict
our operations and our ability to pursue potentially advantageous business opportunities. Our
failure to comply with these covenants could also result in an event of default that, if not cured
or waived, could result in the acceleration of all or a substantial portion of our debt. We have
not been able to meet certain affirmative covenants in our Bank of America Credit Agreement, which
has resulted in eight amendments temporarily relieving us from these obligations. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Bank of
America Credit Agreement” for further discussion of these amendments.
If we cannot meet the New York Stock Exchange (“NYSE”) continued listing requirement, the NYSE may
delist our common stock, which could negatively affect the price of the common stock and your
ability to sell the common stock.
In the future, we may not be able to meet the continued listing requirements of the NYSE, and
NYSE rules, which require, among other things, market capitalization or stockholders’ equity of at
least $75.0 million level over 30 consecutive trading days. The Company’s shareholders’ equity was
less than $75.0 million as of March 15, 2007.
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On October 11, 2005, we announced that we received notification from the NYSE that the Company
was not in compliance with the NYSE’s continued listing standards. The Company’s plan to
demonstrate how the Company intends to comply with the continued listing standards within 18 months
of its receipt was accepted by the NYSE.
If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be
subject to delisting. Trading, if any, of our common stock would thereafter be conducted on
another exchange or quotation system. As a consequence of any such delisting, a stockholder would
likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of
our common stock.
If our internal controls over financial reporting are found not to be effective or if we make
disclosure of existing or potential significant deficiencies or material weaknesses in those
controls, Investors could lose confidence in our financial reports, and our stock price may be
adversely affected.
Beginning with our Annual Report for the year ending December 31, 2007, Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to include an internal control report with our Annual Report
on Form 10-K. That report must include management’s assessment of the effectiveness of our
internal control over financial reporting as of the end of the fiscal year. Additionally, our
independent registered public accounting firm will be required to issue a report on management’s
assessment of our internal control over financial reporting and a report on their evaluation of the
operating effectiveness of our internal control over financial reporting beginning with our Annual
Report for the year ending December 31, 2008.
We continue to evaluate our existing internal control over financial reporting against the
standards adopted by the Public Company Accounting Oversight Board, or PCAOB. During the course of
our ongoing evaluation of the internal controls, we may identify areas requiring improvement, and
may have to design enhanced processes and controls to address issues identified through this
review. Despite the existence of material weaknesses or significant deficiencies in our internal
control over financial reporting, we may fail to identify them. Remedying any deficiencies,
significant deficiencies or material weaknesses that we or our independent registered public
accounting firm may identify, may require us to incur significant costs and expend significant time
and management resources. Further, any of the measures we implement to remedy any such
deficiencies may not effectively mitigate or remedy such deficiencies.
Any failure to remedy the deficiencies identified by management, any failure to implement
required new or improved controls and the discovery of unidentified deficiencies could harm our
operating results, cause us to fail to meet our reporting obligations, subject us to increased risk
of errors and fraud related to our financial statements or result in material misstatements in, and
untimely filing of, our financial statements. The existence of a material weakness could also
cause a restatement of future presented financial statements. Investors could lose confidence in
our financial reports, and our stock price may be adversely affected, if our internal controls over
financial reporting are found not to be effective by management or by an independent registered
public accounting firm or if we make disclosure of existing or potential significant deficiencies
or material weaknesses in those controls.
Changes in significant laws and government regulations affecting environmental compliance and
income taxes.
Katy is subject to many environmental and safety regulations with respect to its operating
facilities that may result in unanticipated costs or liabilities. Most of the Company’s facilities
are subject to extensive laws, regulations, rules and ordinances relating to the protection of the
environment, including those governing the discharge of pollutants in the air and water and the
generation, management and disposal of hazardous substances and wastes or other materials. Katy
may incur substantial costs, including fines, damages and criminal penalties or civil sanctions, or
experience interruptions in its operations for actual or alleged violations or compliance
requirements arising under environmental laws. The Company’s operations could result in violations
under environmental laws, including spills or other releases of hazardous substances to the
environment. Given the nature of Katy’s business, violations of environmental laws may result in
restrictions imposed on its operating activities or substantial fines, penalties, damages or other
costs, including as a result of private litigation. In addition, the Company may incur significant
expenditures to comply with existing or future environmental laws. Costs relating to environmental
matters will be subject to evolving regulatory requirements and will depend on the timing of
promulgation and enforcement of specific standards that impose requirements on Katy’s operations.
Costs beyond those currently anticipated may be required under existing and future environmental
laws.
At any point in time, many tax years are subject to audit by various taxing jurisdictions. The
results of these audits and negotiations with tax authorities may affect tax positions taken.
Additionally, our effective tax rate in a given financial statement period may be materially
impacted by changes in the geographic mix or level of earnings.
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We are subject to litigation that could adversely affect our operating results.
From time to time we may be a party to lawsuits and regulatory actions relating to our
business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot
accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have
a material adverse impact on our business, financial condition and results of operations. In
addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings
could result in substantial costs and may require that we devote substantial resources to defend
the Company. Further, changes in government regulations both in the United States and in the
foreign countries in which we operate could have adverse effects on our business and subject us to
additional regulatory actions. The Company is currently a party to various lawsuits. See “Legal
Proceedings.”
Because we translate foreign currency from international sales into U.S. dollars and are required
to make foreign currency payments, we may incur losses due to fluctuations in foreign currency
exchange rates.
We are exposed to fluctuations in the Euro, British pound, Canadian dollar and various Asian
currencies such as the Chinese Renminbi. We recognize foreign currency gains or losses arising
from our operations in the period incurred. As a result, currency fluctuations between the U.S.
dollar and the currencies in which we do business will cause foreign currency translation gains and
losses, which may cause fluctuations in our future operating results. We do not currently engage
in foreign exchange hedging transactions to manage our foreign currency exposure.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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Item 2. PROPERTIES
As of December 31, 2006, our total building floor area owned or leased was 2,679,000 square
feet, of which 185,000 square feet were owned and 2,494,000 square feet were leased. The
following table shows a summary by location of our principal facilities including the nature of
the facility and the related business unit.
| Location | Facility | Business Unit | ||
UNITED STATES |
||||
California |
||||
Norwalk |
Manufacturing, Distribution | Continental, Contico, Container | ||
Chino |
Distribution | Continental, Contico, Glit, Wilen, Disco | ||
Georgia |
||||
Atlanta |
Manufacturing, Distribution | Wilen | ||
McDonough |
Manufacturing, Distribution | Glit, Wilen, Disco | ||
Wrens* |
Manufacturing, Distribution | Glit | ||
Washington** |
Manufacturing | Glit | ||
Indiana |
||||
Carmel |
Manufacturing | Woods US | ||
Indianapolis |
Office, Distribution | Woods US | ||
Missouri |
||||
Bridgeton |
Office, Manufacturing, Distribution | Continental, Contico | ||
Hazelwood |
Manufacturing | Continental, Contico | ||
Virginia |
||||
Arlington |
Corporate Headquarters | Corporate | ||
CANADA |
||||
Ontario |
||||
Toronto |
Office, Manufacturing, Distribution | Gemtex | ||
Toronto |
Office, Distribution | Woods Canada, CCP Canada | ||
CHINA |
||||
Shenzhen |
Office | Woods US | ||
UNITED KINGDOM |
||||
Cornwall |
||||
Redruth*** |
Office, Distribution | CML | ||
Berkshire |
||||
Slough |
Office | CML |
| * | Facility is owned. |
|
| ** | During 2007, we expect to consolidate all of our abrasives operations in Washington, Georgia
into our Wrens, Georgia (“Wrens”) facility. |
|
| *** | Facility was sold in January, 2007; however, we will lease a portion of the facility. |
We believe that our current facilities have been adequately maintained, generally are in good
condition, and are suitable and adequate to meet our needs in our existing markets for the
foreseeable future.
Item 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 18 to the Consolidated Financial
Statements in Part II, Item 8 and is incorporated by reference herein.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during the fourth quarter of
2006.
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange (“NYSE”). The following table sets
forth high and low sales prices for the common stock in composite transactions as reported on the
NYSE composite tape for the prior two years.
| Period | High | Low | ||||||
2006 |
||||||||
First Quarter |
$ | 3.75 | $ | 2.80 | ||||
Second Quarter |
3.61 | 2.24 | ||||||
Third Quarter |
3.23 | 1.85 | ||||||
Fourth Quarter |
3.40 | 2.51 | ||||||
2005 |
||||||||
First Quarter |
$ | 5.41 | $ | 3.80 | ||||
Second Quarter |
3.98 | 2.35 | ||||||
Third Quarter |
3.70 | 2.25 | ||||||
Fourth Quarter |
3.50 | 1.80 | ||||||
As of February 28, 2007, there were 567 holders of record of our common stock, in addition to
approximately 1,173 holders in street name, and there were 7,951,177 shares of common stock
outstanding.
Dividend Policy
Dividends are paid at the discretion of the Board of Directors. Since the Board of Directors
suspended quarterly dividends on March 30, 2001 in order to preserve cash for operations, the
Company has not declared or paid any cash dividends on its common stock. In addition, the Bank of
America Credit Agreement prohibits the Company from paying dividends on its securities, other than
dividends paid solely in securities. The Company currently intends to retain its future earnings,
if any, to fund the development and growth of its business and, therefore, does not anticipate
paying any dividends, either in cash or securities, in the foreseeable future. Any future decision
concerning the payment of dividends on the Company’s common stock will be subject to its
obligations under the Bank of America Credit Agreement and will depend upon the results of
operations, financial condition and capital expenditure plans of the Company, as well as such other
factors as the Board of Directors, in its sole discretion, may consider relevant. For a discussion
of our Bank of America Credit Agreement, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under the Company’s equity
compensation plans as of December 31, 2006 is set forth in Item 12, “Security Ownership of Certain
Beneficial Owners and Management.”
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Share Repurchase Plan
On April 20, 2003, the Company announced a plan to repurchase up to $5.0 million in shares of
its common stock. In 2004, 12,000 shares of common stock were repurchased on the open market for
approximately $0.1 million, while in 2003, 482,800 shares of common stock were repurchased on the
open market for approximately $2.5 million. We suspended further repurchases under the plan on May
10, 2004. On December 5, 2005, the Company announced the resumption of the above plan to
repurchase $1.0 million in shares of its common stock. In 2005, 3,200 shares of common stock were
repurchased on the open market for $7.5 thousand. In 2006, 40,800 shares of common stock, of which
4,900 shares were completed in the fourth quarter, were repurchased on the open market for $0.1
million. The following table sets forth the repurchases made under this program:
| Total Number | Maximum | |||||||||||||||
| of Shares | Number of | |||||||||||||||
| Purchased as | Shares That | |||||||||||||||
| Part of | May Yet Be | |||||||||||||||
| Publicly | Purchased | |||||||||||||||
| Total Number | Announced | Under the | ||||||||||||||
| of Shares | Average Price | Plans or | Plans or | |||||||||||||
| Period | Purchased | Paid per Share | Programs | Programs | ||||||||||||
2005 |
3,200 | $ | 2.35 | 3,200 | 333,333 | |||||||||||
2006 |
40,800 | $ | 2.71 | 40,800 | ||||||||||||
Total |
44,000 | $ | 2.68 | 44,000 | ||||||||||||
The Company’s share repurchase program is conducted under authorizations made from time to
time by the Company’s Board of Directors. The shares reported in the table are covered by Board
authorizations to repurchase shares of common stock, as follows: 333,333 shares announced on
December 5, 2005. This authorization does not have an expiration date.
Performance Graph
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to
be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under
the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange
Act of 1934, and will not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically
incorporate it by reference into such a filing.
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The graph below compares the yearly percentage change in the cumulative total stockholder
return on the shares of Katy common stock with the cumulative total returns of the Russell 2000
Index, the Dow Jones US Industrial Diversified Index and the S&P Smallcap 600 Industrial
Conglomerates Index for the fiscal years ending December 31, 2001 through 2006. The calculations
in the graph below assume $100 was invested on December 31, 2001 in Katy’s common stock and each
index, and also assume reinvestment of dividends.
| 12/01 | 12/02 | 12/03 | 12/04 | 12/05 | 12/06 | |||||||||||||||||||
Katy Industries, Inc. |
100.00 | 100.58 | 166.96 | 151.46 | 90.64 | 78.36 | ||||||||||||||||||
Russell 2000 |
100.00 | 79.52 | 117.09 | 138.55 | 144.86 | 171.47 | ||||||||||||||||||
Dow Jones US Diversified Industrials |
100.00 | 64.93 | 87.84 | 104.69 | 101.95 | 111.68 | ||||||||||||||||||
S & P SmallCap Industrial Conglomerates |
100.00 | 59.47 | 80.21 | 95.65 | 92.02 | 99.94 | ||||||||||||||||||
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Item 6. SELECTED FINANCIAL DATA
| Years Ended December 31, | ||||||||||||||||||||
| As Restated, see Note 2 | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
| (Amounts in Thousands, except per share data and percentages) | ||||||||||||||||||||
Net sales |
$ | 396,166 | $ | 423,390 | $ | 416,681 | $ | 398,249 | $ | 403,599 | ||||||||||
Loss from continuing operations [a] |
$ | (4,789 | ) | $ | (11,619 | ) | $ | (36,528 | ) | $ | (17,255 | ) | $ | (55,149 | ) | |||||
Discontinued operations [b] |
(6,834 | ) | (2,178 | ) | 407 | 7,891 | 914 | |||||||||||||
Cumulative effect of a change in accounting principle [b] [c] |
(756 | ) | — | — | — | (2,514 | ) | |||||||||||||
Net loss |
(12,379 | ) | (13,797 | ) | (36,121 | ) | (9,364 | ) | (56,749 | ) | ||||||||||
Gain on early redemption of preferred interest of subsidiary [d] |
— | — | — | 6,560 | — | |||||||||||||||
Payment-in-kind of dividends on convertible preferred stock [e] |
— | — | (14,749 | ) | (12,811 | ) | (11,136 | ) | ||||||||||||
Net loss attributable to common stockholders |
$ | (12,379 | ) | $ | (13,797 | ) | $ | (50,870 | ) | $ | (15,615 | ) | $ | (67,885 | ) | |||||
(Loss) earnings per share of common stock — Basic and diluted: |
||||||||||||||||||||
Loss from continuing operations attributable to
common stockholders |
$ | (0.60 | ) | $ | (1.47 | ) | $ | (6.50 | ) | $ | (2.86 | ) | $ | (7.92 | ) | |||||
Discontinued operations |
(0.86 | ) | (0.27 | ) | 0.05 | 0.96 | 0.11 | |||||||||||||
Cumulative effect of a change in accounting principle |
(0.09 | ) | — | — | — | (0.30 | ) | |||||||||||||
Net loss attributable to common stockholders |
$ | (1.55 | ) | $ | (1.74 | ) | $ | (6.45 | ) | $ | (1.90 | ) | $ | (8.11 | ) | |||||
Total assets |
$ | 182,694 | $ | 212,094 | $ | 224,464 | $ | 241,708 | $ | 275,977 | ||||||||||
Total liabilities |
140,662 | 157,390 | 155,879 | 139,416 | 157,405 | |||||||||||||||
Preferred interest in subsidiary |
— | — | — | — | 16,400 | |||||||||||||||
Stockholders’ equity |
42,032 | 54,704 | 68,585 | 102,292 | 102,172 | |||||||||||||||
Long-term debt, including current maturities |
56,871 | 57,660 | 58,737 | 39,663 | 45,451 | |||||||||||||||
Impairments of long-lived assets [f] |
— | 2,112 | 30,056 | 11,525 | 21,204 | |||||||||||||||
Severance, restructuring and related charges [f] |
(112 | ) | 1,090 | 3,505 | 8,132 | 19,155 | ||||||||||||||
Depreciation and amortization [f] |
8,640 | 8,968 | 12,145 | 18,877 | 17,732 | |||||||||||||||
Capital expenditures [f] |
4,614 | 8,925 | 10,782 | 11,062 | 8,714 | |||||||||||||||
Working capital [g] |
48,610 | 48,132 | 59,855 | 43,439 | 35,206 | |||||||||||||||
Ratio of debt to capitalization |
57.5 | % | 51.3 | % | 46.1 | % | 27.9 | % | 27.7 | % | ||||||||||
Weighted average common shares outstanding — Basic and diluted |
7,966,742 | 7,948,749 | 7,883,265 | 8,214,712 | 8,370,815 | |||||||||||||||
Number of employees |
1,172 | 1,544 | 1,793 | 1,808 | 2,261 | |||||||||||||||
Cash dividends declared per common share |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| [a] | Includes distributions on preferred securities in 2003 and 2002. |
|
| [b] | Presented net of tax. |
|
| [c] | In 2006, this amount is stock compensation expense recorded with the adoption of Statement of
Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. In 2002, this amount is a
transitional impairment of goodwill recorded with the adoption of SFAS No. 142, Goodwill and Other
Intangible Assets. |
|
| [d] | Represents the gain recognized on a redemption of a preferred interest of our CCP subsidiary. |
|
| [e] | Represents a 15% payment-in-kind dividend on our Convertible Preferred Stock. See Note 12 to
the Consolidated Financial Statements in Part II, Item 8. |
|
| [f] | From continuing operations only. |
|
| [g] | Defined as current assets minus current liabilities, exclusive of deferred tax assets and
liabilities and debt classified as current. |
19
Table of Contents
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Restatement of Prior Financial Information
As a result of accounting errors in the raw material inventory records, management and the
Company’s Audit Committee determined on August 6, 2007 that the Company’s consolidated financial
statements for fiscal 2005 and 2006 should no longer be relied upon. The Company’s decision to
restate its consolidated financial statements is based on facts obtained by management and the
results of an internal investigation of the physical raw material inventory counting process at
CCP. These procedures resulted in the identification of an intentional overstatement of raw
material inventory when completing the physical inventory. At the time of the physical
inventories, the Company did not have sufficient controls in place to ensure that the accurate
physical raw material inventory on hand was properly accounted for and reported in the proper
period.
In addition, as part of the restatement, the Company has recorded additional items, certain of
which were previously identified and determined to be immaterial. The impact of these additional
items on net loss is approximately ($0.4) million and $0.2 million for the years ended December 31,
2005 and 2006, respectively, which is allocated entirely to loss from continuing operations.
Refer to Note 2 of the Consolidated Financial Statements for additional discussion related to
the effects of the restatement.
COMPANY OVERVIEW
For purposes of this discussion and analysis section, reference is made to the table below
and the Company’s Consolidated Financial Statements included in Part II, Item 8. We have two
principal operating groups: Maintenance Products and Electrical Products. The group labeled as
Other consists of Sahlman and SESCO. Two businesses formerly included in the Maintenance Products
Group, Metal Truck Box and CEL, have been classified as Discontinued Operations for the periods
prior to their sale. These business units were sold in 2006.
Since the Recapitalization, the Company’s management has been focused on various
restructuring and cost reduction initiatives. Currently, the Company’s focus has shifted to
sustaining revenue growth and managing raw material costs. Our future cost reductions, if any,
will continue to come from process improvements (such as Lean Manufacturing and Six Sigma), value
engineering products, improved sourcing/purchasing and lean administration.
End-user demand for our Maintenance and Electrical products is relatively stable and
recurring. Demand for products in our markets is strong and supported by the necessity of the
products to users, creating a steady and predictable market. In the core janitorial/sanitary and
foodservice segments, sanitary and health standards create a steady flow of ongoing demand. The
consumable or short-life nature of most of the products used for cleaning applications (primarily
floor pads, hand pads, and mops, brooms and brushes) means that they are replaced frequently,
creating further demand stability. However, we continue to see a trend of “just in time”
inventory being maintained by our customers. This has resulted in smaller, more frequent orders
coming from our distribution base. The unstable resin market has created a need to increase
prices to commercial customers, and to date, they have been accepted. But, commercial customers
now believe resin prices are coming down and future increases may be difficult to implement. In
addition, many of our Electrical products can be characterized as “value” items that are
frequently lost or discarded, with subsequent replacement ensuring continuing and stable demand.
This is particularly the case with electrical cords, which consistently experience strong sales
ahead of the holiday season.
Certain of the markets in which we compete are expected to experience steady growth over the
next several years. Our core commercial cleaning product markets are expected to grow at rates
approximating gross domestic product (“GDP”), driven by increasing sanitary standards as a result
of heightened health concerns. The consumer plastics market as a whole is relatively mature, with
its growth characteristics linked to household expenditures. Demand is driven by the increasing
acquisition of material possessions by North American households and the desire of consumers to
store those possessions in an attractive and orderly manner. Demand for consumer plastic storage
products is closely linked to “value” items and the ability to pass resin increases has been a
significant challenge. End-users are sensitive to the price/value relationship more than
brand-name and are seeking alternative solutions when the price/value relationship does not meet
their expectations.
We estimate that the North American market for cords and work lights will grow at above-GDP
growth rates, driven by the growing number of suburban homes (particularly those with outdoor
spaces) and the growth in the use of outdoor appliances. The market for surge protectors and
multiple outlet products is also expected to grow at above-GDP growth rates driven by the
continued use in consumer purchasers of appliances, computers, home entertainment equipment, and
other electronic equipment, as well as the growing public awareness of the need to protect these
products from power surges.
Key elements in achieving profitability in the Maintenance Products Group include 1)
maintaining a low cost structure, from a production, distribution and administrative standpoint,
2) providing outstanding customer service and 3) containing raw material costs (especially plastic
resins) or raising prices to shift these higher costs to our customers for our plastic products.
In addition to continually striving to reduce our cost structure, we are seeking to offset pricing
challenges by developing new products, as new products or beneficial modifications of existing
products increase demand from our customers, provide novelty to the consumer, and offer an
opportunity for favorable pricing from customers. Retention of customers, or more specifically,
product lines with those customers, is also very important in the mass merchant retail area, given
the vast size of these national accounts. Since the fourth quarter of 2003, we centralized our
customer service and administrative functions for CCP divisions Continental, Glit, Wilen, and
Disco in one location, allowing customers to order products from any CCP commercial unit on one
purchase order. We believe that operating these business units as a cohesive unit will improve
customer service in that our customers’ purchasing processes will be simplified, as will follow up
on order status, billing, collection and other related functions. We believe that this may
increase customer loyalty, help in attracting new customers and lead to increased top line sales
in future years.
20
Table of Contents
Key elements in achieving profitability in the Electrical Products Group are in many ways
similar to those mentioned for our Maintenance Products Group. The achievement and maintenance of
a low cost structure is critical given the significant level of foreign competition, primarily
from Asia and Latin America. For this reason, Woods US and Woods Canada, respectively, executed a
fully outsourced strategy for their consumer electrical products. Customer service, specifically
the ability to fill orders at a rate designated by our customers, is very important to customer
retention, given seasonal sales pressures in the consumer electrical area. Woods US and Woods
Canada are both subject to seasonal sales trends in connection with the holiday shopping season,
with stronger sales and profits realized in the third and fourth quarters. Retention of customers
is critical in the Electrical Products Group, given the size of national accounts.
See “Outlook for 2007” in this section for discussion of recent developments related to the
Maintenance Products Group and the Electrical Products Group.
| Years Ended December 31, | ||||||||||||||||||||||||
| As Restated, see Note 2 | ||||||||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| (Amounts in Millions, except per share data and percentages) | ||||||||||||||||||||||||
| $ | % to Sales | $ | % to Sales | $ | % to Sales | |||||||||||||||||||
Net sales |
$ | 396.2 | 100.0 | $ | 423.4 | 100.0 | $ | 416.7 | 100.0 | |||||||||||||||
Cost of goods sold |
345.5 | 87.2 | 372.9 | 88.0 | 361.7 | 86.8 | ||||||||||||||||||
Gross profit |
50.7 | 12.8 | 50.5 | 12.0 | 55.0 | 13.2 | ||||||||||||||||||
Selling, general and administrative expenses |
46.5 | (11.7 | ) | 52.7 | (12.5 | ) | 52.7 | (12.6 | ) | |||||||||||||||
Impairments of long-lived assets |
— | — | 2.1 | (0.5 | ) | 30.0 | (7.2 | ) | ||||||||||||||||
Severance, restructuring and related charges |
(0.1 | ) | 0.0 | 1.1 | (0.3 | ) | 3.5 | (0.9 | ) | |||||||||||||||
Loss (gain) on sale of assets |
0.5 | (0.1 | ) | (0.3 | ) | 0.1 | (0.3 | ) | 0.1 | |||||||||||||||
Operating income (loss) |
3.8 | 1.0 | (5.1 | ) | (1.2 | ) | (30.9 | ) | (7.4 | ) | ||||||||||||||
Equity in income of equity method investment |
— | 0.6 | — | |||||||||||||||||||||
Gain on SESCO joint venture transaction |
0.6 | — | — | |||||||||||||||||||||
Interest expense |
(7.1 | ) | (5.7 | ) | (4.0 | ) | ||||||||||||||||||
Other, net |
0.2 | 0.2 | (1.0 | ) | ||||||||||||||||||||
Loss from continuing operations before provision for
income taxes |
(2.5 | ) | (10.0 | ) | (35.9 | ) | ||||||||||||||||||
Provision for income taxes from continuing operations |
(2.3 | ) | (1.6 | ) | (0.6 | ) | ||||||||||||||||||
Loss from continuing operations |
(4.8 | ) | (11.6 | ) | (36.5 | ) | ||||||||||||||||||
(Loss) income from operations of discontinued businesses (net of tax) |
(1.4 | ) | (2.2 | ) | 1.2 | |||||||||||||||||||
Loss on sale of discontinued businesses (net of tax) |
(5.4 | ) | — | (0.8 | ) | |||||||||||||||||||
Loss before cumulative effect of a change in accounting principle |
(11.6 | ) | (13.8 | ) | (36.1 | ) | ||||||||||||||||||
Cumulative effect of a change in accounting principle (net of tax) |
(0.8 | ) | — | — | ||||||||||||||||||||
Net loss |
(12.4 | ) | (13.8 | ) | (36.1 | ) | ||||||||||||||||||
Payment-in-kind of dividends on convertible preferred stock |
— | — | (14.8 | ) | ||||||||||||||||||||
Net loss attributable to common stockholders |
$ | (12.4 | ) | $ | (13.8 | ) | $ | (50.9 | ) | |||||||||||||||
Loss per share of common stock — Basic and diluted |
||||||||||||||||||||||||
Loss from continuing operations |
$ | (0.60 | ) | $ | (1.47 | ) | $ | (4.63 | ) | |||||||||||||||
Payment-in-kind of dividends on convertible preferred stock |
— | — | (1.88 | ) | ||||||||||||||||||||
Loss from continuing operations
attributable to common stockholders |
(0.60 | ) | (1.47 | ) | (6.50 | ) | ||||||||||||||||||
Discontinued operations (net of tax) |
(0.86 | ) | (0.27 | ) | 0.05 | |||||||||||||||||||
Cumulative effect of a change in accounting principle |
(0.09 | ) | — | — | ||||||||||||||||||||
Net loss attributable to common stockholders |
$ | (1.55 | ) | $ | (1.74 | ) | $ | (6.45 | ) | |||||||||||||||
21
Table of Contents
RESULTS OF OPERATIONS
2006 COMPARED TO 2005
Overview
Our consolidated net sales in 2006 decreased $27.2 million, or 6.4%, from 2005. Lower net
sales resulted from a lower volume of 17.0% offset by higher pricing of 9.6% and favorable
currency translation of 1.0%. Gross margins were 12.8% in the year ended December 31, 2006, an
increase of 0.8 percentage point from the year ended December 31, 2005. Margins were positively
impacted by improved operating performance at our Glit business offset by higher material costs, a
portion of which could not be passed on through as price increases within our Electrical Group.
Selling, general and administrative expenses (“SG&A”) as a percentage of sales were 11.7% in 2006
which is lower than 12.5% in 2005. In 2006, operating income was $3.8 million compared to an
operating loss of ($5.1) million in 2005. The improvement was principally due to increased gross
margins, lower selling, general and administrative expenses, along with the reduction of charges
associated with impairment of long-lived assets and severance, restructuring and other charges of
$3.3 million.
Overall, we reported a net loss attributable to common shareholders of ($12.4) million
[($1.55) per share] for the year ended December 31, 2006, versus a net loss attributable to common
shareholders of ($13.8) million [($1.74) per share] in the same period of 2005. In 2006, we
reported a net loss from discontinued businesses of ($6.8) million [($0.86) per share] versus a
net loss from discontinued businesses of ($2.2) million [($0.27) per share] in 2005. We also
reported a cumulative effect of change in accounting principle of ($0.8) million [($0.09 per
share)] related to the adoption of FAS 123R, Shared Based Payments, effective January 1, 2007.
Net Sales
Maintenance Products Group
Net sales from the Maintenance Products Group decreased from $216.1 million during
the year ended December 31, 2005 to $208.4 million during the year ended December 31, 2006, a
decrease of 3.5%. Overall, this decline was primarily due to lower volume of 8.3% offset by higher
pricing of 4.6% and favorable currency translation of 0.2%. Sales volume for the Contico business
unit in the U.S., which sells primarily to mass merchant customers, was significantly lower due to
our decision to exit certain unprofitable business lines. We also experienced volume declines in
our Glit business unit in the U.S. primarily due to activity with a major customer being adversely
impacted from the overall slowdown in the building industry and the lower number of major
hurricanes in 2006.
Higher pricing resulted from the implementation of selling price increases across the
Maintenance Products Group, which took effect throughout the last half of 2005 and throughout 2006.
The implementation of price increases was in response to the accelerating cost of our primary raw
materials, packaging materials, utilities and freight.
Electrical Products Group
The Electrical Products Group’s sales decreased from $207.3 million for the year ended
December 31, 2005 to $187.7 million for the year ended December 31, 2006, a decrease of 9.4%.
Sales decreased as a result of a reduction in volume of 26.0% offset by higher pricing of 15.0%,
and favorable currency translation of 1.6%.
Volume in 2006 at Woods US was adversely impacted by the absence of 2005 sales with one of its
major customers which did not repeat in 2006. In addition, the current year was adversely impacted
by the loss of certain product lines with
certain customers along with a milder hurricane season in the United States. Sales at Woods Canada
were favorably impacted by a stronger Canadian dollar versus the U.S. dollar in 2006 versus 2005.
Multiple selling price increases were implemented throughout 2006 to offset the rising cost of
copper and PVC. We have continued to implement price increases; however, there can be no assurance
that such increases will be accepted.
22
Table of Contents
Operating Income
| As Restated, see Note 2 | ||||||||||||||||||||||||
| 2006 | 2005 | Change | ||||||||||||||||||||||
| $ | % Margin | $ | % Margin | $ | % Margin | |||||||||||||||||||
Maintenance Products Group |
$ | 5.7 | 2.7 | $ | (6.4 | ) | (3.0 | ) | $ | 12.1 | 5.7 | |||||||||||||
Electrical Products Group |
8.7 | 4.6 | 17.4 | 8.4 | (8.7 | ) | (3.8 | ) | ||||||||||||||||
Unallocated corporate expense |
(10.2 | ) | (13.2 | ) | 3.0 | |||||||||||||||||||
| 4.2 | 1.0 | (2.2 | ) | (0.5 | ) | 6.4 | 1.5 | |||||||||||||||||
Impairments of long-lived assets |
— | (2.1 | ) | 2.1 | ||||||||||||||||||||
Severance, restructuring and
related charges |
0.1 | (1.1 | ) | 1.2 | ||||||||||||||||||||
(Loss) gain on sale of assets |
(0.5 | ) | 0.3 | (0.8 | ) | |||||||||||||||||||
Operating income (loss) |
$ | 3.8 | 1.0 | $ | (5.1 | ) | (1.2 | ) | $ | 8.9 | 2.2 | |||||||||||||
Maintenance Products Group
The Maintenance Products Group’s operating income increased from an operating loss of ($6.4)
million (-3.0% of net sales) during the year ended December 31,
2005 to operating income of $5.7 million (2.7% of net sales) for the year ended December 31, 2006. The improvement was primarily
attributable to production efficiencies gained at our Glit business as well as higher pricing
levels in 2006 as well as positive impact from the liquidation of last-in, first-out inventory. In
2005, lower volumes and higher raw material costs adversely impacted our business units which sell
plastic products. SG&A expenses as a percentage of net sales in 2006 were slightly lower versus
2005 due to mostly cost containment measures.
Electrical Products Group
The Electrical Products Group’s operating income decreased from $17.4 million (8.4% of net
sales) for the year ended December 31, 2005 to $8.7 million (4.6% of net sales) for the year ended
December 31, 2006. Operating margins have been negatively impacted, primarily during the last half
of 2006, from the accelerated change in material costs and the inability to recover these costs
from the customer. In addition, the reduced volume levels from 2005 have impacted operating
income. SG&A as a percentage of net sales in 2006 was comparable to 2005 levels.
Corporate
Corporate operating expenses decreased from $13.2 million in 2005 to $10.2 million
in 2006 principally due to compensation cost associated with the acceleration of vesting of stock
options in 2005 and favorable self-insured costs performance in 2006.
Impairments of Long-lived Assets
During 2006, we did not recognize any impairment in our businesses. During the fourth quarter
of 2005, we recognized an impairment loss of $2.1 million related to the Glit business unit of our
Maintenance Products Group (see discussion of impairment in Note 5 of the Consolidated Financial
Statements in Part II, Item 8) including $1.6 million related to goodwill, $0.2 million related to
a tradename intangible, $0.2 million related to a customer list intangible, and $0.1 million
related to patents. Our Glit business unit sustained a lower than expected profitability level
throughout the last half of 2005 which resulted from increased costs due to operational disruptions
at our Wrens, Georgia facility. The operational disruptions were the result of both the
integration of other manufacturing operations into the facility as well as a fire in the fourth
quarter of 2004. Not only did the facility have increased costs, the disruptions triggered the
loss or reduction of customer activity. As a result, an impairment analysis was completed on the
business unit and its long-lived assets. In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 142, Goodwill and Intangible Assets, we (with the assistance of an
independent third party valuation firm) performed an analysis of discounted future cash flows which
indicated that the book value of the Glit unit was greater than the fair value of the business. In
addition, as a result of the goodwill analysis, we also assessed whether there had been an
impairment of the long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. The Company concluded that the book value of tradename, customer
list and patents associated with the Glit business units exceeded the fair value and impairment had
occurred.
23
Table of Contents
Severance, Restructuring and Related Charges
Operating results for the year ended December 31, 2006 include a reduction of the
non-cancelable lease liability for our Hazelwood, Missouri facility. This reduction in the
liability was offset by costs associated with the restructuring of the Glit business ($0.3 million)
and costs associated with the relocation of corporate headquarters ($0.2 million). Operating
results for the Company during the year ended December 31, 2005 were negatively impacted by
severance, restructuring and related charges of $1.1 million. Charges in 2005 related to the
restructuring of the Glit business ($0.7 million), costs associated with the relocation of
corporate headquarters ($0.2 million) and costs associated with various restructuring activities
($0.2 million). Refer to further discussion on severance and restructuring charges on Page 31 and
Note 19 to the Consolidated Financial Statements in Part II, Item 8.
Other
In 2005, the Company recognized $0.6 million in equity income from the Sahlman investment
compared to no income or loss being recognized in 2006. Interest expense increased by $1.4
million in 2006 versus 2005 primarily as a result of higher average borrowings as well as higher
interest rates.
On June 27, 2006, the Company and Montenay amended the partnership interest purchase agreement
in order to allow the Company to completely exit from the SESCO operations and related obligations.
In addition, Montenay became the guarantor under the loan obligation for the IRBs. Montenay
purchased the Company’s limited partnership interest for $0.1 million and a reduction of
approximately $0.6 million in the face amount due to Montenay as agreed upon in the original
partnership agreement. In addition, Montenay removed the Company as the performance guarantor
under the service agreement. As a result of the above transaction, the Company recorded a gain of
$0.4 million within continuing operations during the year ended December 31, 2006 given the
reduction in the face amount due to Montenay as agreed upon in the original partnership interest
purchase agreement. In addition, the Company recorded a gain on the sale of the partnership
interest of approximately $0.1 million as reflected within continuing operations.
The provision for income taxes for 2006 and 2005 reflects current expense for state and
foreign income taxes. The increase in the provision for income taxes reflects the improved
operating performance for certain foreign businesses. In both 2006 and 2005, tax benefits were not
recorded in the U.S. (for federal and certain state income taxes) and for certain foreign
subsidiaries on pre-tax losses as valuation allowances were recorded related to deferred tax assets
created as a result of operating losses in the United States and in certain foreign jurisdictions.
Loss from operations of discontinued businesses includes activity from the U.K. consumer
plastics business plus the Metal Truck Box business unit, which were all sold in 2006. For the
year ended December 31, 2006, we sold these business units for a loss of $5.4 million. In 2006,
the Company incurred a loss from operations of discontinued businesses of $1.4 million compared to
a loss from operations of discontinued businesses of $2.2 million for 2005.
Effective January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payments. As a
result, a cumulative effect of this adoption of $0.8 million was recognized associated with the
fair value of all vested stock appreciation rights (“SARs”).
2005 COMPARED TO 2004
Overview
Our consolidated net sales in 2005 increased $6.7 million, or 1.6%, from 2004. Higher net
sales resulted from higher pricing of 4.6%, favorable currency translation of 0.8% offset by lower
volume of 3.8%. Gross margins were 12.0% in the year ended December 31, 2005, a decrease of 1.2
percentage points from the year ended December 31, 2004. Margins were negatively impacted by
higher material costs, a portion of which could not be passed on through price increases, and
higher operating costs in our Glit business. SG&A as a percentage of sales were 12.5% in 2005
which is slightly lower than 12.6% in 2004. The operating loss decreased by $25.8 million to $5.1
million, principally due to the reduction of charges associated with impairment of long-lived
assets and severance, restructuring and other charges of $30.3 million. However, these reductions
were offset by lower gross margins as discussed above.
Overall, we reported a net loss attributable to common shareholders of ($13.8) million
[($1.74) per share] for the year ended December 31, 2005, versus a net loss attributable to common
shareholders of ($50.9) million [($6.45) per share] in the same period of 2004. In 2005, we
reported net loss from discontinued businesses of ($2.2) million [($0.27) per share] versus net
income from discontinued businesses of $0.4 million [$0.05 per share] in 2004. During the year
ended December 31, 2004, we recorded the impact of paid-in-kind dividends earned on our
convertible preferred stock of ($14.8) million [($1.88) per share].
24
Table of Contents
Net Sales
Maintenance Products Group
Net sales from the Maintenance Products Group decreased from $237.9 million during
the year ended December 31, 2004 to $216.1 million during the year ended December 31, 2005, a
decrease of 9.2%. Overall, this decline was primarily due to lower volume of 13.3% offset by
higher pricing of 3.9% and favorable currency translation of 0.2%. Sales volume for the Contico
business unit in the U.S., which sells primarily to mass merchant customers, was significantly
lower due to our decision to exit certain unprofitable business lines. We also experienced volume
declines in our Glit business unit in the U.S. due to certain operational disruptions including
inefficiencies caused by the consolidation of two additional Glit facilities into the Wrens,
Georgia facility as well as a fire in Wrens, Georgia early in the fourth quarter of 2004. These
decreases in Glit sales were partially offset by stronger sales of roofing products to the
construction industry.
Higher pricing resulted from the implementation of selling price increases across the
Maintenance Products Group, which took effect throughout 2005. The implementation of price
increases was in response to the accelerating cost of our primary raw materials, packaging
materials, utilities and freight starting in 2004 and continuing in 2005.
Electrical Products Group
The Electrical Products Group’s sales improved from $178.8 million for the year ended December
31, 2004 to $207.3 million for the year ended December 31, 2005, an increase of 16.0%. Sales
improved as a result of an increase in volume of 8.9%, higher pricing of 5.4%, and favorable
currency translation of 1.7%.
Volume at Woods US benefited principally from increased promotional activity at one of its
largest mass merchant retailers in the first quarter of 2005, increases in store growth at some of
our large mass merchant retailers, hurricane related orders, and the timing of purchases by
customers switching to direct import (direct import sales represent merchandise shipped directly
from our suppliers to our customers). Woods Canada experienced a volume increase due to an
increased demand at its largest customer (a national mass merchant retailer in Canada). Sales at
Woods Canada were also favorably impacted by a stronger Canadian dollar versus the U.S. dollar in
2005 versus 2004. Multiple selling price increases were implemented throughout 2005 at Woods US
(and to a lesser extent at Woods Canada) to offset the rising cost of copper and PVC.
Operating Income
| As Restated, see Note 2 | ||||||||||||||||||||||||
| 2005 | 2004 | Change | ||||||||||||||||||||||
| $ | % Margin | $ | % Margin | $ | % Margin | |||||||||||||||||||
Maintenance Products Group |
$ | (6.4 | ) | (3.0 | ) | $ | (4.1 | ) | (1.7 | ) | $ | (2.3 | ) | (1.3 | ) | |||||||||
Electrical Products Group |
17.4 | 8.4 | 16.8 | 9.4 | 0.6 | (1.0 | ) | |||||||||||||||||
Unallocated corporate expense |
(13.2 | ) | (10.4 | ) | (2.8 | ) | ||||||||||||||||||
| (2.2 | ) | (0.5 | ) | 2.3 | 0.6 | (4.5 | ) | (1.1 | ) | |||||||||||||||
Impairments of long-lived assets |
(2.1 | ) | (30.0 | ) | 27.9 | |||||||||||||||||||
Severance, restructuring and
related charges |
(1.1 | ) | (3.5 | ) | 2.4 | |||||||||||||||||||
Gain on sale of assets |
0.3 | 0.3 | — | |||||||||||||||||||||
Operating loss |
$ | (5.1 | ) | (1.2 | ) | $ | (30.9 | ) | (7.4 | ) | $ | 25.8 | 6.2 | |||||||||||
Maintenance Products Group
The Maintenance Products Group’s operating loss increased from ($4.1) million (-1.7% of net
sales) during the year ended December 31, 2004 to an operating loss of ($6.4) million (-3.0% of net
sales) for the year ended December 31, 2005. The change was primarily attributable to lower
volumes in the Contico and Glit units. In addition, higher raw material costs in 2005 versus 2004
were substantially recovered through higher selling prices. We continued to experience declines
in the profitability of our Glit business resulting from increased costs which were principally due
to certain operational disruptions at our Wrens Georgia facility. SG&A expenses were lower in 2005
versus 2004, but as a percentage of net sales, SG&A expenses have remained essentially unchanged.
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Electrical Products Group
The Electrical Products Group’s operating income increased from $16.8 million (9.4% of net
sales) for the year ended December 31, 2004 to $17.4 million (8.4% of net sales) for the year ended
December 31, 2005, an increase of 4%. The increase in operating income was due to the strong volume
increases at the Woods US business unit during the fourth quarter of 2005. Operating income as a
percentage of net sales decreased due to a higher mix of direct import sales.
Corporate
Corporate operating expenses increased from $10.4 million in 2004 to $13.2 million
in 2005 primarily due to non-cash stock compensation expense related to the former chief executive
officer of $2.0 million and higher insurance costs of $0.5 million offset by a credit recognized
on SARs of $0.8 million attributable to the lower stock price.
Impairments of Long-lived Assets
During the fourth quarter of 2005, we recognized an impairment loss of $2.1 million related to
the Glit business unit of our Maintenance Products Group (see discussion of impairment in Note 5 of
the Consolidated Financial Statements in Part II, Item 8) including $1.6 million related to
goodwill, $0.2 million related to a tradename intangible, $0.2 million related to a customer list
intangible, and $0.1 million related to patents. During the fourth quarter of 2004, we recognized
an impairment loss of $29.9 million related to the US Plastics business units of our Maintenance
Products Group (see discussion of impairment in Note 5 to the Consolidated Financial Statements in
Part II, Item 8) including $8.0 million related to goodwill, $8.4 million related to machinery and
equipment, $10.9 million related to a customer list intangible, and $2.6 million related to a
trademark. In the fourth quarter of 2004, the profitability of the Contico business unit declined
sharply as we were unable to pass along sufficient selling price increases to combat the
accelerating cost of resin (a key raw material used in all of the US Plastics units). We believe
that our future earnings and cash flow could be negatively impacted to the extent further increases
in resin and other raw material costs cannot be offset or recovered through higher selling prices.
The Company concluded that the book value of equipment, a customer list intangible and trademark
associated with the US Plastics business unit significantly exceeded the fair value and impairment
had occurred. Also in 2004, we recorded impairment charges of $0.1 million related to certain
assets at the Woods US business unit of our Electrical Products Group.
Severance, Restructuring and Related Charges
Operating results for the Company during the years ended December 31, 2005 and 2004 were
negatively impacted by severance, restructuring and related charges of $1.1 million and $3.5
million, respectively. Charges in 2005 related to the restructuring of the Glit business ($0.7
million), costs associated with the relocation of corporate headquarters ($0.2 million) and
costs associated with various restructuring activities ($0.2 million). Refer to further discussion
on severance and restructuring charges on Page 31 and Note 19 to the Consolidated Financial
Statements in Part II, Item 8.
Charges in 2004 related to adjustments to previously established non-cancelable lease
liabilities for abandoned facilities ($0.9 million); a non-cancelable lease accrual and severance
as a result of the shutdown of manufacturing and severance at Woods Canada ($0.9 million); the
restructuring of the Glit business ($0.8 million); costs for the movement of inventory and
equipment in connection with the consolidation of St. Louis, Missouri manufacturing and
distribution facilities ($0.3 million); the shutdown and relocation of a procurement office in Asia
($0.3 million); costs incurred for the consolidation of administrative functions for CCP ($0.2
million); and expenses for the closure of CCP Canada’s facility and the subsequent consolidation
into the Woods Canada facility ($0.1 million).
Other
In 2005, the Company recognized $0.6 million in equity income from the Sahlman investment
compared to no equity income being recognized in 2004.
Interest expense increased by $1.8 million in 2005 versus 2004, primarily as a result of
higher average borrowing as well as higher interest rates and increased margins over LIBOR
pursuant to the Bank of America Credit Agreement. Other, net for the year ended December 31, 2004
included the net write-off of amounts related to divested business ($0.9 million) and the
write-off of fees and expenses ($0.5 million) associated with a financing which the Company chose
not to pursue.
The provision for income taxes for 2005 and 2004 reflects current expense for state and
foreign income taxes offset by changes in certain tax reserves and foreign deferred tax assets.
Loss from operations of discontinued businesses includes activity from the United Kingdom
consumer plastics business plus the Metal Truck Box business unit, which were all sold in 2006.
For the year ended December 31, 2005, the Company incurred a loss from operations of discontinued
businesses of $2.2 million compared to income from operations of discontinued businesses of $1.2
million for 2004. In 2004, the loss on sale of discontinued businesses includes impairment
charges associated with the Metal Truck Box business of $0.8 million.
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LIQUIDITY AND CAPITAL RESOURCES
We require funding for working capital needs and capital expenditures. We believe that our
cash flow from operations and the use of available borrowings under the Bank of America Credit
Agreement (as defined below) provide sufficient liquidity for our operations going forward. As of
December 31, 2006, we had cash and cash equivalents of $7.4 million versus cash and cash
equivalents of $8.4 million at December 31, 2005. Also as of December 31, 2006, we had outstanding
borrowings of $56.9 million [58% of total capitalization], under the Bank of America Credit
Agreement with unused borrowing availability on the Revolving Credit Facility of $13.7 million. As
of December 31, 2005, we had outstanding borrowings of $57.7 million [51% of total capitalization]
with unused borrowing availability of $13.9 million. We provided cash flow from operations of $1.8
million during the year ended December 31, 2006 versus the $6.6 million provided by operations
during the year ended December 31, 2005. Cash flow from operations was lower in 2006 than 2005 as
a result of the level of accounts payable reduction in late 2006.
We have a number of obligations and commitments, which are listed on the schedule later in
this section entitled “Contractual and Commercial Obligations.” We have considered all of these
obligations and commitments in structuring our capital resources to ensure that they can be met.
See the notes accompanying the table in that section for further discussions of those items. We
believe that given our strong working capital base, additional liquidity could be obtained through
additional debt financing, if necessary. However, there is no guarantee that such financing could
be obtained. In addition, we are continually evaluating alternatives relating to the sale of
excess assets and divestitures of certain of our business units. Asset sales and business
divestitures present opportunities to provide additional liquidity by de-leveraging our financial
position.
Bank of America Credit Agreement
On April 20, 2004, we completed a refinancing of our outstanding indebtedness (the
“Refinancing”) and entered into a new agreement with Bank of America Business Capital (formerly
Fleet Capital Corporation) (the “Bank of America Credit Agreement”). Like the previous credit
agreement with Fleet Capital Corporation, the Bank of America Credit Agreement was a $110.0 million
facility with a $20.0 million term loan (“Term Loan”) and a $90.0 million revolving credit facility
(“Revolving Credit Facility”) with essentially the same terms as the previous credit agreement. The
Bank of America Credit Agreement is an asset-based lending agreement and involves a syndicate of
four banks, all of which participated in the syndicate from the previous credit agreement. The
Bank of America Credit Agreement, and the additional borrowing ability under the Revolving
Credit Facility obtained by incurring new term debt, resulted in three important benefits related
to our long-term strategy: (1) additional borrowing capacity to invest in capital expenditures
and/or acquisitions key to our strategic direction, (2) increased working capital flexibility to
build inventory when necessary to accommodate lower cost outsourced finished goods inventory and
(3) the ability to borrow locally in Canada and in the UK and provide a natural hedge against
currency fluctuations.
The $20.0 million Term Loan proceeds were applied as follow: $1.8 million to the rollover of
existing term debt; $16.7 million to reduce the Revolving Credit Facility; and $1.5 million to
cover costs associated with the Bank of America Credit Agreement.
The Revolving Credit Facility has an expiration date of April 20, 2009 and its borrowing base
is determined by eligible inventory and accounts receivable. All extensions of credit under the
Bank of America Credit Agreement are collateralized by a first priority security interest in and
lien upon the capital stock of each material domestic subsidiary (65% of the capital stock of
certain foreign subsidiaries), and all of our present and future assets and properties. The Term
Loan, as amended, also has a final maturity date of April 20, 2009 with quarterly payments of $0.4
million beginning April 1, 2007. A final payment of $10.0 million is scheduled to be paid in April
2009. The term loan is collateralized by our property, plant and equipment.
Our borrowing base under the Bank of America Credit Agreement is reduced by the outstanding
amount of standby and commercial letters of credit. Vendors, financial institutions and other
parties with whom we conduct business may require letters of credit in the future that either (1)
do not exist today or (2) would be at higher amounts than those that exist today. Currently, our
largest letters of credit relate to our casualty insurance programs. At December 31, 2006, total
outstanding letters of credit were $7.9 million.
Primarily due to declining profitability and the timing of certain restructuring payments, the
Company amended the Bank of America Credit Agreement seven times from April 20, 2004, the date of
the Refinancing, through December 31, 2006. The amendments adjusted certain financial covenants
such that the fixed charge coverage ratio and consolidated leverage ratio were eliminated and the
minimum availability (eligible collateral base less outstanding borrowings and letters of credit)
was set such that our eligible collateral must exceed the sum of our outstanding borrowings and
letters of credit under the Revolving Credit Facility by at least $5.0 million to $7.5 million, at
various points during that time period. In addition, the Company was limited on maximum allowable
capital expenditures for $12.0 million and $10.0 million for 2006 and 2005, respectively.
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Until September 30, 2004, interest accrued on the Revolving Credit Facility borrowings at 175
basis points over applicable LIBOR rate and at 200 basis points over LIBOR for borrowings under the
Term Loan. In accordance with the Bank of America Credit Agreement, our margins (i.e. the interest
rate spread above LIBOR) increased by 25 basis points in the fourth quarter of 2004 based upon
certain leverage measurements. Margins increased an additional 25 basis points in the first quarter
of 2005. Effective since April 2005, interest rate margins have been set at the largest margins
set forth in the Bank of Credit Agreement, 275 basis points over applicable LIBOR rate and at 300
basis points over LIBOR for borrowings under the Term Loan. In accordance with the Bank of America
Credit Agreement, margins on the term borrowings will drop 25 basis points if the balance of the
Term Loan is reduced below $10.0 million. Interest accrues at higher margins on prime rates for
swing loans, the amounts of which were nominal at December 31, 2006 and 2005.
As a result of the Seventh Amendment, the Company’s debt covenants, as of December 31, 2006
and thereafter, under the Bank of America Credit Agreement were to be as follows:
Fixed Charge Coverage Ratio — The Company is required to maintain a Fixed Charge Coverage
Ratio (as defined in the Bank of America Credit Agreement) of 1.1:1, beginning December 31, 2006.
Capital Expenditures — For the year ended December 31, 2007, the Company is not to exceed
$15.0 million in capital expenditures.
Leverage Ratio — As noted above, interest rate margins are currently set at the largest
margins set forth in the Bank of America Credit Agreement. Following the first quarter of 2007,
the Leverage Ratio will be utilized to determine the interest rate margin over the applicable LIBOR
rate. No maximum Consolidated Leverage Ratio requirement is present.
We were in compliance with the above financial covenants in the Bank of America Credit
Agreement, as amended above, at December 31, 2006.
While the Company was in compliance with the covenants of the Bank of America Credit Agreement
as of December 31, 2006, it obtained, on March 8, 2007, the Eighth Amendment. The Eighth Amendment
eliminates the Fixed Charge Coverage Ratio for the remaining life of the debt agreement and
requires the Company to maintain a minimum level of availability such that its eligible collateral
must exceed the sum of its outstanding borrowings and letters of credit by at least $5.0 million
from the effective date of the Eighth Amendment through September 29, 2007 and by $7.5 million
through December 31, 2007. Thereafter, the Company is required to maintain a minimum level of
availability of $5.0 million for the first three quarters of the year and $7.5 million for the
fourth quarter. In addition, we reduced our Revolving Credit Facility from $90.0 million to $80.0
million.
If we are unable to comply with the terms of the amended covenants, we could seek to obtain
further amendments and pursue increased liquidity through additional debt financing and/or the sale
of assets (see discussion above). However, the Company believes that we will be able to comply
with all covenants, as amended, throughout 2007.
We incurred additional debt issuance costs in 2004 associated with the Bank of America Credit
Agreement. Additionally, at the time of the inception of the Bank of America Credit Agreement, we
had approximately $4.0 million of unamortized debt issuance costs associated with the previous
credit agreement. The remainder of the previously capitalized costs, along with the capitalized
costs from the Bank of America Credit Agreement, will be amortized over the life of the Bank of
America Credit Agreement through April 2009. Also, during the first quarter of 2004, we incurred
fees and expenses of $0.5 million associated with a financing which we chose not to pursue. The
Company had the amortization of debt issuance costs of $1.2 million, $1.1 million and $1.1 million
in 2006, 2005 and 2004, respectively. In addition, the Company incurred $0.3 million and $0.2
million associated with amending the Bank of America Credit Agreement, as discussed above, in 2006
and 2005, respectively.
The revolving credit facility under the Bank of America Credit Agreement requires lockbox
agreements which provide for all receipts to be swept daily to reduce borrowings outstanding.
These agreements, combined with the existence of a material adverse effect (“MAE”) clause in the
Bank of America Credit Agreement, caused the revolving credit facility to be classified as a
current liability, per guidance in the Emerging Issues Task Force Issue No. 95-22, Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement. We do not expect to repay, or be
required to repay, within one year, the balance of the revolving credit facility classified as a
current liability. The MAE clause, which is a fairly typical requirement in commercial credit
agreements, allows the lenders to require the loan to become due if they determine there has been a
material adverse effect on our operations, business, properties, assets, liabilities, condition, or
prospects. The classification of the revolving credit facility as a current liability is a result
only of the combination of the lockbox agreements and MAE clause. The Bank of America Credit
Agreement does not expire or have a maturity date within one year, but rather has a final
expiration date of April 20, 2009. The lender had not notified us of any indication of a MAE at
December 31, 2006, and we were not in default of any provision of the Bank of America Credit
Agreement at December 31, 2006.
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Contractual Obligations
We have contractual obligations associated with our debt, operating lease agreements,
severance and restructuring, and other obligations. Our obligations as of December 31, 2006, are
summarized below (amounts in thousands):
| Due in less | Due in 1-3 | Due in 3-5 | Due after 5 | |||||||||||||||||
| Contractual Cash Obligations | Total | than 1 year | years | years | years | |||||||||||||||
Revolving credit facility [a] |
$ | 43,879 | $ | 43,879 | $ | — | $ | — | $ | — | ||||||||||
Term loans |
12,992 | 1,125 | 11,867 | — | — | |||||||||||||||
Interest on debt [b] |
10,128 | 4,500 | 5,628 | — | — | |||||||||||||||
Operating leases [c] |
22,090 | 7,663 | 10,571 | 3,242 | 614 | |||||||||||||||
Severance and restructuring [c] |
653 | 247 | 280 | 126 | — | |||||||||||||||
SESCO payable to Montenay [d] |
400 | 400 | — | — | — | |||||||||||||||
Postretirement benefits [e] |
6,203 | 901 | 1,505 | 1,257 | 2,540 | |||||||||||||||
Total Contractual Obligations |
$ | 96,345 | $ | 58,715 | $ | 29,851 | $ | 4,625 | $ | 3,154 | ||||||||||
| Due in less | Due in 1-3 | Due in 3-5 | Due after 5 | |||||||||||||||||
| Other Commercial Commitments | Total | than 1 year | years | years | years | |||||||||||||||
Commercial letters of credit |
$ | 762 | $ | 762 | $ | — | $ | — | $ | — | ||||||||||
Stand-by letters of credit |
7,121 | 7,121 | — | — | — | |||||||||||||||
Total Commercial Commitments |
$ | 7,883 | $ | 7,883 | $ | — | $ | — | $ | — | ||||||||||
| [a] | As discussed in the Liquidity and Capital Resources section above and in Note 9 to the
Consolidated Financial Statements in Part II, Item 8, the entire revolving credit facility under
the Bank of America Revolving Credit Agreement is classified as a current liability on the
Consolidated Balance Sheets as a result of the combination in the Bank of America Credit Agreement
of (i) lockbox agreements on Katy’s depository bank accounts, and (ii) a subjective Material
Adverse Effect (“MAE”) clause. The Revolving Credit Facility expires in April of 2009. |
|
| [b] | Represents interest on the Revolving Credit Facility and Term Loan of the Bank of America
Credit Agreement. Amounts assume interest accrues at the current rate in effect, including the
effect of the impact of the increased margins through the end of the first quarter of 2007 pursuant
to the Sixth Amendment. The amount also assumes the principal balance of the Revolving Credit
Facility remains constant through its expiration date of April 20, 2009 and the principal balance
of the Term Loan amortizes in accordance with the terms of the Bank of America Credit Agreement.
Due to the variable nature of the Bank of America Credit Agreement, actual interest rates could
differ from the assumptions above. In addition, actual borrowing levels could differ from the
assumptions above due to liquidity needs. |
|
| [c] | Future non-cancelable lease rentals are included in the line entitled “Operating leases,” which
also includes obligations associated with restructuring activities. The Consolidated Balance
Sheets at December 31, 2006 and 2005, includes $1.0 million and $3.0 million, respectively, 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. |
|
| [d] | Amount owed to Montenay as a result of the SESCO partnership, discussed in Note 8 to the
Consolidated Financial Statements in Part II, Item 8. This obligation is classified in the
Consolidated Balance Sheets as an Accrued Expense in Current Liabilities. |
|
| [e] | Benefits consisting of post-retirement medical obligations to retirees of former subsidiaries
of Katy, as well as deferred compensation plan liabilities to former officers of the Company,
discussed in Note 11 to the Consolidated Financial Statements in Part II, Item 8. |
Off-balance Sheet Arrangements
See Note 8 to the Consolidated Financial Statements in Part II, Item 8 for a discussion of
SESCO.
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Cash Flow
Liquidity was positively impacted during 2006 as a result of positive operating cash flow
along with proceeds from the sale of discontinued businesses which offset funds used for capital
expenditures and reduction of debt levels. We provided $1.8 million of operating cash compared to
operating cash provided during 2005 of $6.6 million. During 2006, the Company reduced debt
obligations by $1.0 million primarily due to the operating cash performance noted above as well as
the proceeds from the sale of discontinued businesses offsetting our capital expenditures.
Operating Activities
Cash flow from operating activities before changes in operating assets and discontinued
operations was $6.1 million in 2006 versus $1.9 million in 2005. While we reported a net loss in
both periods, these amounts included many non-cash items such as depreciation and amortization,
impairments of long-lived assets, the write-off and amortization of debt issuance costs, non-cash
stock compensation expense associated with the former CEO, the gain or loss on the sale of assets
and the equity income from our equity method investment. We used $7.1 million of cash related to
operating assets and liabilities in 2006 compared to $4.0 million in cash being provided in 2005.
Our operating cash flow was impacted in 2006 by reduction of accounts payable offset slightly by
reduced accounts receivable and inventory levels of $5.6 million. By the end of 2006, we
were turning our inventory at 6.2 times per year versus 6.4 times per year in 2005. Cash of $2.4
million and $2.3 million was used in 2006 and 2005, respectively, to satisfy severance,
restructuring and related obligations.
Investing Activities
Capital expenditures from continuing operations totaled $4.6 million in 2006 as compared to
$8.9 million in 2005 as spending for restructuring activities and new property and equipment
continued to slow down as compared to the past few years. In 2006, we sold the United Kingdom
consumer plastics business and the Metal Truck Box business unit for $5.4 million excluding a $1.2
million note receivable obtained as part of the Metal Truck Box transaction. In addition, the
Company sold additional assets, including our SESCO partnership interest, in 2006 and 2005 for net
proceeds of $0.4 million and $1.0 million, respectively. In 2005, we acquired substantially all of
the assets and assumed certain liabilities of Washington International Non-Wovens, LLC.
Anticipated capital expenditures are expected to be comparable in 2007 to prior year levels, mainly
due to available capacity and amended bank covenants. On March 31, 2004, Woods Canada sold its
manufacturing facility for net proceeds of $3.2 million and immediately entered into a
sale/leaseback arrangement to allow that business unit to occupy this property as a distribution
facility. On June 28, 2004, CCP sold its vacant metals facility in Santa Fe Springs, California
for net proceeds of $1.9 million.
Financing Activities
Cash flows from financing activities in 2006 reflect the reduction of our debt obligations as
cash provided by operations exceeded the requirements from investing activities. In 2005, cash
flows from financing activities reflect the reduction of debt obligations. Overall, debt increased
$1.0 million and $1.4 million in 2006 and 2005, respectively. Direct debt costs, primarily
associated with the debt modifications and refinance transactions, totaled $0.3 million and $0.2
million in 2006 and 2005, respectively. During 2006 and 2005, the Company acquired 40,800 and
3,200 shares of common stock on the open market under the cost method for approximately $0.1
million and $7.5 thousand, respectively. During 2004, 12,000 shares of common stock were
repurchased on the open market for approximately $0.1 million.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In connection with the Contico International, L.L.C. (now “CCP”) acquisition on January 8,
1999, we entered into building lease agreements with Newcastle Industries, Inc. (“Newcastle”).
Lester Miller, the former owner of CCP, and a Katy director from 1999 to 2000, is the majority
owner of Newcastle. Currently, the Hazelwood, Missouri facility is the only property leased
directly from Newcastle. We believe that rental expense for these properties approximates market
rates. Related party rental expense was approximately $0.5 million for each of the years ended
December 31, 2006, 2005 and 2004.
Kohlberg & Co., L.L.C., an affiliate of Kohlberg Investors IV, L.P., whose affiliate holds
all 1,131,551 shares of our Convertible Preferred Stock, provides ongoing management oversight and
advisory services to Katy. We paid $0.5 million annually for such services in 2006, 2005 and
2004. We expect to pay $0.5 million annually in future years.
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SEVERANCE, RESTRUCTURING AND RELATED CHARGES
Over the past three years, the Company has initiated several cost reduction and facility
consolidation initiatives, resulting in severance, restructuring and related charges. Key
initiatives were the consolidation of the St. Louis manufacturing/distribution facilities,
shutdown of both Woods U.S. and Woods Canada manufacturing as well as the consolidation of the
Glit facilities. These initiatives resulted from the on-going strategic reassessment of our
various businesses as well as the markets in which they operate.
A summary of charges by major initiative is as follows:
| 2006 | 2005 | 2004 | ||||||||||
| (Amounts in Thousands) | ||||||||||||
Consolidation of St. Louis
manufacturing/distribution facilities |
$ | (499 | ) | $ | 39 | $ | 1,460 | |||||
Consolidation of Glit facilities |
299 | 724 | 791 | |||||||||
Corporate office relocation |
217 | 172 | — | |||||||||
Shutdown of Woods U.S. manufacturing |
(115 | ) | — | 38 | ||||||||
Shutdown of Woods Canada manufacturing |
(14 | ) | 134 | 841 | ||||||||
Consolidation of administrative functions for CCP |
— | 21 | 215 | |||||||||
Other |
— | — | 160 | |||||||||
Total severance, restructuring and related costs |
$ | (112 | ) | $ | 1,090 | $ | 3,505 | |||||
The impact of actions in connection with the above initiatives on the Company’s reportable
segments (before tax) is as follows:
| Total Expected | Total Provision | |||||||
| Cost | to Date | |||||||
Maintenance Products Group |
$ | 21,993 | $ | 20,993 | ||||
Electrical Products Group |
12,776 | 12,776 | ||||||
Corporate |
12,323 | 12,073 | ||||||
| $ | 47,092 | $ | 45,842 | |||||
A rollforward of all restructuring and related reserves since December 31, 2004 is as follows:
| One-time | Contract | |||||||||||||||
| Termination | Termination | |||||||||||||||
| Total | Benefits [a] | Costs [b] | Other [c] | |||||||||||||
Restructuring and related liabilities at December 31, 2004 |
$ | 4,454 | $ | 807 | $ | 3,647 | $ | — | ||||||||
Additions |
1,170 | 506 | 516 | 148 | ||||||||||||
Reductions |
(80 | ) | (19 | ) | (61 | ) | — | |||||||||
Payments |
(2,252 | ) | (861 | ) | (1,243 | ) | (148 | ) | ||||||||
Currency translation and other |
127 | (1 | ) | 128 | — | |||||||||||
Restructuring and related liabilities at December 31, 2005 |
$ | 3,419 | $ | 432 | $ | 2,987 | $ | — | ||||||||
Additions |
516 | 326 | — | 190 | ||||||||||||
Reductions |
(628 | ) | (19 | ) | (609 | ) | — | |||||||||
Payments |
(2,354 | ) | (739 | ) | (1,425 | ) | (190 | ) | ||||||||
Currency translation |
8 | — | 8 | — | ||||||||||||
Restructuring and related liabilities at December 31, 2006 [d] |
$ | 961 | $ | — | $ | 961 | $ | — | ||||||||
| [a] | Includes severance, benefits, and other employee-related costs associated with the employee
terminations. |
|
| [b] | Includes charges related to non-cancelable lease liabilities for abandoned facilities, net of
estimated sub-lease revenue. Total maximum potential amount of lease loss, excluding any sublease
rentals, is $1.8 million as of December 31, 2006. We have included $0.8 million as an offset for
sublease rentals. |
|
| [c] | Includes charges associated with moving inventory, machinery and equipment, consolidation of
administrative and operational functions, and consultants working on sourcing and other
manufacturing and production efficiency initiatives. |
|
| [d] | Katy expects to substantially complete its restructuring program in 2006. The remaining
severance, restructuring and related costs for these initiatives are expected to be approximately
$0.3 million. |
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Since 2001, the Company has been focused on a number of restructuring and cost reduction
initiatives, resulting in severance, restructuring and related charges. With these changes, we
anticipated cost savings from reduced headcount, higher utilized facilities and divested non-core
operations. However, anticipated cost savings have been impacted from such factors as material
price increases, competitive markets and inefficiencies incurred from consolidation of facilities.
See Note 19 to the Consolidated Financial Statements in Part II, Item 8 for further discussion of
severance, restructuring and related charges.
OUTLOOK FOR 2007
We experienced lower sales performance during 2006 from the Woods US retail electrical corded
products business as well as lower volumes in our Contico and Glit business units. Price increases
were passed along to our Woods US customers during 2006 as a result of the rise in copper prices in
the last two years, however, pricing pressure is anticipated given current copper pricing in early
2007. We anticipate a further reduction in net sales from Woods US due to customers moving more of
their purchases directly to Asian manufacturers. Given the relative stability of resin and other
materials pricing for the short-term period, we anticipate pricing levels to be stable in 2007 for
products within the Maintenance Products Group with sales growth being driven by volume improvement
over 2006. However, in the Contico business, we face the continuing challenge of passing through
price increases to offset these higher costs, and sales volumes have been and are likely to
continue to be negatively impacted as a result of raising prices and our decision to exit certain
unprofitable products.
We believe that the quality, shipping and production issues present at our Glit facilities in
2005 have been resolved in 2006 as the Glit business unit has improved its quality level and
executed cost control in its current operations and in the consolidation of the Pineville, North
Carolina operation into the Wrens, Georgia facility. We currently believe the consolidation of the
Washington, Georgia facility into Wrens, Georgia will occur in 2007 and will result in improved
profitability of our Glit business.
Cost of goods sold is subject to variability in the prices for certain raw materials, most
significantly thermoplastic resins used in the manufacture of plastic products for the Continental
and Contico businesses. Prices of plastic resins, such as polyethylene and polypropylene
increased steadily from the latter half of 2002 through 2005 with prices in 2006 being relatively
stable. Management has observed that the prices of plastic resins are driven to an extent by
prices for crude oil and natural gas, in addition to other factors specific to the supply and
demand of the resins themselves. We are equally exposed to price changes for copper at our Woods
US and Woods Canada business units. Prices for copper increased in late 2003 and continued
through 2006. Copper prices remain and expect to be volatile over the next few years. Prices for
corrugated packaging material and other raw materials have also accelerated over the past few
years. We have not employed an active hedging program related to our commodity price risk, but
are employing other strategies for managing this risk, including contracting for a certain
percentage of resin needs through supply agreements and opportunistic spot purchases. We have
experienced cost increases in the prices of primary raw materials used in our products and
inflation on other costs such as packaging materials, utilities and freight. In a climate of
rising raw material costs (and especially in 2005), we experience difficulty in raising prices to
shift these higher costs to our consumer customers for our plastic products. Our future earnings
may be negatively impacted to the extent further increases in costs for raw materials cannot be
recovered or offset through higher selling prices. We cannot predict the direction our raw
material prices will take during 2007 and beyond.
Over the past few years, our management has been focused on a number of restructuring and
cost reduction initiatives, including the consolidation of facilities, divestiture of non-core
operations, selling general and administrative (“SG&A”) cost rationalization and organizational
changes. In the future, we expect to benefit from various profit enhancing strategies such as
process improvements (including Lean Manufacturing and Six Sigma), value engineering products,
improved sourcing/purchasing and lean administration.
SG&A expenses were comparable as a percentage of sales in 2006 versus 2005 and should remain
stable as a percentage of sales in 2007. We will continue to evaluate the possibility of further
consolidation of administrative processes.
Interest rates rose in 2006 and we expect rates to stabilize in 2007. Ultimately, we cannot
predict the future levels of interest rates. With the execution of the Seventh Amendment under
the Bank of America Credit Agreement, the Company has the interest rate margins on all of our
outstanding borrowings and letters of credit set at the largest margins set forth in the Bank of
America Credit Agreement. Interest rate margins, subsequent to the delivery of our financial
statements for 2006 to our lenders, will be adjusted based on the Company’s ratio of debt to
earnings.
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Given our history of operating losses, along with guidance provided by the accounting
literature covering accounting for income taxes, we are unable to conclude it is more likely than
not that we will be able to generate future taxable income sufficient to realize the benefits of
domestic deferred tax assets carried on our books. Therefore, except for our profitable foreign
subsidiaries, a full valuation allowance on the net deferred tax asset position was recorded at
December 31, 2006 and 2005, and we do not expect to record the benefit of any deferred tax assets
that may be generated in 2007. We will continue to record current expense associated with foreign
and state income taxes.
In 2006, our financial performance benefited from favorable currency translation as the
Canadian dollar and British pound strengthened throughout the year against the U.S. dollar. While
we cannot predict the ultimate direction of exchange rates, we do not expect to see the same
favorable impact on our financial performance in 2007.
We expect our working capital levels to remain constant as a percentage of sales. However,
inventory carrying values may be impacted by higher material costs. Cash flow will be used in
2007 for capital expenditures and payments due under our term loan as well as the settlement of
previously established restructuring accruals. The majority of these accruals relate to
non-cancelable lease obligations for abandoned facilities. These accruals do not create
incremental cash obligations in that we are obligated to make the associated payments whether we
occupy the facilities or not. The amount we will ultimately pay out under these accruals is
dependent on our ability to successfully sublet all or a portion of the abandoned facilities.
While the Company was in compliance with the covenants of the Bank of America Credit Agreement
as of December 31, 2006, it obtained, on March 8, 2007, the Eighth Amendment. The Eighth Amendment
eliminates the Fixed Charge Coverage Ratio for the remaining life of the debt agreement and
requires the Company to maintain a minimum level of availability such that its eligible collateral
must exceed the sum of its outstanding borrowings and letters of credit by at least $5.0 million
from the effective date of the Eighth Amendment through September 29, 2007 and by $7.5 million
through December 31, 2007. Thereafter, the Company is required to maintain a minimum level of
availability of $5.0 million for the first three quarters of the year and $7.5 million for the
fourth quarter. In addition, we reduced our Revolving Credit Facility from $90.0 million to $80.0
million.
If we are unable to comply with the terms of the amended covenants, we could seek to obtain
further amendments and pursue increased liquidity through additional debt financing and/or the sale
of assets. We believe that given our strong working capital base, additional liquidity could be
obtained through additional debt financing, if necessary. However, there is no guarantee that such
financing could be obtained. The Company believes that we will be able to comply with all
covenants, as amended, throughout 2007. In addition, we are continually evaluating alternatives
relating to the sale of excess assets and divestitures of certain of our business units. Asset
sales and business divestitures present opportunities to provide additional liquidity by
de-leveraging our financial position.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995
This report and the information incorporated by reference in this report contain
various “forward-looking statements” as defined in Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act of 1934, as amended. The forward-looking statements are based on
the beliefs of our management, as well as assumptions made by, and information currently available
to, our management. We have based these forward-looking statements on current expectations and
projections about future events and trends affecting the financial condition of our business.
These forward-looking statements are subject to risks and uncertainties that may lead to results
that differ materially from those expressed in any forward-looking statement made by us or on our
behalf, including, among other things:
| • | Increases in the cost of, or in some cases continuation of, the current price levels
of plastic resins, copper, paper board packaging, and other raw materials. |
| • | Our inability to reduce product costs, including manufacturing, sourcing, freight,
and other product costs. |
| • | Greater reliance on third parties for our finished goods as we increase the portion
of our manufacturing that is outsourced. |
||
| • | Our inability to reduce administrative costs through consolidation of functions and systems improvements. |
||
| • | Our inability to execute our systems integration plan. |
||
| • | Our inability to successfully integrate our operations as a result of the facility consolidations. |
| • | Our inability to achieve product price increases, especially as they relate to
potentially higher raw material costs. |
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| • | The potential impact of losing lines of business at large mass merchant retailers in
the discount and do-it-yourself markets. |
||
| • | Competition from foreign competitors. |
||
| • | The potential impact of rising interest rates on our LIBOR-based Bank of America Credit Agreement. |
||
| • | Our inability to meet covenants associated with the Bank of America Credit Agreement. |
| • | Our failure to identify, and promptly and effectively remediate, any material
weaknesses or significant deficiencies in our internal control over financial reporting. |
||
| • | The potential impact of rising costs for insurance for properties and various forms of liabilities. |
||
| • | The potential impact of changes in foreign currency exchange rates related to our foreign operations. |
| • | Labor issues, including union activities that require an increase in production costs
or lead to a strike, thus impairing production and decreasing sales. We are also
subject to labor relations issues at entities involved in our supply chain, including
both suppliers and those involved in transportation and shipping. |
| • | Changes in significant laws and government regulations affecting environmental
compliance and income taxes. |
Words and phrases such as “expects,” “estimates,” “will,” “intends,” “plans,” “believes,”
“should,” “anticipates,” and the like are intended to identify forward-looking statements. The
results referred to in forward-looking statements may differ materially from actual results because
they involve estimates, assumptions and uncertainties. Forward-looking statements included herein
are as of the date hereof and we undertake no obligation to revise or update such statements to
reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated
events. All forward-looking statements should be viewed with caution.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 3 to the Consolidated
Financial Statements of Katy included in Part II, Item 8. Certain of our accounting policies as
discussed below require the application of significant judgment by management in selecting the
appropriate assumptions for calculating amounts to record in our financial statements. By their
nature, these judgments are subject to an inherent degree of uncertainty.
Revenue Recognition — Revenue is recognized for all sales, including sales to
distributors, at the time the products are shipped and title has transferred to the customer,
provided that a purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptances, the sales price is fixed and determinable and
collection is deemed probable. The Company’s standard shipping terms are FOB shipping point. The
Company records sales discounts, returns and allowances in accordance with EITF 01-09, Accounting
for Consideration Given by a Vendor to a Customer. Sales discounts, returns and allowances, and
cooperative advertising are included in net sales, and the provision for doubtful accounts is
included in selling, general and administrative expenses. These provisions are estimated at the
time of sale.
Stock-based Compensation — Effective January 1, 2006, the Company has adopted SFAS
No. 123R, Share-Based Payment (“SFAS No. 123R”), using the modified prospective method. Under
this method, compensation cost recognized during 2006 includes: a) compensation cost for all
stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date
fair value estimated in accordance with SFAS No. 123R amortized over the options’ vesting period;
b) compensation cost for stock appreciation rights granted prior to, but vested as of January 1,
2006, based on the January 1, 2006 fair value estimated in accordance with SFAS No. 123R; and c)
compensation cost for SARs granted prior to and vested as of
December 31, 2006 based on the December 31, 2006 fair value estimated in accordance with SFAS
No. 123R. Going forward into 2007 and thereafter, the Company will incur compensation expense
associated with the fair value of stock options and SARs.
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Accounts Receivable — We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history and the customer’s current creditworthiness, as
determined by our review of their current credit information. We continuously monitor collections
and payment from our customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have identified. While
such credit losses have historically been within our expectations and the provision established, we
cannot guarantee that we will continue to experience the same credit loss rates that we have in the
past. Since our accounts receivable are concentrated in a relatively few number of large sized
customers, especially our consumer/retail customers, a significant change in the liquidity or
financial position of any one of these customers could have a material adverse impact on our
ability to collect our accounts receivable and our future operating results.
Inventories — We value our inventory at the lower of the actual cost to purchase
and/or manufacture the inventory or the current net realizable value of the inventory. We
regularly review inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and production requirements
for the next twelve months. Our accounting policies state that operating divisions are to
identify, at a minimum, those inventory items that are in excess of either one year’s historical or
one year’s forecasted usage, and to use business judgment in determining which is the more
appropriate metric. Those inventory items must then be evaluated on a lower of cost or market
basis for realization. A significant increase in the demand for our products could result in a
short-term increase in the cost of inventory purchases while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand. Additionally, our
estimates of future product demand may prove to be inaccurate, in which case we may have
understated or overstated the provision required for excess and obsolete inventory. In the future,
if our inventory is determined to be overvalued, we would be required to recognize such costs in
our cost of goods sold at the time of such determination.
Therefore, although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or product developments could have
a significant impact on the value of our inventory and our reported operating results. Our
reserves for excess and obsolete inventory were $3.9 million and $4.5 million, respectively, as of
December 31, 2006 and 2005.
Goodwill and Impairments of Long-Lived Assets — In connection with certain
acquisitions, we recorded goodwill representing the cost of the acquisition in excess of the fair
value of the net assets acquired. In accordance with SFAS No. 142, Goodwill and Intangible Assets,
the fair value of each reporting unit that carries goodwill is determined annually, or as
indicators of impairment are identified, and the fair value is compared to the carrying value of
the reporting unit. If the fair value exceeds the carrying value, then no adjustment is necessary.
If the carrying value of the reporting unit exceeds the fair value, appraisals are performed of
long-lived assets and other adjustments are made to arrive at a revised fair value balance sheet.
This revised fair value balance sheet (without goodwill) is compared to the fair value of the
business previously determined, and a revised goodwill amount is reached. If the indicated
goodwill amount meets or exceeds the current carrying value of goodwill, then no adjustment is
required. However, if the result indicates a reduced level of goodwill, an impairment is recorded
to state the goodwill at the revised level. Any future impairments of goodwill determined in
accordance with SFAS No. 142 would be recorded as a component of income from continuing operations.
We review our long-lived assets for impairment in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, whenever triggering events indicate that an
impairment may have occurred. We monitor our operations to look for triggering events that may
cause us to perform an impairment analysis. These events include, among others, loss of product
lines, poor operating performance and abandonment of facilities. We determine the lowest level at
which cash flows are separately identifiable to perform the future cash flows tests, and apply the
results to the assets related to those separately identifiable cash flows. In some cases, this may
be at the individual asset level, but in other cases, it is more appropriate to perform this
testing at a business unit level (especially when poor operating performance was the triggering
event). For assets that are to be held and used, we compare undiscounted future cash flows
associated with the asset (or asset group) and determine if the carrying value of the asset (asset
group) will be recovered by those cash flows over the remaining useful life of the asset (or of the
primary asset of an asset group). If the future undiscounted cash flows indicate that the carrying
value of the asset (asset group) will not be recovered, then the asset is marked to fair value.
For assets that are to be disposed of by sale or by a means other than by sale, the identified
asset (or disposal group if a group of assets or entire business unit) is marked to fair value less
costs to sell. In the case of the planned sale of a business unit, SFAS No. 144 indicates that
disposal groups should be reported as discontinued operations on the consolidated financial
statements if cash flows of the disposal group are separately identifiable. SFAS No. 144 has had
an impact on the application of accounting for discontinued operations, making it in general much
easier to classify a business unit (disposal group) held for sale as a discontinued operation. The
rules covering discontinued operations prior to SFAS No. 144 generally required that an entire
segment of a business be planned for disposal in order to classify it as a discontinued operation.
We recorded impairments of long-lived assets during 2005 and 2004 in accordance with SFAS No. 144, which are discussed in Notes 4
and 5 to the Consolidated Financial Statements in Part II, Item 8.
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Deferred Income Taxes — We recognize deferred income tax assets and liabilities based
on the differences between the financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred income tax assets also include federal, state and foreign net operating loss
carry forwards, primarily due to the significant operating losses incurred during recent years, as
well as various tax credits. We regularly review our deferred income tax assets for recoverability
taking into consideration historical net income (losses), projected future income (losses) and the
expected timing of the reversals of existing temporary differences. We establish a valuation
allowance when it is more likely than not that these assets will not be recovered. As of December
31, 2006, we had a valuation allowance of $67.0 million. During the year ended December 31, 2006,
we increased the valuation allowance by $2.2 million primarily to provide a full reserve against
our net deferred tax asset position. Except for certain of our foreign subsidiaries, given the
negative evidence provided by our history of operating losses, and considering guidance provided by
SFAS No. 109, Accounting for Income Taxes, we were unable to conclude that it is more likely that
not that our deferred tax assets would be recoverable through the generation of future taxable
income. We will continue to evaluate our valuation allowance requirements based on future
operating results and business acquisitions and dispositions, and we may adjust our deferred tax
asset valuation allowance. Such changes in our deferred tax asset valuation allowance will be
reflected in current operations through our income tax provision.
Workers’ Compensation and Product Liabilities — We make payments for workers’
compensation and product liability claims generally through the use of a third party claims
administrator. We have purchased insurance coverage for large claims over our self-insured
retention levels. Our workers’ compensation liabilities are developed using actuarial methods
based upon historical data for payment patterns, cost trends, and other relevant factors. In order
to consider a range of possible outcomes, we have based our estimates of liabilities in this area
on several different sources of loss development factors, including those from the insurance
industry, the manufacturing industry, and factors developed in-house. Our general approach is to
identify a reasonable, logical conclusion, typically in the middle range of the possible outcomes.
While we believe that our liabilities for workers’ compensation and product liability claims as of
December 31, 2006 are adequate and that the judgment applied is appropriate, such estimated
liabilities could differ materially from what will actually transpire in the future.
Environmental and Other Contingencies — We and certain of our current and former
direct and indirect corporate predecessors, subsidiaries and divisions are involved in remedial
activities at certain present and former locations and have been identified by the United States
Environmental Protection Agency, state environmental agencies and private parties as potentially
responsible parties (“PRPs”) at a number of hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act (“Superfund”) or equivalent state laws and,
as such, may be liable for the cost of cleanup and other remedial activities at these sites.
Responsibility for cleanup and other remedial activities at a Superfund site is typically shared
among PRPs based on an allocation formula. Under the federal Superfund statute, parties could be
held jointly and severally liable, thus subjecting them to potential individual liability for the
entire cost of cleanup at the site. Based on our estimate of allocation of liability among PRPs,
the probability that other PRPs, many of whom are large, solvent, public companies, will fully pay
the costs apportioned to them, currently available information concerning the scope of
contamination, estimated remediation costs, estimated legal fees and other factors, we have
recorded and accrued for environmental liabilities in amounts that we deem reasonable. The
ultimate costs will depend on a number of factors and the amount currently accrued represents our
best current estimate of the total costs to be incurred. We expect this amount to be
substantially paid over the next one to four years. See Note 18 to the Consolidated Financial
Statements in Part II, Item 8.
Severance, Restructuring and Related Charges — Since the Recapitalization in
mid-2001, we have initiated several cost reduction and facility consolidation initiatives
including, (1) the closure or consolidation of manufacturing, distribution and office facilities,
(2) the centralization of business units, and (3) the outsourcing of our Electrical Products
manufacturing to Asia. These initiatives have resulted in significant severance, restructuring and
related charges. Included in these charges are one-time termination benefits including severance,
benefits and other employee-related costs associated with employee terminations; contract
termination costs mostly related to non-cancelable lease liabilities for abandoned facilities, net
of sublease revenue; and other costs associated with the consolidation of administrative and
operational functions and consultants working on sourcing and other manufacturing and production
efficiency initiatives. Our current restructuring programs were substantially completed in 2006.
In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
we recognize costs (including costs for one-time termination benefits) associated with exit or
disposal activities as they are incurred. However, charges related to non-cancelable leases
require estimates of sublease income and adjustments to these liabilities are possible in the
future depending on the accuracy of the sublease assumptions made.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 of the Notes to the Consolidated Financial Statements in Part II, Item 8 for a
discussion of new accounting pronouncements and the potential impact to the Company’s consolidated
results of operations and financial position.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk associated with changes in interest rates relates primarily to our
debt obligations. Accordingly, effective August 17, 2005, we entered into a two-year interest rate
swap agreement on a notional amount of $25.0 million in the first year and $15.0 million in the
second year. The fixed interest rate under the swap at December 31, 2006 and over the life of the
agreement is 4.49%. Our interest obligations on outstanding debt at December 31, 2006 were indexed
from short-term LIBOR. As a result of the current rising interest rate environment and the
increase in the interest rate margins on our borrowings as a result of the amendments to the Bank
of America Credit Agreement, our exposures to interest rate risks on the non-capped debt could be
material to our financial position or results of operations. See Note 9 to the Consolidated
Financial Statements in Part II, Item 8.
The following table presents as of December 31, 2006, our financial instruments, rates of
interest and indications of fair value:
| Expected Maturity Dates | ||||||||||||||||||||||||||||||||
| (Amounts in Thousands) | ||||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
Temporary cash investments |
||||||||||||||||||||||||||||||||
Fixed rate |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Average interest rate |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
INDEBTEDNESS |
||||||||||||||||||||||||||||||||
Fixed rate debt |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Average interest rate |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Variable rate debt |
$ | 1,125 | $ | 1,500 | $ | 54,246 | $ | — | $ | — | $ | — | $ | 56,871 | $ | 56,871 | ||||||||||||||||
Average interest rate |
8.38 | % | 8.38 | % | 8.18 | % | — | — | — | — | — | |||||||||||||||||||||
Foreign Exchange Risk
We are exposed to fluctuations in the Euro, British pound, Canadian dollar and
various Asian currencies such as the Chinese Renminbi. Some of our subsidiaries make significant
U.S. dollar purchases from Asian suppliers, particularly in China, Taiwan and the Philippines. An
adverse change in foreign currency exchange rates of Asian countries could result in an increase in
the cost of purchases. We do not currently hedge foreign currency transaction or translation
exposures. Our net investment in foreign subsidiaries translated into U.S. dollars at December 31,
2006 is $23.1 million. A 10% change in foreign currency exchange rates would amount to $2.3
million change in our net investment in foreign subsidiaries at December 31, 2006.
Commodity Price Risk
We have not employed an active hedging program related to our commodity price risk, but are
employing other strategies for managing this risk, including contracting for a certain percentage
of resin needs through supply agreements and opportunistic spot purchases. See Part I — Item 1 -
Raw Materials and Part II — Item 7 — Outlook for 2007 for a further discussion of our raw
materials.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Katy Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, stockholders’ equity and cash flows present fairly, in all material
respects, the financial position of Katy Industries, Inc. and its subsidiaries at December 31, 2006
and 2005, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 11 to the consolidated financial statements, the Company changed the manner in
which it accounts for pensions and post-retirement plans in fiscal 2006.
As discussed in Note 13 to the consolidated financial statements, the Company changed the manner in
which it accounts for share-based compensation in fiscal 2006.
As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2006
and 2005 consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 16, 2007, except for the restatement discussed in Note 2 to the consolidated financial statements, as to which the date is August 17, 2007.
March 16, 2007, except for the restatement discussed in Note 2 to the consolidated financial statements, as to which the date is August 17, 2007.
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KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 and 2005
(Amounts in Thousands)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 and 2005
(Amounts in Thousands)
ASSETS
| As Restated, see Note 2 | ||||||||
| 2006 | 2005 | |||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 7,392 | $ | 8,421 | ||||
Trade accounts receivable, net of allowances of $2,213 and $2,445 |
55,014 | 63,612 | ||||||
Inventories, net |
54,980 | 62,593 | ||||||
Other current assets |
2,991 | 3,600 | ||||||
Asset held for sale |
4,483 | — | ||||||
Total current assets |
124,860 | 138,226 | ||||||
OTHER ASSETS: |
||||||||
Goodwill |
665 | 665 | ||||||
Intangibles, net |
6,435 | 6,946 | ||||||
Other |
8,990 | 8,260 | ||||||
Total other assets |
16,090 | 15,871 | ||||||
PROPERTY AND EQUIPMENT |
||||||||
Land and improvements |
336 | 1,732 | ||||||
Buildings and improvements |
9,669 | 14,011 | ||||||
Machinery and equipment |
119,703 | 140,514 | ||||||
| 129,708 | 156,257 | |||||||
Less — Accumulated depreciation |
(87,964 | ) | (98,260 | ) | ||||
Property and equipment, net |
41,744 | 57,997 | ||||||
Total assets |
$ | 182,694 | $ | 212,094 | ||||
See Notes to Consolidated Financial Statements.
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Table of Contents
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 and 2005
(Amounts in Thousands, Except Share Data)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 and 2005
(Amounts in Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
| As Restated, see Note 2 | ||||||||
| 2006 | 2005 | |||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 33,684 | $ | 47,449 | ||||
Accrued compensation |
3,518 | 4,071 | ||||||
Accrued expenses |
38,187 | 37,713 | ||||||
Current maturities, long-term debt |
1,125 | 2,857 | ||||||
Revolving credit agreement |
43,879 | 41,946 | ||||||
Total current liabilities |
120,393 | 134,036 | ||||||
LONG-TERM DEBT, less current maturities |
11,867 | 12,857 | ||||||
OTHER LIABILITIES |
8,402 | 10,497 | ||||||
Total liabilities |
140,662 | 157,390 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 18 and 21) |
— | — | ||||||
STOCKHOLDERS’ EQUITY |
||||||||
15% Convertible preferred stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 1,131,551
shares, liquidation value $113,155 |
108,256 | 108,256 | ||||||
Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,304 shares |
9,822 | 9,822 | ||||||
Additional paid-in capital |
27,120 | 27,067 | ||||||
Accumulated other comprehensive income |
2,242 | 3,158 | ||||||
Accumulated deficit |
(83,434 | ) | (71,055 | ) | ||||
Treasury stock, at cost, 1,869,827 shares
and 1,874,027 shares, respectively |
(21,974 | ) | (22,544 | ) | ||||
Total stockholders’ equity |
42,032 | 54,704 | ||||||
Total liabilities and stockholders’ equity |
$ | 182,694 | $ | 212,094 | ||||
See Notes to Consolidated Financial Statements.
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KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(Amounts in Thousands, Except Per Share Data)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(Amounts in Thousands, Except Per Share Data)
| As Restated, see Note 2 | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Net sales |
$ | 396,166 | $ | 423,390 | $ | 416,681 | ||||||
Cost of goods sold |
345,469 | 372,921 | 361,660 | |||||||||
Gross profit |
50,697 | 50,469 | 55,021 | |||||||||
Selling, general and administrative expenses |
46,556 | 52,749 | 52,668 | |||||||||
Impairments of goodwill |
— | 1,574 | 7,976 | |||||||||
Impairments of other long-lived assets |
— | 538 | 22,080 | |||||||||
Severance, restructuring and related charges |
(112 | ) | 1,090 | 3,505 | ||||||||
Loss (gain) on sale of assets |
467 | (377 | ) | (288 | ) | |||||||
Operating income (loss) |
3,786 | (5,105 | ) | (30,920 | ) | |||||||
Equity in income of equity method investment |
— | 600 | — | |||||||||
Gain on SESCO joint venture transaction |
563 | — | — | |||||||||
Interest expense |
(7,114 | ) | (5,713 | ) | (3,968 | ) | ||||||
Other, net |
302 | 207 | (998 | ) | ||||||||
Loss from continuing operations before provision for
income taxes |
(2,463 | ) | (10,011 | ) | (35,886 | ) | ||||||
Provision for income taxes from continuing operations |
(2,326 | ) | (1,608 | ) | (642 | ) | ||||||
Loss from continuing operations |
(4,789 | ) | (11,619 | ) | (36,528 | ) | ||||||
(Loss) income from operations of discontinued businesses (net of tax) |
(1,429 | ) | (2,178 | ) | 1,182 | |||||||
Loss on sale of discontinued businesses (net of tax) |
(5,405 | ) | — | (775 | ) | |||||||
Loss before cumulative effect of a change in accounting principle |
(11,623 | ) | (13,797 | ) | (36,121 | ) | ||||||
Cumulative effect of a change in accounting principle (net of tax) |
(756 | ) | — | — | ||||||||
Net loss |
(12,379 | ) | (13,797 | ) | (36,121 | ) | ||||||
Payment-in-kind of dividends on convertible preferred stock |
— | — | (14,749 | ) | ||||||||
Net loss attributable to common stockholders |
$ | (12,379 | ) | $ | (13,797 | ) | $ | (50,870 | ) | |||
Loss per share of common stock — Basic and diluted |
||||||||||||
Loss from continuing operations attributable to
common stockholders |
$ | (0.60 | ) | $ | (1.47 | ) | $ | (6.50 | ) | |||
Discontinued operations (net of tax) |
(0.86 | ) | (0.27 | ) | 0.05 | |||||||
Cumulative effect of a change in accounting principle |
(0.09 | ) | — | — | ||||||||
Net loss attributable to common stockholders |
$ | (1.55 | ) | $ | (1.74 | ) | $ | (6.45 | ) | |||
See Notes to Consolidated Financial Statements.
41
Table of Contents
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(Amounts in Thousands, Except Share Data)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(Amounts in Thousands, Except Share Data)
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | Other | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Stock | Additional | Compre- | Compre- | Total | |||||||||||||||||||||||||||||||||||
| Number of | Par | Number of | Par | Paid-in | hensive | Accumulated | Treasury | hensive | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Income | Deficit | Stock | Loss | Equity | |||||||||||||||||||||||||||||||
Balance, January 1, 2004 |
925,750 | $ | 93,507 | 9,822,204 | $ | 9,822 | $ | 40,441 | $ | 2,387 | $ | (21,137 | ) | $ | (22,728 | ) | $ | 102,292 | ||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | (36,121 | ) | — | $ | (36,121 | ) | (36,121 | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustment |
— | — | — | — | — | 2,065 | — | — | 2,065 | 2,065 | ||||||||||||||||||||||||||||||
Pension minimum liability adjustment |
— | — | — | — | — | 112 | — | — | 112 | 112 | ||||||||||||||||||||||||||||||
Comprehensive loss |
$ | (33,944 | ) | |||||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | — | — | — | (75 | ) | (75 | ) | |||||||||||||||||||||||||||||
Issuance of convertible preferred stock
related to PIK dividends accrued |
205,801 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Payment in kind dividends accrued |
— | 14,749 | — | — | (14,749 | ) | — | — | — | — | ||||||||||||||||||||||||||||||
Stock option exercise |
— | — | — | — | (571 | ) | — | — | 875 | 304 | ||||||||||||||||||||||||||||||
Other |
— | — | — | — | (10 | ) | — | — | 18 | 8 | ||||||||||||||||||||||||||||||
Balance, December 31, 2004 |
1,131,551 | $ | 108,256 | 9,822,204 | $ | 9,822 | $ | 25,111 | $ | 4,564 | $ | (57,258 | ) | $ | (21,910 | ) | $ | 68,585 | ||||||||||||||||||||||
Net loss, As
Restated, see Note 2 |
— | — | — | — | — | — | (13,797 | ) | — | $ | (13,797 | ) | (13,797 | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustment |
— | — | — | — | — | (1,352 | ) | — | — | (1,352 | ) | (1,352 | ) | |||||||||||||||||||||||||||
Pension minimum liability adjustment |
— | — | — | — | — | (109 | ) | — | — | (109 | ) | (109 | ) | |||||||||||||||||||||||||||
Interest rate swap |
— | — | — | — | — | 55 | — | — | 55 | 55 | ||||||||||||||||||||||||||||||
Comprehensive
loss, As Restated, see Note 2 |
$ | (15,203 | ) | |||||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | — | — | — | (7 | ) | (7 | ) | |||||||||||||||||||||||||||||
Stock
compensation, As Restated, see Note
2 |
— | — | — | — | 2,004 | — | — | — | 2,004 | |||||||||||||||||||||||||||||||
Other |
— | — | — | — | (48 | ) | — | — | (627 | ) | (675 | ) | ||||||||||||||||||||||||||||
Balance,
December 31, 2005, As Restated, see
Note 2 |
1,131,551 | $ | 108,256 | 9,822,204 | $ | 9,822 | $ | 27,067 | $ | 3,158 | $ | (71,055 | ) | $ | (22,544 | ) | $ | 54,704 | ||||||||||||||||||||||
Net loss, As
Restated, see Note 2 |
— | — | — | — | — | — | (12,379 | ) | — | $ | (12,379 | ) | (12,379 | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustment |
— | — | — | — | — | 686 | — | — | 686 | 686 | ||||||||||||||||||||||||||||||
Interest rate swap |
— | — | — | — | — | 22 | — | — | 22 | 22 | ||||||||||||||||||||||||||||||
Comprehensive
loss, As Restated, see Note 2 |
$ | (11,671 | ) | |||||||||||||||||||||||||||||||||||||
Adoption of SFAS 158 |
— | — | — | — | — | (1,624 | ) | — | — | (1,624 | ) | |||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | — | — | — | (111 | ) | (111 | ) | |||||||||||||||||||||||||||||
Stock option exercise |
— | — | — | — | (378 | ) | — | — | 525 | 147 | ||||||||||||||||||||||||||||||
Stock compensation |
— | — | — | — | 587 | — | — | — | 587 | |||||||||||||||||||||||||||||||
Other |
— | — | 100 | — | (156 | ) | — | — | 156 | — | ||||||||||||||||||||||||||||||
Balance,
December 31, 2006, As Restated, see
Note 2 |
1,131,551 | $ | 108,256 | 9,822,304 | $ | 9,822 | $ | 27,120 | $ | 2,242 | $ | (83,434 | ) | $ | (21,974 | ) | $ | 42,032 | ||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
42
Table of Contents
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(Amounts in Thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 and 2004
(Amounts in Thousands)
| As Restated, see Note 2 | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (12,379 | ) | $ | (13,797 | ) | $ | (36,121 | ) | |||
Loss (income) from discontinued operations |
6,834 | 2,178 | (407 | ) | ||||||||
Loss from continuing operations |
(5,545 | ) | (11,619 | ) | (36,528 | ) | ||||||
Cumulative effect of a change in accounting principle |
756 | — | — | |||||||||
Depreciation and amortization |
8,640 | 8,968 | 12,145 | |||||||||
Impairments of goodwill |
— | 1,574 | 7,976 | |||||||||
Impairments of other long-lived assets |
— | 538 | 22,080 | |||||||||
Write-off and amortization of debt issuance costs |
1,178 | 1,122 | 1,076 | |||||||||
Stock option expense |
587 | 2,004 | — | |||||||||
Loss (gain) on sale of assets |
467 | (377 | ) | (288 | ) | |||||||
Equity in income of equity method investment |
— | (600 | ) | — | ||||||||
Deferred income taxes |
14 | 240 | (1,228 | ) | ||||||||
| 6,097 | 1,850 | 5,233 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
2,743 | (16 | ) | (215 | ) | |||||||
Inventories |
2,830 | 2,260 | (8,649 | ) | ||||||||
Other assets |
600 | (1,045 | ) | 307 | ||||||||
Accounts payable |
(8,000 | ) | 7,503 | 200 | ||||||||
Accrued expenses |
(78 | ) | (3,952 | ) | (1,595 | ) | ||||||
Other, net |
(5,206 | ) | (804 | ) | (3,508 | ) | ||||||
| (7,111 | ) | 3,946 | (13,460 | ) | ||||||||
Net cash (used in) provided by continuing operations |
(1,014 | ) | 5,796 | (8,227 | ) | |||||||
Net cash provided by discontinued operations |
2,837 | 766 | 256 | |||||||||
Net cash provided by (used in) operating activities |
1,823 | 6,562 | (7,971 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures of continuing operations |
(4,614 | ) | (8,925 | ) | (10,782 | ) | ||||||
Acquisition of subsidiary, net of cash acquired |
— | (1,115 | ) | — | ||||||||
Proceeds from sale of assets, net |
367 | 981 | 5,778 | |||||||||
Net cash used in continuing operations |
(4,247 | ) | (9,059 | ) | (5,004 | ) | ||||||
Net cash provided by (used in) discontinued operations |
5,292 | (335 | ) | (3,051 | ) | |||||||
Net cash provided by
(used in) investing
activities |
1,045 | (9,394 | ) | (8,055 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Net borrowings of revolving loans |
1,761 | 1,450 | 4,037 | |||||||||
(Decrease) increase in book overdraft |
(2,322 | ) | 4,028 | — | ||||||||
Proceeds of term loans |
1,364 | — | 18,152 | |||||||||
Repayments of term loans |
(4,086 | ) | (2,857 | ) | (3,244 | ) | ||||||
Direct costs associated with debt facilities |
(312 | ) | (151 | ) | (1,485 | ) | ||||||
Repurchases of common stock |
(111 | ) | (7 | ) | (75 | ) | ||||||
Proceeds from the exercise of stock options |
147 | — | 304 | |||||||||
Net cash (used in) provided by financing activities |
(3,559 | ) | 2,463 | 17,689 | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
(338 | ) | 265 | 114 | ||||||||
Net (decrease) increase in cash and cash equivalents |
(1,029 | ) | (104 | ) | 1,777 | |||||||
Cash and cash equivalents, beginning of period |
8,421 | 8,525 | 6,748 | |||||||||
Cash and cash equivalents, end of period |
$ | 7,392 | $ | 8,421 | $ | 8,525 | ||||||
Supplemental disclosure of non-cash investing activities: |
||||||||||||
Note receivable from sale of discontinued operations |
$ | 1,200 | $ | — | $ | — | ||||||
See Notes to Consolidated Financial Statements.
43
Table of Contents
KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2006 and 2005
(Amounts in Thousands, Except Per Share Data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2006 and 2005
(Amounts in Thousands, Except Per Share Data)
Note 1. ORGANIZATION OF THE BUSINESS
The Company is organized into two operating segments: the Maintenance Products Group and the
Electrical Products Group. The activities of the Maintenance Products Group include the
manufacture and distribution of a variety of commercial cleaning supplies and consumer home
storage products. The Electrical Products Group is a distributor of consumer electrical corded
products. Principal geographic markets are in the United States, Canada, and Europe and include
the sanitary maintenance, foodservice, mass merchant retail and home improvement markets.
Note 2. RESTATEMENT OF PRIOR FINANCIAL INFORMATION
Restatement — As a result of accounting errors in the raw material
inventory records, management and the Company’s Audit Committee determined on August 6, 2007 that
the Company’s consolidated financial statements for fiscal 2005 and 2006 should no longer be relied
upon. The Company’s decision to restate its consolidated financial statements is based on facts
obtained by management and the results of an internal investigation of the physical raw material
inventory counting process at CCP. These procedures resulted in the identification of an
intentional overstatement of raw material inventory when completing the physical inventory. At the
time of the physical inventories, the Company did not have sufficient controls in place to ensure that the accurate physical raw material inventory on
hand was properly accounted for and reported in the proper period.
(A) Impact of error on previously filed financial statements — The impact of the raw material
inventory error on loss from continuing operations and net loss is approximately ($0.2) million and
($0.6) million for the years ended December 31, 2005 and 2006, respectively.
Other Out-of-Period Adjustments and Revisions — Due to the adjustments discussed
above that required a restatement of our previously filed consolidated financial statements, we are
also correcting these out-of-period adjustments and revisions by recording them in the proper
periods.
The out-of-period adjustments and revisions in the table include the following as referenced:
(B) Accelerated vesting of stock options — The Company recorded non-cash compensation expense
in 2005 of approximately $0.1 million related to stock options which would not have otherwise
vested but for an accelerated vesting as further described in Note 12.
(C) Deferred compensation — In conjunction with a retirement compensation program as further
described in Note 11, the Company made an adjustment for approximately $0.4 million in 2005
associated with the accounting for related compensation expense. The Company had originally
recorded the out-of-period adjustment in 2006; therefore, the Company
reduced compensation expense by the corresponding amount in 2006.
(D) Inventory reserves — The Company recorded an adjustment of approximately $0.1 million to
increase inventory reserves and cost of goods sold in 2006 associated with our lower of cost or
market evaluation.
(E) Revision of SESCO as a continuing operation — For all years presented, the Company
previously inappropriately reported the results from the Savannah Energy Systems Company
Partnership operation as discontinued operations, as described further in Note 8. As a result, the
Company revised in 2006 $0.4 million from loss from operations of discontinued businesses and
$0.1 million from loss on sale of discontinued businesses. Accordingly, the Company recorded in
2006 within continuing operations a $0.6 million gain on SESCO joint venture transaction offset by
$0.1 million in interest expense. For 2005, the Company revised $0.1 million from loss from
operations of discontinued businesses to interest expense within continuing operations.
All affected amounts described in these Notes to Consolidated Financial Statements have been
restated. As a result of this restatement, the Company’s fiscal 2005 and 2006 financial results
are adjusted as follows:
44
Table of Contents
Consolidated Balance Sheets
(Amounts in thousands)
(Amounts in thousands)
| December 31, 2006 | December 31, 2005 | |||||||||||||||
| Previously | Previously | |||||||||||||||
| Assets | reported | Restated | reported | Restated | ||||||||||||
CURRENT ASSETS: |
||||||||||||||||
Cash and cash equivalents |
$ | 7,392 | $ | 7,392 | $ | 8,421 | $ | 8,421 | ||||||||
Trade accounts receivable, net |
55,014 | 55,014 | 63,612 | 63,612 | ||||||||||||
Inventories, net (A)(D) |
55,960 | 54,980 | 62,799 | 62,593 | ||||||||||||
Other current assets |
2,991 | 2,991 | 3,600 | 3,600 | ||||||||||||
Asset held for sale |
4,483 | 4,483 | — | — | ||||||||||||
Total current assets |
125,840 | 124,860 | 138,432 | 138,226 | ||||||||||||
OTHER ASSETS: |
||||||||||||||||
Goodwill |
665 | 665 | 665 | 665 | ||||||||||||
Intangibles, net |
6,435 | 6,435 | 6,946 | 6,946 | ||||||||||||
Other (C) |
8,990 | 8,990 | 8,643 | 8,260 | ||||||||||||
Total other assets |
16,090 | 16,090 | 16,254 | 15,871 | ||||||||||||
Property and equipment, net |
41,744 | 41,744 | 57,997 | 57,997 | ||||||||||||
Total assets |
$ | 183,674 | $ | 182,694 | $ | 212,683 | $ | 212,094 | ||||||||
Liabilities and Stockholders’ Equity |
||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||
Accounts payable |
$ | 33,684 | 33,684 | $ | 47,449 | 47,449 | ||||||||||
Accrued compensation |
3,518 | 3,518 | 4,071 | 4,071 | ||||||||||||
Accrued expenses |
38,187 | 38,187 | 37,713 | 37,713 | ||||||||||||
Current maturities, long-term debt |
1,125 | 1,125 | 2,857 | 2,857 | ||||||||||||
Revolving credit agreement |
43,879 | 43,879 | 41,946 | 41,946 | ||||||||||||
Total current liabilities |
120,393 | 120,393 | 134,036 | 134,036 | ||||||||||||
LONG-TERM DEBT, less current maturities |
11,867 | 11,867 | 12,857 | 12,857 | ||||||||||||
OTHER LIABILITIES |
8,402 | 8,402 | 10,497 | 10,497 | ||||||||||||
Total liabilities |
140,662 | 140,662 | 157,390 | 157,390 | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Notes 18 and 21) |
— | — | — | — | ||||||||||||
STOCKHOLDERS’ EQUITY |
||||||||||||||||
15% Convertible preferred stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 1,131,551
shares, liquidation value $113,155 |
108,256 | 108,256 | 108,256 | 108,256 | ||||||||||||
Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,304 shares |
9,822 | 9,822 | 9,822 | 9,822 | ||||||||||||
Additional paid-in capital (B) |
27,069 | 27,120 | 27,016 | 27,067 | ||||||||||||
Accumulated other comprehensive income |
2,242 | 2,242 | 3,158 | 3,158 | ||||||||||||
Accumulated deficit |
(82,403 | ) | (83,434 | ) | (70,415 | ) | (71,055 | ) | ||||||||
Treasury stock, at cost |
(21,974 | ) | (21,974 | ) | (22,544 | ) | (22,544 | ) | ||||||||
Total stockholders’ equity |
43,012 | 42,032 | 55,293 | 54,704 | ||||||||||||
Total liabilities and stockholders’ equity |
$ | 183,674 | $ | 182,694 | $ | 212,683 | $ | 212,094 | ||||||||
45
Table of Contents
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Amounts in thousands, except per share data)
| For the years ended | ||||||||||||||||
| December 31, 2006 | December 31, 2005 | |||||||||||||||
| Previously | Previously | |||||||||||||||
| reported | Restated | reported | Restated | |||||||||||||
Net sales |
$ | 396,166 | 396,166 | $ | 423,390 | 423,390 | ||||||||||
Cost of goods sold (A)(D) |
344,695 | 345,469 | 372,715 | 372,921 | ||||||||||||
Gross profit |
51,471 | 50,697 | 50,675 | 50,469 | ||||||||||||
Selling, general and administrative expenses (B)(C) |
46,939 | 46,556 | 52,315 | 52,749 | ||||||||||||
Impairments of goodwill |
— | — | 1,574 | 1,574 | ||||||||||||
Impairments of other long-lived assets |
— | — | 538 | 538 | ||||||||||||
Severance, restructuring and related charges |
(112 | ) | (112 | ) | 1,090 | 1,090 | ||||||||||
Loss (gain) on sale of assets |
467 | 467 | (377 | ) | (377 | ) | ||||||||||
Operating income (loss) |
4,177 | 3,786 | (4,465 | ) | (5,105 | ) | ||||||||||
Equity in income of equity method investment |
— | — | 600 | 600 | ||||||||||||
Gain on SESCO joint venture transaction (E) |
— | 563 | — | — | ||||||||||||
Interest expense (E) |
(7,037 | ) | (7,114 | ) | (5,570 | ) | (5,713 | ) | ||||||||
Other, net |
302 | 302 | 207 | 207 | ||||||||||||
Loss from continuing operations before provision for
income taxes |
(2,558 | ) | (2,463 | ) | (9,228 | ) | (10,011 | ) | ||||||||
Provision for income taxes from continuing operations |
(2,326 | ) | (2,326 | ) | (1,608 | ) | (1,608 | ) | ||||||||
Loss from continuing operations |
(4,884 | ) | (4,789 | ) | (10,836 | ) | (11,619 | ) | ||||||||
(Loss) income from operations of discontinued
businesses (net of tax) (E) |
(1,043 | ) | (1,429 | ) | (2,321 | ) | (2,178 | ) | ||||||||
Loss on sale of discontinued businesses (net of tax) (E) |
(5,305 | ) | (5,405 | ) | — | — | ||||||||||
Loss before cumulative effect of a change in
accounting principle |
(11,232 | ) | (11,623 | ) | (13,157 | ) | (13,797 | ) | ||||||||
Cumulative effect of a change in accounting
principle (net of tax) |
(756 | ) | (756 | ) | — | — | ||||||||||
Net loss |
(11,988 | ) | (12,379 | ) | (13,157 | ) | (13,797 | ) | ||||||||
Payment-in-kind of dividends on convertible
preferred stock |
— | — | — | — | ||||||||||||
Net loss attributable to common stockholders |
$ | (11,988 | ) | $ | (12,379 | ) | $ | (13,157 | ) | $ | (13,797 | ) | ||||
Loss per share of common stock — Basic and diluted |
||||||||||||||||
Loss from continuing operations attributable
to common stockholders |
$ | (0.61 | ) | $ | (0.60 | ) | $ | (1.37 | ) | $ | (1.47 | ) | ||||
Discontinued operations (net of tax) |
(0.80 | ) | (0.86 | ) | (0.29 | ) | (0.27 | ) | ||||||||
Cumulative effect of a change in accounting principle |
(0.09 | ) | (0.09 | ) | — | — | ||||||||||
Net loss attributable to common stockholders |
$ | (1.50 | ) | $ | (1.55 | ) | $ | (1.66 | ) | $ | (1.74 | ) | ||||
46
Table of Contents
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Amounts in thousands)
| For the years ended | ||||||||||||||||
| December 31, 2006 | December 31, 2005 | |||||||||||||||
| Previously | Previously | |||||||||||||||
| reported | Restated | reported | Restated | |||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net loss |
$ | (11,988 | ) | $ | (12,379 | ) | $ | (13,157 | ) | $ | (13,797 | ) | ||||
Loss (income) from discontinued operations (E) |
6,348 | 6,834 | 2,321 | 2,178 | ||||||||||||
Loss from continuing operations |
(5,640 | ) | (5,545 | ) | (10,836 | ) | (11,619 | ) | ||||||||
Cumulative effect of a change in accounting principle |
756 | 756 | — | — | ||||||||||||
Depreciation and amortization |
8,640 | 8,640 | 8,968 | 8,968 | ||||||||||||
Impairments of goodwill |
— | — | 1,574 | 1,574 | ||||||||||||
Impairments of other long-lived assets |
— | — | 538 | 538 | ||||||||||||
Write-off and amortization of debt issuance costs |
1,178 | 1,178 | 1,122 | 1,122 | ||||||||||||
Stock option expense (B) |
587 | 587 | 1,953 | 2,004 | ||||||||||||
Loss (gain) on sale of assets |
467 | 467 | (377 | ) | (377 | ) | ||||||||||
Equity in income of equity method investment |
— | — | (600 | ) | (600 | ) | ||||||||||
Deferred income taxes |
14 | 14 | 240 | 240 | ||||||||||||
| 6,002 | 6,097 | 2,582 | 1,850 | |||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
2,743 | 2,743 | (16 | ) | (16 | ) | ||||||||||
Inventories (A)(D) |
2,056 | 2,830 | 2,054 | 2,260 | ||||||||||||
Other assets |
600 | 600 | (1,045 | ) | (1,045 | ) | ||||||||||
Accounts payable |
(8,000 | ) | (8,000 | ) | 7,503 | 7,503 | ||||||||||
Accrued expenses (E) |
622 | (78 | ) | (3,047 | ) | (3,952 | ) | |||||||||
Other, net (C)(E) |
(3,237 | ) | (5,206 | ) | (1,187 | ) | (804 | ) | ||||||||
| (5,216 | ) | (7,111 | ) | 4,262 | 3,946 | |||||||||||
Net cash (used in) provided by continuing operations |
786 | (1,014 | ) | 6,844 | 5,796 | |||||||||||
Net cash provided by discontinued operations (E) |
1,037 | 2,837 | (282 | ) | 766 | |||||||||||
Net cash provided by (used in) operating activities |
1,823 | 1,823 | 6,562 | 6,562 | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures of continuing operations |
(4,614 | ) | (4,614 | ) | (8,925 | ) | (8,925 | ) | ||||||||
Acquisition of subsidiary, net of cash acquired |
— | — | (1,115 | ) | (1,115 | ) | ||||||||||
Proceeds from sale of assets, net (E) |
267 | 367 | 981 | 981 | ||||||||||||
Net cash used in continuing operations |
(4,347 | ) | (4,247 | ) | (9,059 | ) | (9,059 | ) | ||||||||
Net cash
provided by (used in) discontinued operations (E) |
5,392 | 5,292 | (335 | ) | (335 | ) | ||||||||||
Net cash provided by (used in) investing activities |
1,045 | 1,045 | (9,394 | ) | (9,394 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||||
Net borrowings on revolving loans |
1,761 | 1,761 | 1,450 | 1,450 | ||||||||||||
(Decrease) increase in book overdraft |
(2,322 | ) | (2,322 | ) | 4,028 | 4,028 | ||||||||||
Proceeds of term loans |
1,364 | 1,364 | — | — | ||||||||||||
Repayments of term loans |
(4,086 | ) | (4,086 | ) | (2,857 | ) | (2,857 | ) | ||||||||
Direct costs associated with debt facilities |
(312 | ) | (312 | ) | (151 | ) | (151 | ) | ||||||||
Repurchases of common stock |
(111 | ) | (111 | ) | (7 | ) | (7 | ) | ||||||||
Proceeds from the exercise of stock options |
147 | 147 | — | — | ||||||||||||
Net cash (used in) provided by financing activities |
(3,559 | ) | (3,559 | ) | 2,463 | 2,463 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
(338 | ) | (338 | ) | 265 | 265 | ||||||||||
Net
(decrease) increase in cash and cash equivalents |
(1,029 | ) | (1,029 | ) | (104 | ) | (104 | ) | ||||||||
Cash and cash equivalents, beginning of period |
8,421 | 8,421 | 8,525 | 8,525 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 7,392 | $ | 7,392 | $ | 8,421 | $ | 8,421 | ||||||||
Supplemental disclosure of non-cash investing activities: |
||||||||||||||||
Note receivable from sale of discontinued operations |
$ | 1,200 | $ | 1,200 | $ | — | $ | — | ||||||||
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The comprehensive loss of approximately $12.9 million and $14.6 million for the years
ended December 31, 2006 and 2005, respectively as previously reported was restated to a
comprehensive loss of $11.7 million and $15.2 million, respectively. The change resulted from
changes within our net loss attributable to common stockholders. Refer to Note 21 for restated
unaudited quarterly results of operations.
Financial statement footnotes affected by this restatement are as follows:
| 3. | Significant Accounting Policies; |
||
| 7. | Discontinued Operations; |
||
| 8. | Savannah Energy Systems Company Partnership; |
||
| 10. | Earnings Per Share; |
||
| 14. | Income Taxes; |
||
| 17. | Industry Segments and Geographic Information; and |
||
| 21. | Quarterly Results of Operations (Unaudited). |
Note 3. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy — The consolidated financial statements include the accounts of
Katy Industries, Inc. and subsidiaries in which it has a greater than 50% voting interest or
significant influence, collectively “Katy” or the “Company”. All significant intercompany
accounts, profits and transactions have been eliminated in consolidation. Investments in
affiliates, which do not meet the criteria of a variable interest entity and are not majority
owned or where the Company exercises significant influence, are reported using the equity method.
As part of the continuous evaluation of its operations, Katy has acquired and disposed of
certain of its operating units in recent years. Those which affected the Consolidated Financial
Statements for the year ended December 31, 2006 are discussed in Note 6.
At December 31, 2006, the Company owns 30,000 shares of common stock, a 45% interest, in
Sahlman Holding Company, Inc. (“Sahlman”) that is accounted for under the equity method. The
Company does not have significant influence over the operation. Sahlman is engaged in the
business of shrimp farming in Nicaragua. As of December 31, 2006 and 2005, the investment balance
was $2.2 million.
Use of Estimates — The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition — Revenue is recognized for all sales, including sales to agents
and distributors, at the time the products are shipped and title has transferred to the customer,
provided that a purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptances, the sales price is fixed and determinable and
collectibility is deemed probable. The Company’s standard shipping terms are FOB shipping point.
The Company records sales discounts, returns and allowances in accordance with Emerging Issues
Task Force (“EITF”) Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer.
Sales discounts, returns and allowances, and cooperative advertising are included in net sales,
and the provision for doubtful accounts is included in selling, general and administrative
expenses. These provisions are estimated at the time of sale.
Cash and Cash Equivalents — Cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Advertising Costs — Advertising costs are expensed as incurred. Advertising costs
within continuing operations expensed in 2006, 2005 and 2004 were $3.1 million, $3.3 million and
$3.4 million, respectively.
Accounts Receivable and Allowance for Doubtful Accounts — Trade accounts receivable
are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts
is the Company’s best estimate of the amount of probable credit losses in its existing accounts
receivable. The Company determines the allowance based on its historical write-off experience.
The Company reviews its allowance for doubtful accounts quarterly, which includes a review of past
due balances over 90 days and over a specified amount for collectibility. All other balances are
reviewed on a pooled basis by market distribution channels. Account balances are charged off
against the allowance when the Company determines it is probable the receivable will not be
recovered. The Company does not have any off-balance-sheet credit exposure related to its
customers. Charges within continuing operations to expense for probable credit losses and
allowances were $3.1 million, $3.3 million and $3.1 million in 2006, 2005 and 2004, respectively.
48
Table of Contents
Inventories — Inventories are stated at the lower of cost or market value, and
reserves are established for excess and obsolete inventory in order to ensure proper valuation of
inventories. Cost includes materials, labor and overhead. At December 31, 2006 and 2005,
approximately 23% and 39%, 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 $3.7 million and $6.6 million at December 31, 2006 and 2005, respectively.
The reduction in the LIFO reserve primarily resulted from the reduction in quantity levels as well
as the sales of the Metal Truck Box and United Kingdom consumer plastics business units. The
components of inventories are:
| As Restated, see Note 2 | ||||||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| (Amounts in Thousands) | ||||||||
Raw materials |
$ | 14,777 | $ | 22,997 | ||||
Work in process |
613 | 1,766 | ||||||
Finished goods |
47,230 | 48,949 | ||||||
Inventory reserves |
(3,905 | ) | (4,548 | ) | ||||
LIFO reserve |
(3,735 | ) | (6,571 | ) | ||||
| $ | 54,980 | $ | 62,593 | |||||
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (“SFAS No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and spoilage. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Effective January 1, 2006, the
Company adopted SFAS No. 151 which did not have a material impact on the results of operations and
financial position.
Goodwill — In connection with certain acquisitions, the Company recorded
goodwill representing the cost of the acquisition in excess of the fair value of the net assets
acquired. Beginning in 2002, goodwill is not amortized in accordance with SFAS No. 142, Goodwill
and Intangible Assets (“SFAS No. 142”). The fair value of each reporting unit that carries
goodwill is determined annually, or as indicators of impairment are identified, and the fair value
is compared to the carrying value of the reporting unit. If the fair value exceeds the carrying
value, then no adjustment is necessary. If the carrying value of the reporting unit exceeds the
fair value, appraisals are performed of long-lived assets and other adjustments are made to arrive
at a revised fair value balance sheet. This revised fair value balance sheet (without goodwill)
is compared to the fair value of the business previously determined, and a revised goodwill amount
is reached. If the indicated goodwill amount meets or exceeds the current carrying value of
goodwill, then no adjustment is required. However, if the result indicates a reduced level of
goodwill, an impairment is recorded to state the goodwill at the revised level. Any impairments
of goodwill determined in accordance with SFAS No. 142 are recorded as a component of income from
continuing operations. See Note 4.
Property and Equipment — Property and equipment are stated at cost and depreciated
over their estimated useful lives: buildings (10-40 years) generally using the straight-line
method; machinery and equipment (3-20 years) using straight-line or composite methods; tooling (5
years) using the straight-line method; and leasehold improvements using the straight-line method
over the remaining lease period or useful life, if shorter. Costs for repair and maintenance of
machinery and equipment are expensed as incurred, unless the result significantly increases the
useful life or functionality of the asset, in which case capitalization is considered.
Depreciation expense from continuing operations for 2006, 2005 and 2004 was $8.0 million, $8.3
million, and $10.4 million, respectively.
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Katy adopted SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”), on
January 1, 2003. SFAS No. 143 requires that an asset retirement obligation associated with the
retirement of a tangible long-lived asset be recognized as a liability in the period in which it
is incurred or becomes determinable, with an associated increase in the carrying amount of the
related long-term asset. The cost of the tangible asset, including the initially recognized asset
retirement cost, is depreciated over the useful life of the asset. In accordance with SFAS No.
143, the Company has recorded as of December 31, 2006 an asset of $0.4 million and related
liability of $1.1 million for retirement obligations associated with returning certain leased
properties to the respective lessors upon the termination of the lease arrangements. A summary of
the changes in asset retirement obligation since December 31, 2004 is included in the table below
(amounts in thousands):
SFAS No. 143 Obligation at December 31, 2004 |
$ | 1,237 | ||
Accretion expense |
49 | |||
Additions |
330 | |||
Changes in estimates, including timing |
32 | |||
Payments |
(580 | ) | ||
SFAS No. 143 Obligation at December 31, 2005 |
$ | 1,068 | ||
Accretion expense |
49 | |||
SFAS No. 143 Obligation at December 31, 2006 |
$ | 1,117 | ||
Impairment of Long-lived Assets — Long-lived assets, other than goodwill which is
discussed above, are reviewed for impairment if events or circumstances indicate the carrying
amount of these assets may not be recoverable through future undiscounted cash flows. If this
review indicates that the carrying value of these assets will not be recoverable, based on future
undiscounted net cash flows from the use or disposition of the asset, the carrying value is reduced
to fair value. See Note 5.
Income Taxes — Income taxes are accounted for using a balance sheet approach known as
the liability method. The liability method accounts for deferred income taxes by applying the
statutory tax rates in effect at the date of the balance sheet to the differences between the book
basis and tax basis of the assets and liabilities. The Company records a valuation allowance when
it is more likely than not that some portion or all of the deferred income tax asset will not be
realizable. See Note 14.
Foreign Currency Translation — The results of the Company’s foreign
subsidiaries are translated to U.S. dollars using the current-rate method. Assets and liabilities
are translated at the year end spot exchange rate, revenue and expenses at average exchange rates
and equity transactions at historical exchange rates. Exchange differences arising on translation
are recorded as a component of accumulated other comprehensive income (loss). Katy recorded gains
on foreign exchange transactions (included in other, net in the Consolidated Statements of
Operations) of $0.2 million, $2.0 thousand, and $0.3 million, in 2006, 2005 and 2004, respectively.
Fair Value of Financial Instruments — Where the fair values of Katy’s financial
instrument assets and liabilities differ from their carrying value or Katy is unable to establish
the fair value without incurring excessive costs, appropriate disclosures have been given in the
Notes to the Consolidated Financial Statements. All other financial instrument assets and
liabilities not specifically addressed are believed to be carried at their fair value in the
accompanying Consolidated Balance Sheets.
Stock Options and Other Stock Awards — Prior to January 1, 2006, the Company
accounted for stock options and other stock awards under the provisions of Accounting Principles
Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), as allowed
by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), as amended by SFAS No.
148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS No. 148”). APB
No. 25 dictated a measurement date concept in the determination of compensation expense related to
stock awards including stock options, restricted stock, and stock appreciation rights (“SARs”).
Katy’s outstanding stock options all had established measurement dates and therefore, fixed
plan accounting was applied, generally resulting in no compensation expense for stock option
awards. However, the Company issued stock appreciation rights, stock awards and restricted stock
awards which were accounted for as variable stock compensation awards for which compensation
income (expense) was recorded. Compensation income associated with stock appreciation rights was
$0.9 million and $0.1 million in 2005 and 2004, respectively. Compensation expense relative to
stock awards was $22.1 thousand and $8.9 thousand in 2005 and 2004, respectively. No compensation
expense relative to restricted stock awards was recognized in 2005 or 2004. Compensation income
(expense) for stock awards and stock appreciation rights is recorded in selling, general and
administrative expenses in the Consolidated Statements of Operations.
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Effective January 1, 2006, the Company has adopted SFAS No. 123R, Share-Based Payment (“SFAS
No. 123R”), using the modified prospective method. Under this method, compensation cost recognized
during 2006 includes: a) compensation cost for all stock options granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS
No. 123R amortized over the options’ vesting period; b) compensation cost for stock appreciation
rights granted prior to, but vested as of January 1, 2006, based on the January 1, 2006 fair value
estimated in accordance with SFAS No. 123R; and c) compensation cost for stock appreciation rights
granted prior to and vested as of December 31, 2006 based on the December 31, 2006 fair value
estimated in accordance with SFAS No. 123R.
The following table shows total compensation expense (see Note 12 for descriptions of Stock
Incentive Plans) included in the Consolidated Statements of Operations for the year ended December
31, 2006:
| Year Ended | ||||
| December 31, 2006 | ||||
Selling, general and administrative expense |
$ | 398 | ||
Cumulative effect of a change in accounting principle |
756 | |||
| $ | 1,154 | |||
The cumulative effect of a change in accounting principle reflects the compensation cost for
stock appreciation rights granted prior to, but vested as of January 1, 2006, based on the January
1, 2006 fair value. Prior to the effective date, no compensation cost was accrued associated with
SARs as all of these stock awards were out of the money. Pro forma results for the prior period
have not been restated. As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s
net loss for the year ended December 31, 2006 is approximately $1.2 million higher than had it
continued to account for stock-based employee compensation under APB No. 25. Basic and diluted net
loss per share for the year ended December 31, 2006 would have been $1.36 had the Company not
adopted SFAS No. 123R (which is a non-GAAP measurement), compared to reported basic and diluted net
loss per share of $1.50. The adoption of SFAS No. 123R had approximately $0.6 million positive
impact on cash flows from operations with the recognition of a liability for the outstanding and
vested stock appreciation rights. The adoption of SFAS No. 123R had no impact on cash flows from
financing.
The fair value for stock options was estimated at the date of grant using a Black-Scholes
option pricing model. The Company used the simplified method, as allowed by Staff Accounting
Bulletin (“SAB”) No. 107, Share-Based Payment, for estimating the expected term equal to the
average between the minimum and maximum lives expected for each award, ranging from 5.30 years to
6.50 years. In addition, the Company estimated volatility, ranging from 53.8% to 57.6%, by
considering its historical stock volatility over a term comparable to the remaining expected life
of each award. The risk-free interest rate, ranging from 3.98% to 4.48%, was the current yield
available on U.S. treasury rates with issues with a remaining term equal in term to each award.
The Company estimates forfeitures using historical results. Its estimates of forfeitures will be
adjusted over the requisite service period based on the extent to which actual forfeitures differ,
or are expected to differ, from their estimate.
The fair value for stock appreciation rights, a liability award, was estimated at the
effective date of SFAS No. 123R and December 31, 2006 using a Black-Scholes option pricing model.
The Company estimated the expected term equal to the average between the minimum and maximum lives
expected for each award, ranging from 0.4 years to 5.5 years. In addition, the Company estimated
volatility, ranging from 52.6% to 70.3%, by considering its historical stock volatility over a term
comparable to the remaining expected life of each award. The risk-free interest rate, ranging from
4.69% to 5.10%, was the current yield available on U.S. treasury rates with issues with a remaining
term equal in term of each award. The Company estimates forfeitures using historical results. Its
estimates of forfeitures will be adjusted over the requisite service period based on the extent to
which actual forfeitures differ, or are expected to differ, from their estimate.
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The following table illustrates the effect on net loss and net loss per share had the Company
applied the fair value recognition provisions of SFAS No. 123R to account for the Company’s
employee stock option awards for the years ended December 31, 2005 and 2004 because these awards
were not accounted for using the fair value recognition method during those periods. However, no
impact was present on net loss as all stock option awards were vested prior to the time period
presented. For purposes of pro forma disclosure, the estimated fair value of the stock awards, as
prescribed by SFAS No. 123, is amortized to expense over the vesting period:
| For the years ended | ||||||||
| December 31, | ||||||||
| 2005 | 2004 | |||||||
| As Restated, | ||||||||
| see Note 2 | ||||||||
Net loss attributable to common stockholders, as
reported |
$ | (13,797 | ) | $ | (50,870 | ) | ||
Add: Stock-based employee compensation expense
included in reported net loss, with no related
tax effects |
2,004 | |||||||
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects |
(293 | ) | (1,852 | ) | ||||
Pro forma net loss |
$ | (12,086 | ) | $ | (52,722 | ) | ||
Earnings per share |
||||||||
Basic and diluted-as reported |
$ | (1.74 | ) | $ | (6.45 | ) | ||
Basic and diluted-pro forma |
$ | (1.52 | ) | $ | (6.69 | ) | ||
The historical pro forma impact of applying the fair value method prescribed by SFAS No. 123
is not representative of the impact that may be expected in the future due to changes resulting
from additional grants and changes in assumptions such as volatility, interest rates, and the
expected life used to estimate fair value of stock options and other stock awards. Note that the
above pro forma disclosure was not presented for the year ended December 31, 2006 because all stock
awards have been accounted for using the fair value recognition method under SFAS No. 123R for this
period.
Derivative Financial Instruments — Effective August 17, 2005, the Company entered
into an interest rate swap agreement designed to limit exposure to increasing interest rates on its
floating rate indebtedness. The differential to be paid or received is recognized as an adjustment
of interest expense related to the debt upon settlement. In connection with the Company’s adoption
of SFAS No. 133, Accounting for Derivative Financial Instruments and Hedging Activities (“SFAS No.
133”), the Company is required to recognize all derivatives, such as interest rate swaps, on its
balance sheet at fair value. As the derivative instrument held by the Company is classified as a
hedge under SFAS No. 133, changes in the fair value of the derivative will be offset against the
change in fair value of the hedged liability through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. Hedge ineffectiveness associated with the
swap will be reported by the Company in interest expense.
The agreement has an effective date of August 17, 2005 and a termination date of August 17,
2007 with a notional amount of $25.0 million in the first year declining to $15.0 million in the
second year. The Company is hedging its variable LIBOR-based interest rate for a fixed interest
rate of 4.49% for the term of the swap agreement to protect the Company from potential interest
rate increases. The Company has designated its benchmark variable LIBOR-based interest rate on a
portion of the Bank of America Credit Agreement as a hedged item under a cash flow hedge. In
accordance with SFAS No. 133, the Company recorded an asset of $0.1 million on its balance sheet at
December 31, 2006 and 2005, respectively, with changes in fair market value included in other
comprehensive income.
The Company reported insignificant losses for 2006 and 2005 as a result of hedge
ineffectiveness. Future changes in this swap arrangement, including termination of the agreement,
may result in a reclassification of any gain or loss reported in other comprehensive income into
earnings as an adjustment to interest expense.
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Details regarding the swap as of December 31, 2006 are as follows (amounts in thousands):
| Notional Amount | Maturity | Rate Paid | Rate Received | Fair Value (2) | ||||||||||||
| $ | 15,000 | August 17, 2007 |
4.49 | % | LIBOR (1) | $ | 87 | |||||||||
| (1) | LIBOR rate is determined on the 23rd of each month and continues up to and including the
maturity date |
|
| (2) | The fair value is the mark-to-market value. |
New Accounting Pronouncements — In June 2006, the FASB issued FASB Interpretation
(“FIN”) No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which describes a
comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax
positions in the financial statements. Under the interpretation, the financial statements will
reflect expected future tax consequences of such positions presuming the tax authorities’ full
knowledge of the position and all relevant facts, but without considering time values. For the
Company, the provisions of FIN 48 are effective January 1, 2007. The Company continues to evaluate
the impact of FIN 48 on its consolidated financial statements. At this time, the Company does not
know what the impact will be upon adoption of this standard. However, it does not expect the
impact to be significant.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. This
standard does not require any new fair value measurements but provides guidance in determining fair
value measurements presently used in the preparation of financial statements. For the Company,
SFAS No. 157 is effective January 1, 2008. The Company is assessing the impact this standard may
have in its future financial statements.
Reclassifications — Certain amounts from prior years have been
reclassified to conform to the 2006 financial statement presentation.
Note 4. GOODWILL AND INTANGIBLE ASSETS
Below is a summary of activity (all in the Maintenance Products Group) in the goodwill
accounts since December 31, 2003 (amounts in thousands):
Goodwill at December 31, 2003 |
$ | 10,215 | ||
Impairment charge |
(7,976 | ) | ||
Goodwill at December 31, 2004 |
2,239 | |||
Impairment charge |
(1,574 | ) | ||
Goodwill at December 31, 2005 |
665 | |||
Impairment charge |
— | |||
Goodwill at December 31, 2006 |
$ | 665 | ||
See Note 5 for discussion of impairment of long-lived assets. Following is detailed
information regarding Katy’s intangible assets (amounts in thousands):
| December 31, | December 31, | |||||||||||||||||||||||
| 2006 | 2005 | |||||||||||||||||||||||
| Gross | Accumulated | Net Carrying | Gross | Accumulated | Net Carrying | |||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Patents |
$ | 1,511 | $ | (1,065 | ) | $ | 446 | $ | 1,409 | $ | (954 | ) | $ | 455 | ||||||||||
Customer lists |
10,454 | (8,111 | ) | 2,343 | 10,643 | (7,997 | ) | 2,646 | ||||||||||||||||
Tradenames |
5,612 | (2,345 | ) | 3,267 | 5,498 | (2,075 | ) | 3,423 | ||||||||||||||||
Other |
441 | (62 | ) | 379 | 441 | (19 | ) | 422 | ||||||||||||||||
Total |
$ | 18,018 | $ | (11,583 | ) | $ | 6,435 | $ | 17,991 | $ | (11,045 | ) | $ | 6,946 | ||||||||||
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All of Katy’s intangible assets are definite long-lived intangibles. Katy recorded
amortization expense on intangible assets of $0.7 million, $0.7 million and $1.7 million in 2006,
2005 and 2004, respectively. Estimated aggregate future amortization expense related to intangible
assets is as follows (amounts in thousands):
2007 |
$ | 645 | ||
2008 |
632 | |||
2009 |
597 | |||
2010 |
549 | |||
2011 |
508 | |||
Thereafter |
3,504 |
Note 5. IMPAIRMENTS OF LONG-LIVED ASSETS
Under SFAS No. 142, goodwill and other intangible assets are reviewed for impairment at least
annually and if a triggering event were to occur in an interim period. The Company’s annual
impairment test is performed in the fourth quarter. For the year ended December 31, 2006, no
impairments were noted.
The Glit business unit, part of the Maintenance Products Group, had sustained a low
profitability level throughout the last half of 2005 which resulted from increased costs during
operational disruptions at our Wrens, Georgia facility. These operational disruptions were the
result of the integration of other manufacturing operations into this facility and a fire at the
facility in the fourth quarter of 2004. These disruptions triggered loss or reduction of customer
activity. The first step of the impairment test resulted in the book value of the Glit business
unit exceeding its fair value. The second step of the impairment testing showed that the goodwill
of the Glit business unit had no fair value, and that the book value of the unit’s tradename,
customer relationships and patent exceeded their implied fair value. As a result, impairment
charges were recorded in 2005 for goodwill, tradename, customer relationships and patents of $1.6
million, $0.2 million, $0.2 million and $0.1 million, respectively. The valuation utilized a
discounted cash-flow method and multiple analyses of historical results and 3% growth rate.
The Company operates three businesses in the United States that are engaged in the manufacture
and distribution of plastics products: Continental, Contico and Container (collectively, “US
Plastics”), part of the Maintenance Products Group. Since all of these business units essentially
share long-lived assets, namely manufacturing equipment and certain intangibles, it is difficult to
attribute separately identifiable cash flows emanating from each of the units. Therefore, in
accordance with guidance provided in SFAS No. 142, SFAS No. 144, Accounting for the Impairments or
Disposal of Long Lived Assets (“SFAS No. 144”), and EITF Topic D-101, Clarification of Reporting
Unit Guidance in Paragraph 30 of FASB Statement No. 142, the Company determined that the appropriate level of testing for impairment under SFAS
No. 142 and SFAS No. 144 was at the US Plastics combination of units.
In the fourth quarter of 2004, the profitability of the Contico business unit declined sharply
as the Company was unable to pass along sufficient selling price increases to combat the
accelerating cost of resin (a key raw material used in the US Plastics units). The Company
believed that future earnings and cash flow could be negatively impacted to the extent further
increases in resin and other raw material costs could not be offset or recovered through higher
selling prices. In accordance with SFAS No. 142, the Company performed an analysis of discounted
future cash flows which indicated that the book value of the US Plastics units was significantly
greater than the fair value of those businesses. In addition, as a result of the goodwill
analysis, the Company also assessed whether there had been an impairment of the long-lived assets
in accordance with SFAS No. 144. The Company concluded that the book value of equipment, a
customer list intangible and trademark associated with the US Plastics business unit significantly
exceeded the fair value and impairment had occurred. Accordingly, the Company recognized an
impairment loss and related charge of $29.9 million in 2004. The charges included $8.0 million
related to goodwill, $8.4 million related to machinery and equipment, $10.9 million related to a
customer list and $2.6 million related to the trademark. The valuation utilized a discounted cash
flow method and multiple analyses of historical results and 3% growth rate. Also in 2004, the
Company recorded impairment charges of $0.8 million related to property and equipment at its Metal
Truck Box business unit, classified as a discontinued operation, and $0.1 million related to
certain assets at the Woods US business unit.
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Note 6. EQUITY METHOD INVESTMENT
In 2005, the Company recorded $0.6 million in equity income from operations as a result of
Sahlman’s improving financial performance. No adjustment was made in 2006 based on current and
future operating results and financial position as well as an independent assessment of the
investment’s fair value. At December 31, 2006 and 2005, its investment in Sahlman reflects a $2.2
million balance.
Sahlman was in the business of harvesting shrimp off the coast of South and Central America,
and farming shrimp in Nicaragua, and its customers are primarily in the United States. Currently,
Sahlman is only farming shrimp in Nicaragua. Sahlman experienced poor results of operations in
2002, primarily as a result of producers receiving very low prices for shrimp. Increased foreign
competition, especially from Asia, has had a significant downward impact on shrimp prices in the
United States. Upon review of Sahlman’s results for 2002 and through the second quarter of 2003,
and after initial study of the status of the shrimp industry and markets in the United States, Katy
evaluated the business further to determine if there had been a loss in the value of the investment
that was other than temporary. Per ABP No. 18, The Equity Method for of Accounting for Investments
in Common Stock, losses in the value of equity investments that are other than temporary should be
recognized.
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. 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 as of December 31, 2004.
Note 7. DISCONTINUED OPERATIONS
Two of Katy’s operations have been classified as discontinued operations as of and for the
years ended December 31, 2006, 2005 and 2004 in accordance with SFAS No. 144.
On June 2, 2006, the Company sold certain assets of the Metal Truck Box business unit within
the Maintenance Products Group for gross proceeds of $3.6 million, including a $1.2 million note
receivable. These proceeds were used to pay off related portions of the Term Loan and the
Revolving Credit Facility. The Company recorded a loss of $50 thousand in 2006 in connection with
this sale. Management and the board of directors determined that this business is not a core
component to the Company’s long-term business strategy.
On November 27, 2006, the Company sold its United Kingdom consumer plastics business unit
(excluding the related real estate holdings) for gross proceeds of approximately $3.0 million.
These proceeds were used to pay off related portions of the Term Loan and the Revolving Credit
Facility. The Company recorded a loss of $5.4 million in 2006 in connection with this sale.
Management and the board of directors determined that this business is not a core component of the
Company’s long-term business strategy. Refer to further discussion below related to asset held for
sale classification.
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The Company did not separately identify the related assets and liabilities of the Metal Truck
Box business unit and the United Kingdom consumer plastics business unit on the Consolidated
Balance Sheets, except for the Asset Held for Sale. Following is a summary of the major asset and
liability categories for these discontinued operations:
| As Restated, see Note 2 | ||||||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
Current assets: |
||||||||
Accounts receivable, net |
$ | 83 | $ | 6,434 | ||||
Inventories, net |
— | 5,746 | ||||||
Other current assets |
— | 583 | ||||||
| $ | 83 | $ | 12,763 | |||||
Non-current assets: |
||||||||
Intangibles, net |
$ | — | $ | 166 | ||||
Property and equipment, net |
— | 12,145 | ||||||
| $ | — | $ | 12,311 | |||||
Current liabilities: |
||||||||
Accounts payable |
$ | — | $ | 3,834 | ||||
Accrued compensation |
— | 119 | ||||||
Accrued expenses |
743 | 1,445 | ||||||
| $ | 743 | $ | 5,398 | |||||
On September 29, 2006, the Board of Directors of Katy approved management’s plan to sell the
United Kingdom consumer plastics business unit. As a result, the net assets of this business unit
were classified as an asset held for sale on the Consolidated Balance Sheets in accordance with
SFAS No. 144 as of September 30, 2006. Accordingly, the carrying value of the business unit’s net
assets was adjusted to the lower of its costs or its fair value less costs to sell, amounting to
$8.7 million. Costs to sell included the incremental direct costs to complete the sale and
represent costs such as broker commissions, legal and other closing costs. Costs to sell excluded
future expected losses associated with the operations of the disposal group while held for sale.
With the classification as an asset held for sale and its adjusted valuation, the Company incurred
a $3.2 million impairment charge. Upon the sale of the United Kingdom consumer plastics business
unit, excluding real estate holdings, in November, 2006, the Company incurred a total loss of $5.4
million, which includes the $3.2 million impairment charge taken during the third quarter of 2006.
As of December 31, 2006, the Company was in the process of selling the related real estate
holdings of the United Kingdom consumer plastics business unit. As a result, the real estate
holdings have been classified as an asset held for sale on the Consolidated Balance Sheets in
accordance with SFAS No. 144. Accordingly, the carrying value of the business unit’s net assets
was adjusted to the lower of its costs or its fair value less costs to sell, amounting to $4.5
million. Costs to sell include the incremental direct costs to complete the sale and represent
costs such as broker commissions, legal and other closing costs. The transaction on the sale of
the real estate holdings was completed on January 19, 2007 and resulted in a gain of approximately
$1.9 million.
The historical operating results of the United Kingdom consumer plastics business unit and the
Metal Truck Box business unit have been segregated as discontinued operations on the Consolidated
Statements of Operations. Selected financial data for discontinued operations is summarized as
follows (in thousands):
| As Restated, see Note 2 | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Net sales |
$ | 21,485 | $ | 31,807 | $ | 40,961 | ||||||
Pre-tax operating (loss) income |
$ | (1,436 | ) | $ | (2,357 | ) | $ | 1,423 | ||||
Pre-tax loss on sale of discontinued businesses |
$ | (5,405 | ) | $ | — | $ | (775 | ) | ||||
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Note 8. SAVANNAH ENERGY SYSTEMS COMPANY PARTNERSHIP
In 1984, SESCO, an indirect wholly owned subsidiary of Katy, entered into a series of
contracts with the Resource Recovery Development Authority of the City of Savannah, Georgia (“the
Authority”) to construct and operate a waste-to-energy facility. The facility would be owned and
operated by SESCO solely for the purpose of processing and disposing of waste from the City of
Savannah. In 1984, the Authority issued $55.0 million of Industrial Revenue Bonds (“the IRBs”)
and lent the proceeds to SESCO under the loan agreement for the acquisition and construction of
the waste-to-energy facility. 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. The debt service component of the monthly fee
is paid into a trust, outside of the Company’s control, which is then utilized to make the
scheduled debt payments on the IRBs. The Authority is unconditionally obligated to pay the
monthly fee whether or not the facility is operating unless SESCO and Katy are insolvent and the
facility is deemed incapable of handling the required amount of waste.
SESCO has a legally enforceable right to offset amounts it owes to the Authority under the
loan agreement (scheduled principal repayments) against amounts that are owed from the Authority
under the service agreement. At December 31, 2006, no amounts were outstanding as a result of the
sale of the partnership interest discussed further below. At December 31, 2005, the outstanding
amount was $15.3 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
accordance with FIN No. 39, Offsetting of Amounts Related to Certain Contracts.
On April 29, 2002, SESCO entered into a partnership agreement with Montenay Power Corporation
and its affiliates (“Montenay”) that turned over the control of SESCO’s waste-to-energy facility
to Montenay Savannah Limited Partnership. The Company caused SESCO to enter into this agreement
as a result of evaluations of SESCO’s business. First, Katy concluded that SESCO was not a core
component of the Company’s long-term business strategy. Moreover, Katy did not feel it had the
management expertise to deal with certain risks and uncertainties presented by the operation of
SESCO’s business, given that SESCO was the Company’s only waste-to-energy facility. Katy had
explored options for divesting SESCO for a number of years, and management felt that this
transaction offered a reasonable strategy to exit this business.
The partnership, with Montenay’s leadership, assumed SESCO’s position in various contracts
relating to the facility’s operation. Under the partnership agreement, SESCO contributed its
assets and liabilities (except for its liability under the loan agreement with the Authority and
the related receivable under the service agreement with the Authority) to the partnership. While
SESCO had a 99% interest as a limited partner, profits and losses were allocated 1% to SESCO and
99% to Montenay. In addition, Montenay had the day to day responsibility for administration,
operations, financing and other matters of the partnership. While the above partnership qualified
as a variable interest entity, the Company was not the primary beneficiary as defined by FIN No.
46, Consolidation of Variable Interest Entities, and accordingly, the partnership was not
consolidated. SESCO did not meet the criteria as the primary beneficiary as Montenay received 99%
of all profits and losses, Montenay was required to finance the partnership, partners were not
obligated to contribute additional capital, and Montenay had agreed to indemnify SESCO for any
losses incurred due to a breach in the service agreement.
Katy agreed to pay Montenay $6.6 million over the span of seven years under a note payable in
return for Montenay assuming the risks associated with the partnership and its operation of the
waste-to-energy facility. In the first quarter of 2002, the Company recognized a charge of $6.0
million consisting of 1) the discounted value of the $6.6 million note, 2) the carrying value of
certain assets contributed to the partnership, consisting primarily of machinery spare parts, and
3) costs to close the transaction. It should be noted that all of SESCO’s long-lived assets were
reduced to a zero value in 2001, so no additional impairment was required. On a going forward
basis, Katy expected that income statement activity associated with
its involvement in the partnership would not be material, and Katy’s Consolidated Balance Sheets
would carry the liability mentioned above.
Certain amounts may have been due to SESCO upon expiration of the service agreement in 2008;
also, Montenay may have purchased SESCO’s interest in the partnership at that time. Katy did not
record any amounts receivable or other assets relating to amounts that may have been received at
the time the service agreement expired, given their uncertainty.
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. In addition
to SESCO retaining its liabilities under the loan agreement, to induce the required parties to
consent to the partnership transaction, Katy continued to guarantee the obligations of the
partnership under the service agreement. The partnership was liable for liquidated damages under
the service agreement if it failed to accept the minimum amount of waste or to meet other
performance standards under the service agreement. Additionally, Montenay had agreed to indemnify
Katy for any breach of the service agreement by the partnership.
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On June 27, 2006, the Company and Montenay amended the partnership interest purchase agreement
in order to allow the Company to completely exit from the SESCO operations and related obligations.
In addition, Montenay became the guarantor under the loan obligation for the IRBs. Montenay
purchased the Company’s limited partnership interest for $0.1 million and a reduction of
approximately $0.6 million in the face amount due to Montenay as agreed upon in the original
partnership agreement. In addition, Montenay removed the Company as the performance guarantor
under the service agreement. As a result of the above transaction, the Company recorded a gain of
$0.4 million within operating income during the year ended December 31, 2006 given the reduction in
the face amount due to Montenay as agreed upon in the original partnership interest purchase
agreement. In addition, the Company recorded a gain on the sale of the partnership interest of
approximately $0.1 million as reflected within operating income.
The final payment of $0.4 million due to Montenay as of December 31, 2006 is reflected in
accrued expenses in the Consolidated Balance Sheets, and was paid in January 2007.
Note 9. INDEBTEDNESS
Long-term debt consists of the following:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
| (Amounts in Thousands) | ||||||||
Term loan payable under the Bank of America Credit Agreement, interest based on
LIBOR and Prime Rates (8.38% - 9.50%), due through 2009 |
$ | 12,992 | $ | 15,714 | ||||
Revolving loans payable under the Bank of America Credit Agreement,
interest based on LIBOR and Prime Rates (8.13% - 9.25%) |
43,879 | 41,946 | ||||||
Total debt |
56,871 | 57,660 | ||||||
Less revolving loans, classified as current (see below) |
(43,879 | ) | (41,946 | ) | ||||
Less current maturities |
(1,125 | ) | (2,857 | ) | ||||
Long-term debt |
$ | 11,867 | $ | 12,857 | ||||
Aggregate remaining scheduled maturities of the Term Loan as of December 31, 2006 are as
follows (in thousands):
2007 |
$ | 1,125 | ||
2008 |
1,500 | |||
2009 |
10,367 |
On April 20, 2004, the Company completed a refinancing of its outstanding indebtedness (the
“Refinancing”) and entered into a new agreement with Bank of America Business Capital (formerly
Fleet Capital Corporation) (the “Bank of America Credit Agreement”). Like the previous credit
agreement with Fleet Capital Corporation, the Bank of America Credit Agreement is a $110.0 million
facility with a $20.0 million term loan (“Term Loan”) and a $90.0 million revolving credit
facility (“Revolving Credit Facility”) with essentially the same terms as the previous credit
agreement. The Bank of America Credit Agreement is an asset-based lending agreement and involves a
syndicate of four banks, all of which participated in the syndicate from the previous credit
agreement. The Bank of America Credit Agreement, and the additional borrowing ability under the
Revolving Credit Facility obtained by incurring new term debt, results in three important benefits
related to the Company’s long-term strategy: (1) additional borrowing capacity to invest in
capital expenditures and/or acquisitions key to the Company’s strategic direction, (2) increased
working capital flexibility to build inventory when necessary to accommodate lower cost outsourced
finished goods inventory and (3) the ability to borrow locally in Canada and the United Kingdom
and provide a natural hedge against currency fluctuations.
The funding of the Bank of America Credit Agreement was derived from term loan incremental
borrowings of $18.2 million of which $16.7 million was utilized to reduce the Revolving Credit
Facility and the remaining $1.5 million covering costs associated with the Bank of America Credit
Agreement.
The Revolving Credit Facility has an expiration date of April 20, 2009 and its borrowing base
is determined by eligible inventory and accounts receivable. Unused borrowing availability on the
Revolving Credit Facility was $27.4 million at December 31, 2005. All extensions of credit under
the Bank of America Credit Agreement are collateralized by a first priority security interest in
and lien upon the capital stock of each material domestic subsidiary (65% of the capital stock of
certain foreign subsidiaries), and all present and future assets and properties of the Company.
The Term Loan also has a final maturity date of April 20, 2009 with quarterly payments of $0.4
million, as amended and beginning April 1, 2007. A final payment of $10.0 million is scheduled to
be paid in April 2009. The Term Loan is collateralized by the Company’s property, plant and
equipment.
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The Company’s borrowing base under the Bank of America Credit Agreement is reduced by the
outstanding amount of standby and commercial letters of credit. Vendors, financial institutions
and other parties with whom the Company conducts 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, the Company’s largest letters of credit relate to its casualty insurance
programs. At December 31, 2006, total outstanding letters of credit were $7.9 million.
Primarily due to declining profitability and the timing of certain restructuring payments, the
Company amended the Bank of America Credit Agreement seven times from April 20, 2004, date of
Refinancing, through December 31, 2006. The amendments adjusted certain financial covenants such
that the fixed charge coverage ratio and consolidated leverage ratio were eliminated and the
minimum availability (eligible collateral base less outstanding borrowings and letters of credit)
was set such that the Company’s eligible collateral must exceed the sum of its outstanding
borrowings and letters of credit under the Revolving Credit Facility by at least $5.0 million to
$7.5 million, at various points during that time period. In addition, the Company was limited on
maximum allowable capital expenditures for $12.0 million and $10.0 million for 2006 and 2005,
respectively.
Until September 30, 2004, interest accrued on Revolving Credit Facility borrowings at 175
basis points over applicable LIBOR rates and at 200 basis points over LIBOR for borrowings under
the Term Loan. In accordance with the Bank of America Credit Agreement, margins (i.e. the
interest rate spread above LIBOR) increased to 25 basis points in the fourth quarter of 2004 based
upon certain leverage measurements. Margins increased an additional 25 basis points in the first
quarter of 2005. Effective since April 2005, interest rate margins have been set at the largest
margins set forth in the Bank of America Credit Agreement, 275 basis points over applicable LIBOR
rates for Revolving Credit Facility borrowings and 300 basis points over LIBOR for borrowings
under the Term Loan. In accordance with the Bank of America Credit Agreement, margins on the Term
Loan will drop 25 basis points if the balance of the Term Loan is reduced below $10.0 million.
Interest accrues at higher margins on prime rates for swing loans, the amounts of which were
nominal at December 31, 2006 and 2005.
Effective August 17, 2005, the Company entered into a two-year interest rate swap on a
notional amount of $25.0 million in the first year and $15.0 million in the second year. The
purpose of the swap was to limit the Company’s exposure to interest rate increases on a portion of
the Revolving Credit Facility over the two-year term of the swap. The fixed interest rate under
the swap at December 31, 2006 and over the life of the agreement is 4.49%.
As a result of the Seventh Amendment, the Company’s debt covenants, as of December 31, 2006
and thereafter, under the Bank of America Credit Agreement were to be as follows:
Fixed Charge Coverage Ratio — The Company is required to maintain a Fixed Charge Coverage
Ratio (as defined in the Bank of America Credit Agreement) of 1.1:1, beginning December 31, 2006.
Capital Expenditures — For the year ended December 31, 2007, the Company is not to exceed
$15.0 million in capital expenditures.
Leverage Ratio — As noted above, interest rate margins are currently set at the largest
margins set forth in the Bank of America Credit Agreement. Following the first quarter of 2007,
the Leverage Ratio will be utilized to determine the interest rate margin over the applicable LIBOR
rate. No maximum Consolidated Leverage Ratio requirement is present.
The Company was in compliance with the above financial covenants in the Bank of America Credit
Agreement, as amended above, at December 31, 2006.
While the Company was in compliance with the covenants of the Bank of America Credit Agreement
as of December 31, 2006, it obtained, on March 8, 2007, the Eighth Amendment. The Eighth Amendment
eliminates the Fixed Charge Coverage Ratio for the remaining life of the debt agreement and
requires the Company to maintain a minimum level of availability such that its eligible collateral
must exceed the sum of its outstanding borrowings and letters of credit by at least $5.0 million
from the effective date of the Eighth Amendment through September 29, 2007 and by $7.5 million
through December 2007. Thereafter, the Company is required to maintain a minimum level of
availability of $5.0 million for the first three quarters of the year and $7.5 million for the
fourth quarter. In addition, the Company reduced its Revolving Credit Facility from $90.0 million
to $80.0 million.
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If the Company is unable to comply with the terms of the amended covenants, it could seek to
obtain further amendments and pursue increased liquidity through additional debt financing and/or
the sale of assets (see discussion above). However, the Company believes that it will be able to
comply with all covenants, as amended, throughout 2007.
All of the debt under the Bank of America Credit Agreement is re-priced to current rates at
frequent intervals. Therefore, its fair value approximates its carrying value at December 31,
2006. The Company incurred additional debt issuance costs in 2004 associated with the Bank of
America Credit Agreement. Additionally, at the time of the inception of the Bank of America Credit
Agreement, the Company had approximately $4.0 million of unamortized debt issuance costs associated
with the previous credit agreement. The remainder of the previously capitalized costs, along with
the capitalized costs from the Bank of America Credit Agreement, will be amortized over the life of
the Bank of America Credit Agreement through April 2009. Also, during the first quarter of 2004,
the Company incurred fees and expenses of $0.5 million associated with a financing which the
Company chose not to pursue. The Company had amortization of debt issuance costs of $1.2 million,
$1.1 million and $1.1 million in 2006, 2005 and 2004, respectively. In addition, the Company
incurred $0.3 million and $0.2 million associated with amending the Bank of America Credit
Agreement, as discussed above, in 2006 and 2005, respectively.
The Revolving Credit Facility under the Bank of America Credit Agreement requires lockbox
agreements which provide for all receipts to be swept daily to reduce borrowings outstanding.
These agreements, combined with the existence of a material adverse effect (“MAE”) clause in the
Bank of America Credit Agreement, caused the Revolving Credit Facility to be classified as a
current liability, per guidance in 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. 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 lenders
to require the loan to become due if they determine there has been a material adverse effect on the
Company’s operations, business, properties, assets, liabilities, condition, or prospects. The
classification of the Revolving Credit Facility as a current liability is a result only of the
combination of the lockbox agreements and the MAE clause. The Revolving Credit Facility does not
expire or have a maturity date within one year, but rather has a final expiration date of April 20,
2009. The lender has not notified the Company of any indication of a MAE at December 31, 2006, and
the Company was not in default of any provision of the Bank of America Credit Agreement at December
31, 2006.
Note 10. EARNINGS PER SHARE
The Company’s diluted earnings per share were calculated using the treasury stock method in
accordance with SFAS No. 128, Earnings Per Share. The basic and diluted earnings per share (“EPS”)
calculations are as follows:
| As Restated, see Note 2 | ||||||||||||
| For the Year Ended December 31, | 2006 | 2005 | 2004 | |||||||||
Basic and Diluted EPS: |
||||||||||||
Loss from continuing operations |
$ | (4,789 | ) | $ | (11,619 | ) | $ | (36,528 | ) | |||
Payment-in-kind dividends on convertible preferred stock |
— | — | (14,749 | ) | ||||||||
Loss from continuing operations attributable to common stockholders |
(4,789 | ) | (11,619 | ) | (51,277 | ) | ||||||
Discontinued operations (net of tax) |
(6,834 | ) | (2,178 | ) | 407 | |||||||
Cumulative effect of a change in accounting principle |
(756 | ) | — | — | ||||||||
Net loss attributable to common stockholders |
$ | (12,379 | ) | $ | (13,797 | ) | $ | (50,870 | ) | |||
Weighted average shares — Basic and Diluted |
7,967 | 7,949 | 7,883 | |||||||||
Per share amount: |
||||||||||||
Loss from continuing operations attributable to common stockholders |
$ | (0.60 | ) | $ | (1.47 | ) | $ | (6.50 | ) | |||
Discontinued operations (net of tax) |
(0.86 | ) | (0.27 | ) | 0.05 | |||||||
Cumulative effect of a change in accounting principle |
(0.09 | ) | — | — | ||||||||
Net loss attributable to common stockholders |
$ | (1.55 | ) | $ | (1.74 | ) | $ | (6.45 | ) | |||
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As of December 31, 2006, 2005 and 2004, 150,000, 920,000 and 1,530,000 options were
in-the-money and 1,568,000, 936,350 and 195,650 options were out-of-the money, respectively. At
December 31, 2006, 2005 and 2004, 1,131,551 convertible preferred shares were outstanding, which
are in total convertible into 18,859,183 shares of Katy common stock. In-the-money options and
convertible preferred shares were not included in the calculation of diluted earnings per share in
any period presented because of their anti-dilutive impact as a result of the Company’s net loss
position.
Note 11. RETIREMENT BENEFIT PLANS
Pension and Other Postretirement Plans
Certain subsidiaries have pension plans covering substantially all of their employees. These
plans are noncontributory, defined benefit pension plans. The benefits to be paid under these
plans are generally based on employees’ retirement age and years of service. The Company’s funding
policies, subject to the minimum funding requirements of employee benefit and tax laws, are to
contribute such amounts as determined on an actuarial basis to provide the plans with assets
sufficient to meet the benefit obligations. Plan assets consist primarily of fixed income
investments, corporate equities and government securities. The Company also provides certain
health care and life insurance benefits for some of its retired employees. The postretirement
health plans are unfunded. Katy uses an annual measurement date as of December 31 for the majority
of its pension and other postretirement benefit plans for all years presented.
The Company adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)
(“SFAS No. 158”), effective December 31, 2006. SFAS No. 158 requires employers to recognize the overfunded or underfunded
positions of defined benefit postretirement plans as an asset or liability in their balance sheets
and to recognize as a component of other comprehensive income the gains or losses and prior
services costs or credits that arise during the period but are not recognized as components of net
periodic benefit cost. The following table presents the incremental effect of applying SFAS No.
158 on individual line items in the Company’s Consolidated Balance Sheets as of December 31, 2006:
| Incremental Effect of Applying SFAS No. 158 on Individual Line Items in Katy's | ||||||||||||
| Consolidated Balance Sheets as of December 31, 2006 | ||||||||||||
| Before | After | |||||||||||
| Application of | Application of | |||||||||||
| SFAS No. 158 | Adjustments | SFAS No. 158 | ||||||||||
Assets: |
||||||||||||
Other non-current assets |
$ | 136 | $ | (94 | ) | $ | 42 | |||||
Deferred taxes |
— | — | — | |||||||||
Liabilities: |
||||||||||||
Accrued expenses |
— | 327 | 327 | |||||||||
Other liabilities |
2,585 | 1,203 | 3,788 | |||||||||
Stockholders’ Equity: |
||||||||||||
Accumulated OCI |
$ | (500 | ) | $ | (1,624 | ) | $ | (2,124 | ) | |||
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The following table presents the funded status of the Company’s pension and postretirement
benefit plans for the years ended December 31, 2006 and 2005:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| (Amounts in Thousands) | ||||||||||||||||
Change in benefit obligation: |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 1,634 | $ | 1,544 | $ | 2,801 | $ | 3,171 | ||||||||
Service cost |
9 | 7 | — | — | ||||||||||||
Interest cost |
90 | 90 | 209 | 160 | ||||||||||||
Actuarial (gain) loss |
(43 | ) | 123 | 1,093 | (246 | ) | ||||||||||
Benefits paid |
(151 | ) | (130 | ) | (272 | ) | (284 | ) | ||||||||
Benefit obligation at end of year |
$ | 1,539 | $ | 1,634 | $ | 3,831 | $ | 2,801 | ||||||||
Accumulated benefit obligation at end of year |
$ | 1,539 | $ | 1,634 | ||||||||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 1,239 | $ | 1,306 | $ | — | $ | — | ||||||||
Actuarial return on plan assets |
106 | 63 | — | — | ||||||||||||
Employer contributions |
102 | — | 272 | 284 | ||||||||||||
Benefits paid |
(150 | ) | (130 | ) | (272 | ) | (284 | ) | ||||||||
Fair value of plan assets at end of year |
$ | 1,297 | $ | 1,239 | $ | — | $ | — | ||||||||
Funded status — deficiency |
$ | 242 | $ | 395 | $ | 3,831 | $ | 2,801 | ||||||||
Unrecognized net actuarial loss |
— | (766 | ) | — | (633 | ) | ||||||||||
Unrecognized prior service cost |
— | — | — | (74 | ) | |||||||||||
Accrued (prepaid) benefit cost at end of year |
$ | 242 | $ | (371 | ) | $ | 3,831 | $ | 2,094 | |||||||
Amount recognized in financial statements: |
||||||||||||||||
Other non-current assets |
$ | (42 | ) | $ | (150 | ) | $ | — | $ | — | ||||||
Accrued expenses |
— | 453 | 327 | — | ||||||||||||
Other liabilities |
284 | — | 3,504 | 2,094 | ||||||||||||
Accumulated other comprehensive income |
— | (674 | ) | — | — | |||||||||||
Total |
$ | 242 | $ | (371 | ) | $ | 3,831 | $ | 2,094 | |||||||
Amounts recognized in accumulated OCI consist of: |
||||||||||||||||
Unrecognized net actuarial loss (gain) |
$ | 604 | $ | (395 | ) | $ | 285 | $ | (2,801 | ) | ||||||
Unrecognized prior service cost |
— | — | 1,235 | — | ||||||||||||
Prepaid (accrued) benefit cost |
$ | 604 | $ | (395 | ) | $ | 1,520 | $ | (2,801 | ) | ||||||
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The following table presents the assumptions used to determine the Company’s benefit
obligations at December 31, 2006 and 2005 along with sensitivity of the Company’s plans to
potential changes in certain key assumptions:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Assumptions as of December 31: |
||||||||||||||||
Discount rates |
5.75 | % | 5.50 | % | 5.75 | % | 5.50 | % | ||||||||
Assumed rates of compensation increases |
N/A | N/A | N/A | N/A | ||||||||||||
Medical trend rate (initial) |
N/A | N/A | 8.50 | % | 9.00 | % | ||||||||||
Medical trend rate (ultimate) |
N/A | 5.00 | % | 5.00 | % | |||||||||||
Years to ultimate rate |
N/A | 7 | 7 | |||||||||||||
Impact of one-percent increase in health
care trend rate: |
||||||||||||||||
Increase in accumulated postretirement
benefit obligation |
$ | 322 | $ | 391 | ||||||||||||
Increase in service cost and interest cost |
$ | 18 | $ | 25 | ||||||||||||
Impact of one-percent decrease in health
care trend rate: |
||||||||||||||||
Decrease in accumulated postretirement
benefit obligation |
$ | 280 | $ | 315 | ||||||||||||
Decrease in service cost and interest cost |
$ | 16 | $ | 20 | ||||||||||||
The discount rate was based on several factors comparing Moody’s AA Corporate rate and
actuarial-based yield curves. In determining the expected return on plan assets, the Company
considers the relative weighting of plan assets, the historical performance of total plan assets
and individual asset classes and economic and other indictors of future performance. In addition,
the Company may consult with and consider the opinions of financial and other professionals in
developing appropriate return benchmarks. Assets are rebalanced to the target asset allocation at
least once per quarter. The allocation of pension plan assets is as follows:
| Target | Percentage of | |||||||||
| Allocation | Plan Assets | |||||||||
| Asset Category | 2007 | 2006 | 2005 | |||||||
Equity Securities |
30 - 35% | 45 | % | 35 | % | |||||
Debt Securities |
60 - 65% | 55 | % | 65 | % | |||||
Real estate |
0% | 0 | % | 0 | % | |||||
Other |
0 - 3% | 0 | % | 0 | % | |||||
| 100 | % | 100 | % | |||||||
The following table presents components of the net periodic benefit cost for the Company’s
pension and postretirement benefit plans during 2006 and 2005:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Service cost |
$ | 9 | $ | 7 | $ | — | $ | — | ||||||||
Interest cost |
90 | 90 | 209 | 160 | ||||||||||||
Expected return on plan assets |
(90 | ) | (101 | ) | — | — | ||||||||||
Amortization of prior service cost |
— | — | 126 | 55 | ||||||||||||
Amortization of net gain |
59 | 52 | 16 | 39 | ||||||||||||
Net periodic benefit cost |
$ | 68 | $ | 48 | $ | 351 | $ | 254 | ||||||||
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Required contributions to the pension plans for 2007 are $10 thousand and as a result, the
Company will make contributions in 2007. The following table presents estimated future benefit
payments:
| Pension Benefits | Other Benefits | |||||||
2007 |
$ | 53 | $ | 337 | ||||
2008 |
60 | 338 | ||||||
2009 |
71 | 336 | ||||||
2010 |
80 | 333 | ||||||
2011 |
83 | 327 | ||||||
2012-2016 |
454 | 1,474 | ||||||
Total |
$ | 801 | $ | 3,145 | ||||
The estimated amounts that will be amortized from accumulated other comprehensive income into
net periodic benefit cost in 2007 are:
| Pension Benefits | Other Benefits | |||||||
Actuarial loss |
$ | 48 | $ | 6 | ||||
Prior service cost |
— | 89 | ||||||
Total |
$ | 48 | $ | 95 | ||||
In addition to the plans described above, in 1993 the Company’s Board of Directors approved a
retirement compensation program for certain officers and employees of the Company and a retirement
compensation arrangement for the Company’s then Chairman and Chief Executive Officer. The Board
approved a total of $3.5 million to fund such plans. Participants are allowed to defer 50% of
their annual compensation as well as be eligible to participate in a profit sharing arrangement in
which they vest over a five year period. In 2001, the Company limited participation to existing
participants as well as discontinued any profit sharing arrangements. Participants can withdraw
from the plan upon the latter of age 62 or termination from the Company.
The obligation created by this plan is partially funded. Assets are held in a rabbi trust
invested in various mutual funds. Gains and/or losses are earned by the participant. For the
unfunded portion of the obligation, interest is accrued at 4% each year. The Company had $1.6
million and $2.4 million recorded in accrued compensation and other liabilities at December 31,
2006 and 2005, respectively, for this obligation.
401(k) Plans
The Company offers its employees the opportunity to voluntarily participate in one of two
401(k) plans administered by the Company or one of its subsidiaries. On January 1, 2002, Katy
consolidated certain of its 401(k) plans and reduced the number of plans within the Company from
five to two. The Company makes matching and other contributions in accordance with the provisions
of the plans and, under certain provisions, at the discretion of the Company. The Company made
annual matching and other contributions for continuing operations of $0.5 million, $0.6 million and
$0.6 million in 2006, 2005 and 2004, respectively.
Note 12. STOCKHOLDERS’ EQUITY
Convertible Preferred Stock
On June 28, 2001, Katy completed a recapitalization following an agreement on June 2, 2001
with KKTY Holding Company, LLC (“KKTY”), an affiliate of Kohlberg Investors IV, L.P. (“Kohlberg”)
(the “Recapitalization”). Under the terms of the Recapitalization, KKTY purchased 700,000 shares
of newly issued preferred stock, $100 par value per share (“Convertible Preferred Stock”), which is
convertible into 11,666,666 common shares, for an aggregate purchase price of $70.0 million. The
Convertible Preferred shares were entitled to a 15% payment in kind (“PIK”) dividend (that is,
dividends in the form of additional shares of Convertible Preferred Stock), compounded annually,
which started accruing on August 1, 2001. PIK dividends were paid on August 1, 2002 (105,000
convertible preferred shares, equivalent to 1,750,000 common shares); August 1, 2003 (120,750
convertible preferred shares, equivalent to 2,012,500 common shares); August 1, 2004 (138,862.5
convertible preferred shares equivalent to 2,314,375 common shares); and on December 31, 2004
(66,938.5 convertible preferred shares, equivalent to 1,115,642 common shares). No dividends
accrue or are payable after December 31, 2004. If converted, the 11,666,666 common shares, along
with the 7,192,517 equivalent common shares from PIK dividends paid through December 31, 2004,
would represent approximately 70% of the outstanding shares of common stock as of December 31,
2006, excluding outstanding options. The accruals of the PIK dividends were recorded as a charge
to Additional Paid-in Capital due to the Company’s Accumulated Deficit position, and an increase to
Convertible Preferred Stock. The dividends were recorded at fair value, reduced earnings available
to common shareholders in the calculation of basic and diluted earnings per share, and are
presented on the Consolidated Statements of Operations as an adjustment to arrive at net loss
available to common shareholders.
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The Convertible Preferred Stock is convertible at the option of the holder at any time after
the earlier of 1) June 28, 2006, 2) board approval of a merger, consolidation or other business
combination involving a change in control of the Company, or a sale of all or substantially all of
the assets or liquidation of the Company, or 3) a contested election for directors of the Company
nominated by KKTY. The preferred shares 1) are non-voting (with limited exceptions), 2) are
non-redeemable, except in whole, but not in part, at the Company’s option (as approved only by the
Class I directors) at any time after June 30, 2021, 3) were entitled to receive cumulative PIK
dividends through December 31, 2004, as mentioned above, at a rate of 15% percent, 4) have no
preemptive rights with respect to any other securities or instruments issued by the Company, and 5)
have registration rights with respect to any common shares issued upon conversion of the
Convertible Preferred Stock. Upon a liquidation of Katy, the holders of the Convertible Preferred
Stock would receive the greater of (i) an amount equal to the par value ($100 per share) of their
Convertible Preferred Stock, or (ii) an amount that the holders of the Convertible Preferred Stock
would have received if their shares of Convertible Preferred Stock were converted into common stock
immediately prior to the distribution upon liquidation.
Share Repurchase
On April 20, 2003, the Company announced a plan to repurchase up to $5.0 million in shares of
its common stock. In 2004, 12,000 shares of common stock were repurchased on the open market for
approximately $0.1 million. The Company suspended further repurchases under the plan on May 10,
2004. On December 5, 2005, the Company announced the resumption of the plan. During 2006 and
2005, the Company purchased 40,800 and 3,200 shares of common stock, respectively, on the open
market for $0.1 million and $7.5 thousand, respectively.
Rights Plan
In January 1995, the Board of Directors adopted a Stockholder Rights Agreement (“Rights
Agreement”) and distributed one right for each outstanding share of the Company’s common stock
(not otherwise exempted under the terms of the agreement). The rights entitle the stockholders to
purchase, upon certain triggering events, shares of either the Company’s common stock or any
acquiring company’s stock, at a reduced price. The rights are not and will not become exercisable
unless certain change of control events or increases in certain parties’ percentage ownership
occur. Consistent with the intent of the Rights Agreement, a shareholder who caused a triggering
event would not be able to exercise his or her rights. If stockholders were to exercise rights,
the effect would be to increase the percentage ownership stakes of those not causing the
triggering event, while decreasing the percentage ownership stake of the party causing the
triggering event. The Rights Agreement was amended on June 2, 2001 to clarify that the
Recapitalization was not a triggering event under the Rights Agreement. The Rights Agreement
expired in January 2005.
Note 13. STOCK INCENTIVE PLANS
Director Stock Grant
During 2006, the Company did not make any grants as this plan has expired. During 2005, the
Company granted all independent, non-employee directors 2,000 shares of Company common stock as
part of their compensation. During 2004, the Company granted these directors 500 shares of
Company common stock as part of their compensation. The total grant to the directors for the
years ended December 31, 2005 and 2004 was 6,000 and 1,500 shares, respectively.
Stock Options
At the 1995 Annual Meeting, the Company’s stockholders approved the Long-Term Incentive Plan
(the “1995 Incentive Plan”) authorizing the issuance of up to 500,000 shares of Company common
stock pursuant to the grant or exercise of stock options, including incentive stock options,
nonqualified stock options, SARs, restricted stock, performance units or shares and other
incentive awards to executives and certain key employees. The Compensation Committee of the Board
of Directors administers the 1995 Incentive Plan and determines to whom awards may be granted, the
type of award as well as the number of shares of Company common stock to be covered by each award,
and the terms and conditions of such awards. The exercise price of stock options granted under
the 1995 Incentive Plan cannot be less than 100 percent of the fair market value of such stock on
the date of grant. In the event of a Change in Control of the Company, awards granted under the
1995 Incentive Plan are subject to substantially similar provisions to those described under the
1997 Incentive Plan. The definition of Change in Control of the Company under the 1995 Incentive
Plan is substantially similar to the definition described under the 1997 Incentive Plan below.
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At the 1995 Annual Meeting, the Company’s stockholders approved the Non-Employee Directors
Stock Option Plan (the “Directors Plan”) authorizing the issuance of up to 200,000 shares of
Company common stock pursuant to the grant or exercise of nonqualified stock options to outside
directors. The Board of Directors administers the Directors Plan. The exercise price of stock
options granted under the Directors Plan is equal to the fair market value of the Company’s common
stock on the date of grant. Stock options granted pursuant to the Directors Plan are immediately
vested in full on the date of grant and generally expire 10 years after the date of grant. This
plan has expired as of December 31, 2005 and no further grants will be made.
At the 1998 Annual Meeting, the Company’s stockholders approved the 1997 Long-Term Incentive
Plan (the “1997 Incentive Plan”), authorizing the issuance of up to 875,000 shares of Company
common stock pursuant to the grant or exercise of stock options, including incentive stock
options, nonqualified stock options, SARs, restricted stock, performance units or shares and other
incentive awards. The Compensation Committee of the Board of Directors administers the 1997
Incentive Plan and determines to whom awards may be granted, the type of award as well as the
number of shares of Company common stock to be covered by each award, and the terms and conditions
of such awards. The exercise price of stock options granted under the 1997 Incentive Plan cannot
be less than 100 percent of the fair market value of such stock on the date of grant. The
restricted stock grants in 1999 and 1998 referred to above were made under the 1997 Incentive
Plan. Related to the 1997 Incentive Plan, the Company granted SARs as described below.
The 1997 Incentive Plan also provides that in the event of a Change in Control of the
Company, as defined below, 1) any SARs and stock options outstanding as of the date of the Change
in Control which are neither exercisable or vested will become fully exercisable and vested (the
payment received upon the exercise of the SARs shall be equal to the excess of the fair market
value of a share of the Company’s Common Stock on the date of exercise over the grant date price
multiplied by the number of SARs exercised); 2) the restrictions applicable to restricted stock
will lapse and such restricted stock will become free of all restrictions and fully vested; and 3)
all performance units or shares will be considered to be fully earned and any other restrictions
will lapse, and such performance units or shares will be settled in cash or stock, as applicable,
within 30 days following the effective date of the Change in Control. For purposes of subsection
3), the payout of awards subject to performance goals will be a pro rata portion of all targeted
award opportunities associated with such awards based on the number of complete and partial
calendar months within the performance period which had elapsed as of the effective date of the
Change in Control. The Compensation Committee will also have the authority, subject to the
limitations set forth in the 1997 Incentive Plan, to make any modifications to awards as
determined by the Compensation Committee to be appropriate before the effective date of the Change
in Control.
For purposes of the 1997 Incentive Plan, “Change in Control” of the Company means, and shall
be deemed to have occurred upon, any of the following events: 1) any person (other than those
persons in control of the Company as of the effective date of the 1997 Incentive Plan, a trustee
or other fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company) becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 30 percent or more of the
combined voting power of the Company’s then outstanding securities; or 2) during any period of two
consecutive years (not including any period prior to the effective date), the individuals who at
the beginning of such period constitute the Board of Directors (and any new director, whose
election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose election or nomination
for election was so approved), cease for any reason to constitute a majority thereof, or 3) the
stockholders of the Company approve: (a) a plan of complete liquidation of the Company; or (b) an
agreement for the sale or disposition of all or substantially all the Company’s assets; or (c) a
merger, consolidation, or reorganization of the Company with or involving any other corporation,
other than a merger, consolidation, or reorganization that would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent at least 50 percent
of the combined voting power of the voting securities of the Company (or such surviving entity)
outstanding immediately after such merger, consolidation, or reorganization. The Company has
determined that the Recapitalization did not result in such a Change in Control.
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In March 2004, the Company’s Board of Directors approved the vesting of all previously
unvested stock options. The Company did not recognize any compensation expense upon this vesting
of options because, based on the information available at that time, the Company did not have an
expectation that the holders of the previously unvested options would terminate their employment
with the Company prior to the original vesting period.
On June 28, 2001, the Company entered into an employment agreement with C. Michael Jacobi,
its former President and Chief Executive Officer. To induce Mr. Jacobi to enter into the
employment agreement, on June 28, 2001, the Compensation Committee of the Board of Directors
approved the Katy Industries, Inc. 2001 Chief Executive Officer’s Plan. Under this plan, Mr.
Jacobi was granted 978,572 stock options. Mr. Jacobi was also granted 71,428 stock options under
the Company’s 1997 Incentive Plan. Upon Mr. Jacobi’s retirement in May 2005, all but 300,000 of
these options were cancelled. All of the remaining options are under the 2001 Chief Executive
Officer’s Plan. The Company recognized $2.0 million of non-cash compensation expense related to
his 1,050,000 options using the intrinsic method of accounting under APB 25, because he would not
have otherwise vested in these options but for the March 2004 accelerated vesting.
On September 4, 2001, the Company entered into an employment agreement with Amir Rosenthal,
its Vice President, Chief Financial Officer, General Counsel and Secretary. To induce Mr.
Rosenthal to enter into the employment agreement, on September 4, 2001, the Compensation Committee
of the Board of Directors approved the Katy Industries, Inc. 2001 Chief Financial Officer’s Plan.
Under this plan, Mr. Rosenthal was granted 123,077 stock options. Mr. Rosenthal was also granted
76,923 stock options under the Company’s 1995 Incentive Plan.
On June 1, 2005, the Company entered into an employment agreement with Anthony T. Castor III,
its President and Chief Executive Officer. To induce Mr. Castor to enter into the employment
agreement, on July 15, 2005, the Compensation Committee of the Board of Directors approved the
Katy Industries, Inc. 2005 Chief Executive Officer’s Plan. Under this plan, Mr. Castor was
granted 750,000 stock options. These options vest evenly over a three-year period.
The following table summarizes option activity under each of the 1997 Incentive Plan, 1995
Incentive Plan, the Chief Executive Officer’s Plan, the Chief Financial Officer’s Plan and the
Directors Plan:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Exercise | Contractual | Value | ||||||||||||||
| Options | Price | Life | (in thousands) | |||||||||||||
Outstanding at December 31, 2003 |
1,799,200 | $ | 4.92 | |||||||||||||
Granted |
6,000 | 5.91 | ||||||||||||||
Exercised |
(75,000 | ) | 4.05 | |||||||||||||
Cancelled |
(4,550 | ) | 12.70 | |||||||||||||
Outstanding at December 31, 2004 |
1,725,650 | $ | 4.94 | |||||||||||||
Granted |
936,000 | 2.71 | ||||||||||||||
Expired |
(55,000 | ) | 8.98 | |||||||||||||
Cancelled |
(750,300 | ) | 4.20 | |||||||||||||
Outstanding at December 31, 2005 |
1,856,350 | $ | 3.99 | |||||||||||||
Exercised |
(45,000 | ) | 3.26 | |||||||||||||
Expired |
(60,750 | ) | 13.23 | |||||||||||||
Cancelled |
(32,600 | ) | 5.53 | |||||||||||||
Outstanding at December 31, 2006 |
1,718,000 | $ | 3.66 | 6.69 years | $ | 48 | ||||||||||
Vested and Exercisable at
December 31, 2006 |
1,098,000 | $ | 4.20 | 5.69 years | $ | 16 | ||||||||||
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As of December 31, 2006, total unvested compensation expense associated with stock options
amounted to $0.3 million, and is being amortized on a straight-line basis over the respective
option’s vesting period. The weighted average period in which the above compensation cost will be
recognized is 0.9 years as of December 31, 2006.
Stock Appreciation Rights
During 2002, a non-employee consultant was awarded 200,000 SARs under the 1997 Incentive
Plan. As of December 31, 2006, these SARs were outstanding at an exercise price of $6.00.
On November 21, 2002, the Board of Directors approved the 2002 Stock Appreciation Rights Plan
(the “2002 SAR Plan”), authorizing the issuance of up to 1,000,000 SARs. Vesting of the SARs
occurs ratably over three years from the date of issue. The 2002 SAR Plan provides limitations on
redemption by holders, specifying that no more than 50% of the cumulative number of vested SARs
held by an employee could be exercised in any one calendar year. The SARs expire ten years from
the date of issue. The Board approved grants on November 22, 2002, of 717,175 SARs to 60
individuals with an exercise price of $3.15, which equaled the market price of Katy’s stock on the
grant date. In addition, 50,000 SARs were granted to four individuals during 2003 with exercise
prices ranging from $3.01 through $5.05. In 2004, 275,000 SARs were granted to fifteen
individuals with exercise prices ranging from $5.20 through $6.45. No SARs were granted in 2005.
In 2006, 20,000 SARs were granted to one individual with an exercise price of $3.16. In addition
in 2006, 2,000 SARs each were granted to three directors with a Stand-Alone Stock Appreciation
Rights Agreement. These 6,000 SARs vest immediately and have an exercise price of $2.08. At
December 31, 2006, Katy had 598,281 SARs outstanding at a weighted average exercise price of
$4.18.
The 2002 SAR Plan also provides that in the event of a Change in Control of the Company, all
outstanding SARs may become fully vested. In accordance with the 2002 SAR Plan, a “Change in
Control” is deemed to have occurred upon any of the following events: 1) a sale of 100 percent of
the Company’s outstanding capital stock, as may be outstanding from time to time; 2) a sale of all
or substantially all of the Company’s operating subsidiaries or assets; or 3) a transaction or
series of transactions in which any third party acquires an equity ownership in the Company
greater than that held by KKTY Holding Company, L.L.C. and in which Kohlberg & Co., L.L.C.
relinquishes its right to nominate a majority of the candidates for election to the Board of
Directors.
The following table summarizes SARs activity under each of the 1997 Incentive Plan and the
2002 SAR Plan:
Non-Vested at December 31, 2005 |
85,115 | |||
Granted |
26,000 | |||
Vested |
(55,998 | ) | ||
Cancelled |
(1,683 | ) | ||
Non-Vested at December 31, 2006 |
53,434 | |||
Total Outstanding at December 31, 2006 |
798,281 | |||
See Note 3 for a discussion of accounting for stock awards, and related fair value and pro
forma earnings disclosures.
Note 14. INCOME TAXES
The provision for income taxes from continuing operations is based on the following pre-tax
loss:
| As Restated, see Note 2 | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| (Amounts in Thousands) | ||||||||||||
Domestic |
$ | (7,409 | ) | $ | (14,730 | ) | $ | (39,125 | ) | |||
Foreign |
4,946 | 4,719 | 3,239 | |||||||||
Total |
$ | (2,463 | ) | $ | (10,011 | ) | $ | (35,886 | ) | |||
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The provision for income taxes from continuing operations consists of the following:
| 2006 | 2005 | 2004 | ||||||||||
| (Amounts in Thousands) | ||||||||||||
Current tax provision (benefit): |
||||||||||||
Federal |
$ | — | $ | — | $ | (343 | ) | |||||
State |
110 | 100 | (204 | ) | ||||||||
Foreign |
2,202 | 1,268 | 2,417 | |||||||||
Total |
$ | 2,312 | $ | 1,368 | $ | 1,870 | ||||||
Deferred tax provision (benefit): |
||||||||||||
Federal |
$ | — | $ | — | $ | — | ||||||
State |
— | — | — | |||||||||
Foreign |
14 | 240 | (1,228 | ) | ||||||||
Total |
$ | 14 | $ | 240 | $ | (1,228 | ) | |||||
Total provision from continuing operations |
$ | 2,326 | $ | 1,608 | $ | 642 | ||||||
Actual income taxes reported from continuing operations are different than would have been
computed by applying the federal statutory tax rate to income from continuing operations before
income taxes. The reasons for this difference are as follows:
| As Restated, see Note 2 | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
| (Amounts in Thousands) | ||||||||||||
Benefit for income taxes at statutory rate |
$ | (865 | ) | $ | (3,504 | ) | $ | (12,560 | ) | |||
State income taxes, net of federal benefit |
72 | 65 | (133 | ) | ||||||||
Foreign tax rate differential |
95 | 112 | 463 | |||||||||
Foreign tax credits |
(2,080 | ) | (1,266 | ) | (245 | ) | ||||||
Utilization of foreign losses |
823 | 718 | — | |||||||||
Return to provision adjustments |
2,739 | (166 | ) | (991 | ) | |||||||
Dividend income from foreign subsidiary |
1,267 | 913 | — | |||||||||
Dividend gross-up |
698 | 494 | — | |||||||||
Stock option expense |
— | 547 | — | |||||||||
Valuation allowance adjustments |
(310 | ) | 3,712 | 14,325 | ||||||||
Permanent items |
(115 | ) | 4 | 103 | ||||||||
Increase (reduction) of tax reserves |
— | — | (343 | ) | ||||||||
Other, net |
2 | (21 | ) | 23 | ||||||||
Net provision for income taxes |
$ | 2,326 | $ | 1,608 | $ | 642 | ||||||
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The significant components of the Company’s deferred income tax liabilities and assets are as
follows:
| As Restated, see Note 2 | ||||||||
| 2006 | 2005 | |||||||
| (Amounts in Thousands) | ||||||||
Deferred tax liabilities |
||||||||
Waste-to-energy facility |
$ | 160 | $ | (2,602 | ) | |||
Inventory costs |
(1,072 | ) | (1,800 | ) | ||||
Unremitted foreign earnings |
(4,153 | ) | (4,428 | ) | ||||
| $ | (5,065 | ) | $ | (8,830 | ) | |||
Deferred tax assets |
||||||||
Allowance for doubtful receivables |
$ | 1,862 | $ | 972 | ||||
Accrued expenses and other items |
12,069 | 13,425 | ||||||
Difference between book and tax basis of property |
12,859 | 16,149 | ||||||
Operating loss carry-forwards — domestic |
35,326 | 35,026 | ||||||
Operating loss carry-forwards — foreign |
94 | 45 | ||||||
Tax credit carry forwards |
6,647 | 4,567 | ||||||
Estimated foreign tax credit related to
unremitted earnings |
4,153 | 4,428 | ||||||
| 73,010 | 74,612 | |||||||
Less valuation allowance |
(66,971 | ) | (64,794 | ) | ||||
| 6,039 | 9,818 | |||||||
Net deferred income tax asset |
$ | 974 | $ | 988 | ||||
At December 31, 2006, the Company had approximately $94.1 million of Federal net operating
loss carry-forwards (“Federal NOLs”), which will expire in years 2020 through 2026 if not utilized
prior to that time. Due to tax laws governing change in control events and their relation to the
Recapitalization, approximately $20.4 million of the Federal NOLs are subject to certain
limitations as to the amount that can be used to offset taxable income in any single year. The
remainder of the Company’s domestic and foreign net operating loss carry-forwards relate to
certain U.S. operating subsidiaries, and the Company’s Canadian operations, respectively, and can
only be used to offset income from these operations. At December 31, 2006, the Company’s Canadian
subsidiaries have Canadian net operating loss carry-forwards of approximately $0.1 million that
expire in 2008. The tax credit carry-forwards relate to United States federal minimum tax credits
of $1.2 million that have no expiration date, general business credits of $0.1 million that expire
in years 2011 through 2022, and foreign tax credit carryovers of $5.2 million that expire in the
years 2009 through 2016.
Valuation allowances are recorded when it is considered more likely than not that some
portion or all of the deferred tax assets will not be realized. A history of operating losses
incurred by the domestic and certain foreign subsidiaries provides significant negative evidence
with respect to the Company’s ability to generate future taxable income, a requirement in order to
recognize deferred tax assets. For this reason, the Company was unable to conclude that it was
more likely that not that certain deferred tax assets would be utilized in the future. The
valuation allowance relates to federal, state and foreign net operating loss carry-forwards, foreign and domestic tax credits, and certain other
deferred tax assets to the extent they exceed deferred tax liabilities with the exception of
deferred tax assets of certain foreign subsidiaries which are considered realizable.
Deduction for Qualified Domestic Production Activities
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”).
The Act provides a deduction for income from qualified domestic production activities, which will
be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out of
the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. The Company expects that
due to its net operating loss carry forwards and its full valuation allowance the phase out of the
ETI and the phase in of this new deduction to have no effect on its effective tax rate for fiscal
year 2007.
Repatriation of Foreign Earnings
The American Jobs Creation Act of 2004 provides for a special one-time elective dividends
received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer
(Repatriation Provision). The Company has completed its review of the Repatriation Provision and
has concluded that it will not benefit from the Act because of the Company’s current tax position.
As a result, the Repatriation Provision did not have any impact on income tax expense during
fiscal 2006.
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During 2006 and 2005, the Company made provision for U.S. federal and foreign withholding tax
on approximately $8.3 million of its Canadian subsidiary earnings which we intend to repatriate.
The Company provided no federal and foreign withholding tax on the undistributed earnings of its
UK subsidiary as these earnings are intended to be re-invested indefinitely. It is not
practicable to determine the amount of income tax liability that would result had such earnings
actually been repatriated.
Note 15. LEASE OBLIGATIONS
The Company, a lessee, has entered into non-cancelable leases for manufacturing and data
processing equipment and real property with lease terms of up to ten years. Future minimum lease
payments as of December 31, 2006 are as follows:
2007 |
$ | 7,663 | ||
2008 |
7,239 | |||
2009 |
3,332 | |||
2010 |
2,732 | |||
2011 |
510 | |||
Thereafter |
614 | |||
Total minimum payments |
$ | 22,090 | ||
Liabilities totaling $1.0 million were recorded on the Consolidated Balance Sheets at
December 31, 2006, related to leased facilities that have been fully or partially abandoned and
available for sub-lease. These facilities were abandoned as cost saving measures as a result of
efforts to restructure the Company’s operations. These liabilities are stated at fair value
(i.e., discounted), and include estimates of sub-lease revenue. See Note 22 for further detail on
accrued amounts in both current and long-term liabilities related to non-cancelable, abandoned,
leased facilities.
Rental expense for 2006, 2005 and 2004 for operating leases from continuing operations was
$8.4 million, $8.9 million, and $10.8 million, respectively. Also, $1.4 million and $1.3 million
of rent was paid and charged against liabilities in 2006 and 2005, respectively, for
non-cancelable leases at facilities abandoned as a result of restructuring initiatives. In 2004,
the Company bought out the remaining obligation for its non-cancelable lease at the Warson Road
facility for $2.3 million.
Note 16. RELATED PARTY TRANSACTIONS
In connection with the CCP (formerly Contico International, L.L.C.) acquisition on January 8,
1999, the Company entered into building lease agreements with Newcastle. Lester Miller, the
former owner of CCP, and a Katy director from 1999 to 2000, is the majority owner of Newcastle.
Since the acquisition of CCP, several additional properties utilized by CCP are leased directly
from Lester Miller. Rental expense for these properties approximates historical market rates.
Related party rental expense was approximately $0.5 million for each of the years ended December
31, 2006, 2005 and 2004.
Kohlberg, whose affiliate holds all 1,131,551 shares of our Convertible Preferred Stock,
provides ongoing management oversight and advisory services to Katy. We paid $0.5 million
annually for such services in 2006, 2005 and 2004, respectively, and expect to pay $0.5 million
annually in future years. Such amounts are recorded in selling, general and administrative
expenses in the Consolidated Statements of Operations.
Note 17. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company is organized into two operating segments: Maintenance Products and Electrical
Products. The activities of the Maintenance Products Group include the manufacture and
distribution of a variety of commercial cleaning supplies and consumer home products. The
Electrical Products Group is a marketer and distributor of consumer electrical corded products.
Principal geographic markets are in the United States, Canada, and Europe and include the sanitary
maintenance, foodservice, mass merchant retail and home improvement markets. During 2006, Lowe’s
Companies, Inc. (“Lowe’s”) and Wal-Mart Stores, Inc. (“Wal-Mart”) accounted for 16% and 14%,
respectively, of consolidated net sales. Sales to Lowe’s are made by two separate business units
(Woods US and Contico). Sales to Wal-Mart are made by six separate business units (Woods US,
Contico, Glit, Woods Canada, Wilen, and Continental). A significant loss of business at either of
these retail outlets could have a material adverse impact on the Company’s results.
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For all periods presented, information for the Maintenance Products Group excludes amounts
related to the United Kingdom consumer plastics and Metal Truck Box business units as these units
are classified as discontinued operations as discussed further in Note 7. The table below
summarizes the key factors in the year-to-year changes in operating results:
| Years Ended December 31, | ||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||
| As Restated, see Note 2 | ||||||||||||||
| (Amounts in thousands) | ||||||||||||||
Maintenance Products Group |
||||||||||||||
Net external sales |
$ | 208,423 | $ | 216,068 | $ | 237,927 | ||||||||
Operating income (loss) |
5,637 | (6,467 | ) | (4,115 | ) | |||||||||
Operating margin (deficit) |
2.7 | % | (3.0 | %) | (1.7 | %) | ||||||||
Depreciation
and amortization |
7,694 | 7,673 | 10,593 | |||||||||||
Capital expenditures |
3,855 | 8,329 | 10,111 | |||||||||||
Total assets |
95,119 | 107,806 | 124,458 | |||||||||||
Electrical Products Group |
||||||||||||||
Net external sales |
$ | 187,743 | $ | 207,322 | $ | 178,754 | ||||||||
Operating income |
8,710 | 17,385 | 16,809 | |||||||||||
Operating margin |
4.6 | % | 8.4 | % | 9.4 | % | ||||||||
Depreciation
and amortization |
827 | 1,191 | 1,327 | |||||||||||
Capital expenditures |
739 | 596 | 671 | |||||||||||
Total assets |
74,025 | 66,744 | 57,698 | |||||||||||
Net sales |
- Operating segments | $ | 396,166 | $ | 423,390 | $ | 416,681 | |||||||
| Total | $ | 396,166 | $ | 423,390 | $ | 416,681 | ||||||||
Operating income (loss) |
- Operating segments | $ | 14,347 | $ | 10,918 | $ | 12,694 | |||||||
| - Unallocated corporate | (10,206 | ) | (13,198 | ) | (10,341 | ) | ||||||||
| - Impairments of long-lived assets | — | (2,112 | ) | (30,056 | ) | |||||||||
| - Severance, restructuring and related charges | 112 | (1,090 | ) | (3,505 | ) | |||||||||
| - (Loss) gain on sale of assets | (467 | ) | 377 | 288 | ||||||||||
| Total | $ | 3,786 | $ | (5,105 | ) | $ | (30,920 | ) | ||||||
Depreciation and
amortization |
- Operating segments | $ | 8,521 | $ | 8,864 | $ | 11,920 | |||||||
| - Unallocated corporate | 119 | 104 | 225 | |||||||||||
| Total | $ | 8,640 | $ | 8,968 | $ | 12,145 | ||||||||
Capital expenditures |
- Operating segments | $ | 4,594 | $ | 8,925 | $ | 10,782 | |||||||
| - Unallocated corporate | 20 | — | — | |||||||||||
| - Discontinued operations | 128 | 441 | 3,094 | |||||||||||
| Total | $ | 4,742 | $ | 9,366 | $ | 13,876 | ||||||||
Total assets |
- Operating segments | $ | 169,144 | $ | 174,550 | $ | 182,156 | |||||||
| - Other [a] | 6,700 | 27,391 | 31,801 | |||||||||||
| - Unallocated corporate | 6,850 | 10,153 | 10,507 | |||||||||||
| Total | $ | 182,694 | $ | 212,094 | $ | 224,464 | ||||||||
| [a] | Amounts shown as “Other” represent items associated with Sahlman Holding Company,
Inc., the Company’s equity method investment, and the assets of the United Kingdom consumer
plastics and the Metal Truck Box business units. |
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The Company operates businesses in the United States and foreign countries. The operations
for 2006, 2005 and 2004 of businesses within major geographic areas are summarized as follows:
| United | Europe | |||||||||||||||||||||||
| (Thousands of Dollars) | States | Canada | U.K. | (Excluding U.K.) | Other | Consolidated | ||||||||||||||||||
2006: |
||||||||||||||||||||||||
Sales to unaffiliated
customers |
$ | 316,313 | $ | 58,334 | $ | 14,289 | $ | 3,826 | $ | 3,404 | $ | 396,166 | ||||||||||||
Total
assets, As Restated, see Note 2 |
$ | 145,512 | $ | 24,678 | $ | 12,264 | $ | — | $ | 240 | $ | 182,694 | ||||||||||||
2005: |
||||||||||||||||||||||||
Sales to unaffiliated
customers |
$ | 347,894 | $ | 53,684 | $ | 14,185 | $ | 3,721 | $ | 3,906 | $ | 423,390 | ||||||||||||
Total
assets, As Restated, see Note 2 |
$ | 161,044 | $ | 25,950 | $ | 24,881 | $ | — | $ | 219 | $ | 212,094 | ||||||||||||
2004: |
||||||||||||||||||||||||
Sales to unaffiliated
customers |
$ | 346,346 | $ | 47,549 | $ | 14,167 | $ | 4,423 | $ | 4,196 | $ | 416,681 | ||||||||||||
Total assets |
$ | 170,166 | $ | 23,513 | $ | 30,227 | $ | 558 | $ | — | $ | 224,464 | ||||||||||||
Net sales for each geographic area include sales of products produced in that area and
sold to unaffiliated customers, as reported in the Consolidated Statements of Operations.
Note 18. COMMITMENTS AND CONTINGENCIES
General Environmental Claims
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions are involved in remedial activities at certain present and former
locations and have been identified by the United States Environmental Protection Agency (“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 environmental liabilities in 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 five to ten years.
W.J. Smith Wood Preserving Company (“W.J. Smith”)
The W. J. Smith matter originated in the 1980s when the United States and the State of Texas,
through the Texas Water Commission, initiated environmental enforcement actions against W.J. Smith
alleging that certain conditions on the W.J. Smith property (the “Property”) violated
environmental laws. In order to resolve the enforcement actions, W.J. Smith engaged in a series
of cleanup activities on the Property and implemented a groundwater monitoring program.
In 1993, the EPA initiated a proceeding under Section 7003 of the Resource Conservation and
Recovery Act (“RCRA”) against W.J. Smith and Katy. The proceeding sought certain actions at the
site and at certain off-site areas, as well as development and implementation of additional
cleanup activities to mitigate off-site releases. In December 1995, W.J. Smith, Katy and the EPA
agreed to resolve the proceeding through an Administrative Order on Consent under Section 7003 of
RCRA. While the Company has completed the cleanup activities required by the Administrative Order
on Consent under Section 7003 of RCRA, the Company still has further obligations with respect to
this matter in the areas of groundwater and land treatment unit monitoring and closure as well as
ongoing site operation and maintenance costs.
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Since 1990, the Company has spent in excess of $7.0 million undertaking cleanup and
compliance activities in connection with this matter. While ultimate liability with respect to
this matter is not easy to determine, the Company has recorded and accrued amounts that it deems
reasonable for prospective liabilities with respect to this matter.
Asbestos Claims
A. The Company has been named as a defendant in ten lawsuits filed in state court in Alabama by a
total of approximately 324 individual plaintiffs. There are over 100 defendants named in each
case. In all ten cases, the Plaintiffs claim that they were exposed to asbestos in the course of
their employment at a former U.S. Steel plant in Alabama and, as a result, contracted mesothelioma,
asbestosis, lung cancer or other illness. They claim that they were exposed to asbestos in
products in the plant which were manufactured by each defendant. In eight of the cases, Plaintiffs
also assert wrongful death claims. The Company will vigorously defend the claims against it in
these matters. The liability of the Company cannot be determined at this time.
B. Sterling Fluid Systems (USA) has tendered over 2,082 cases pending in Michigan, New Jersey, New
York, Illinois, Nevada, Mississippi, Wyoming, Louisiana, Georgia, Massachusetts and California to
the Company for defense and indemnification. With respect to one case, Sterling has demanded that
Katy indemnify it for a $200,000 settlement. Sterling bases its tender of the complaints on the
provisions contained in a 1993 Purchase Agreement between the parties whereby Sterling purchased
the LaBour Pump business and other assets from the Company. Sterling has not filed a lawsuit
against Katy in connection with these matters.
The tendered complaints all purport to state claims against Sterling and its subsidiaries.
The Company and its current subsidiaries are not named as defendants. The plaintiffs in the cases
also allege that they were exposed to asbestos and products containing asbestos in the course of
their employment. Each complaint names as defendants many manufacturers of products containing
asbestos, apparently because plaintiffs came into contact with a variety of different products in
the course of their employment. Plaintiffs’ claim that LaBour Pump and/or Sterling may have
manufactured some of those products.
With respect to many of the tendered complaints, including the one settled by Sterling for
$200,000, the Company has taken the position that Sterling has waived its right to indemnity by
failing to timely request it as required under the 1993 Purchase Agreement. With respect to the
balance of the tendered complaints, the Company has elected not to assume the defense of Sterling
in these matters.
C. LaBour Pump Company, a former subsidiary of the Company, has been named as a defendant in over
361 similar cases in New Jersey. These cases have also been tendered by Sterling. The Company has
elected to defend these cases, many of which have been dismissed or settled for nominal sums.
While the ultimate liability of the Company related to the asbestos matters above cannot be
determined at this time, the Company has recorded and accrued amounts that it deems reasonable for
prospective liabilities with respect to this matter.
Non-Environmental Litigation — Banco del Atlantico, S.A.
Banco del Atlantico, S.A. v. Woods Industries, Inc., et al. Civil Action No. L-96-139 (now
1:03-CV-1342-LJM-VSS, U.S. District Court, Southern District of Indiana). In December
1996, Banco del Atlantico (“plaintiff”), a bank located in Mexico, filed a lawsuit in Texas
against Woods Industries, Inc., a subsidiary of Katy, and against certain past and/or then present
officers, directors and owners of Woods (collectively, “defendants”). The plaintiff alleges that
it was defrauded into making loans to a Mexican corporation controlled by certain past officers
and directors of Woods based upon fraudulent representations and purported guarantees. Based on
these allegations, and others, the plaintiff originally asserted claims for alleged violations of
the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”); “money laundering” of the
proceeds of the illegal enterprise; the Indiana RICO and Crime Victims Act; common law fraud and
conspiracy; and fraudulent transfer. As discussed below, certain of the plaintiff’s claims were
dismissed with prejudice by the Court. The plaintiff also seeks recovery upon certain alleged
guarantees purportedly executed by Woods Wire Products, Inc., a predecessor company from which
Woods purchased certain assets in 1993 (prior to Woods’s ownership by Katy, which began in
December 1996). The primary legal theories under which the plaintiff seeks to hold Woods liable
for its alleged damages are respondeat superior, conspiracy, successor liability, or a combination
of the three.
The case was transferred from Texas to the Southern District of Indiana in 2003. In
September 2004, the plaintiff and HSBC Mexico, S.A. (collectively, “plaintiffs”), who intervened
in the litigation as an additional alleged owner of the claims against the defendants, filed a
Second Amended Complaint. The defendants filed motions to dismiss the Second Amended Complaint on
November 8, 2004. These motions sought dismissal of plaintiffs’ Second Amended Complaint on
grounds of, among other things, failure to state a claim and forum non conveniens.
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On August 11, 2005, the court granted significant aspects of Defendants’ motions to dismiss
for failure to state a claim. Specifically, the Court dismissed with prejudice all of the federal
and Indiana RICO claims asserted in the Second Amended Complaint against Woods. This ruling
removes the treble damages exposure associated with the federal and Indiana RICO claims. Recently,
the Court also denied the defendants’ renewed motion to dismiss for forum non conveniens. The sole
claims now remaining against Woods are certain common law claims and claims under the Indiana Crime
Victims Act.
The time set for discovery has concluded, and the appearing Defendants (including Woods) have
moved for summary judgment on all remaining claims against them. Defendants have also moved under
the Court’s rules for sanctions against Plaintiffs for their asserted failures to abide by the
rules of discovery and produce certain documents and witnesses. These discovery sanction motions
separately seek dismissal of all of Plaintiffs’ claims with prejudice. Plaintiffs have cross-moved
for summary judgment in their favor on their claims under the alleged guarantees purportedly
executed by old Woods Wire Products, Inc. (the company from which Woods purchased certain assets).
Summary judgment briefing is expected to be complete by April 15, 2007, with a decision some time
thereafter. A trial, if any is necessary, is not expected until late 2007 or 2008.
The plaintiffs seek damages in excess of $24.0 million, request that the Court void certain
asset sales as purported “fraudulent transfers” (including the 1993 Woods Wire Products, Inc./Woods
asset sale), and continue to claim that the Indiana Crime Victims Act entitles them to treble
damages for some or all of their claims. Katy may have recourse against the former owners 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.
Woods may also have indemnity claims against the former officers and directors. In addition, there
is a dispute with the former owners of Woods regarding the final disposition of amounts withheld
from the purchase price, which may be subject to further adjustment as a result of the claims by
the plaintiff. The extent or limit of any such adjustment cannot be predicted at this time.
While the ultimate liability of the Company related to this matter cannot be determined at
this time, the Company has recorded and accrued amounts that it deems reasonable for prospective
liabilities with respect to this matter.
Other Claims
Katy also has a number of product liability and workers’ compensation claims pending against
it and its subsidiaries. Many of these claims are proceeding through the litigation process and
the final outcome will not be known until a settlement is reached with the claimant or the case is
adjudicated. The Company estimates that it can take up to 10 years from the date of the injury to
reach a final outcome on certain claims. With respect to the product liability and workers’
compensation claims, Katy has provided for its share of expected losses beyond the applicable
insurance coverage, including those incurred but not reported to the Company or its insurance
providers, which are developed using actuarial techniques. Such accruals are developed using
currently available claim information, and represent management’s best estimates. The ultimate
cost of any individual claim can vary based upon, among other factors, the nature of the injury,
the duration of the disability period, the length of the claim period, the jurisdiction of the
claim and the nature of the final outcome.
Although management believes that the actions specified above in this section individually
and in the aggregate are not likely to have outcomes that will have a material adverse effect on
the Company’s financial position, results of operations or cash flow, further costs could be
significant and will be recorded as a charge to operations when, and if, current information
dictates a change in management’s estimates.
Note 19. SEVERANCE, RESTRUCTURING AND RELATED CHARGES
Over the past three years, the Company has initiated several cost reduction and facility
consolidation initiatives, resulting in severance, restructuring and related charges. Key
initiatives were the consolidation of the St. Louis, Missouri manufacturing/distribution
facilities, shutdown of both Woods U.S. and Woods Canada manufacturing as well as the
consolidation of the Glit facilities. These initiatives resulted from the on-going strategic
reassessment of our various businesses as well as the markets in which they operate.
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A summary of charges (reductions) by major initiative is as follows:
| 2006 | 2005 | 2004 | ||||||||||
| (Amounts in Thousands) | ||||||||||||
Consolidation of St. Louis
manufacturing/distribution facilities |
$ | (499 | ) | $ | 39 | $ | 1,460 | |||||
Consolidation of Glit facilities |
299 | 724 | 791 | |||||||||
Corporate office relocation |
217 | 172 | — | |||||||||
Shutdown of Woods U.S. manufacturing |
(115 | ) | — | 38 | ||||||||
Shutdown of Woods Canada manufacturing |
(14 | ) | 134 | 841 | ||||||||
Consolidation of administrative functions for CCP |
— | 21 | 215 | |||||||||
Other |
— | — | 160 | |||||||||
Total severance, restructuring and related costs |
$ | (112 | ) | $ | 1,090 | $ | 3,505 | |||||
Consolidation of St. Louis manufacturing/distribution facilities — In 2002, the
Company committed to a plan to consolidate the manufacturing and distribution of the four CCP
facilities in the St. Louis, Missouri area. Management believed that in order to implement a more
competitive cost structure and combat competitive pricing pressure, the excess capacity at the four
plastic molding facilities in this area would need to be eliminated. This plan was expected to be
completed
by the end of 2003; however charges have been incurred past 2003 due to changes in assumptions in
non-cancelable lease accruals. Charges in 2006 were for an adjustment to the non-cancelable lease
accrual at the Hazelwood, Missouri facility due to the execution of a sublease on the property as
well as an increased amount of usable manufacturing space currently required. Charges in 2005 and
2004 related to adjustments to previously established non-cancelable lease liabilities for
abandoned facilities and costs for the movement of inventory and equipment. Management believes
that no further charges will be incurred for this activity, except for potential adjustments to
non-cancelable lease liabilities. Following is a rollforward of restructuring liabilities by type
for the consolidation of St. Louis manufacturing/distribution facilities (amounts in thousands):
| Contract | ||||
| Termination | ||||
| Costs [b] | ||||
Restructuring liabilities
at December 31, 2004 |
$ | 2,402 | ||
Additions |
100 | |||
Reductions |
(61 | ) | ||
Payments |
(596 | ) | ||
Restructuring liabilities
at December 31, 2005 |
$ | 1,845 | ||
Additions |
— | |||
Reductions |
(499 | ) | ||
Payments |
(881 | ) | ||
Restructuring liabilities
at December 31, 2006 |
$ | 465 | ||
Consolidation of Glit facilities — In 2002, the Company approved a plan to
consolidate the manufacturing facilities of its Glit business unit in order to implement a more
competitive cost structure. It was anticipated that this activity would begin in early 2003 and be
completed by the end of the second quarter of 2004. Due to numerous operational issues, including
management turnover and a small fire at the Wrens, Georgia facility, the completion of this
consolidation was delayed. In 2006, the Company completed the closure of the Pineville, North
Carolina facility. Charges were incurred in 2006 associated with severance ($0.1 million) and
costs for the movement of equipment ($0.2 million). In 2005, the Company completed the closure of
the Lawrence, Massachusetts facility. Charges were incurred in 2005 associated with severance
($0.3 million), establishment of non-cancelable lease liability ($0.3 million) and other charges
($0.1 million). Charges were incurred in 2004 related to severance for expected terminations at
the Lawrence facility ($0.4 million), the closure of the Pineville facility ($0.3 million) and
expenses for the preparation of the Wrens facility ($0.1 million). Management believes that no
further charges will be incurred for this activity. Following is a rollforward of restructuring
liabilities by type for the consolidation of Glit facilities (amounts in thousands):
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| One-time | Contract | |||||||||||||||
| Termination | Termination | |||||||||||||||
| Total | Benefits [a] | Costs [b] | Other [c] | |||||||||||||
Restructuring liabilities
at December 31, 2004 |
$ | 983 | $ | 733 | $ | 250 | $ | — | ||||||||
Additions |
724 | 313 | 263 | 148 | ||||||||||||
Payments |
(1,202 | ) | (791 | ) | (263 | ) | (148 | ) | ||||||||
Restructuring liabilities
at December 31, 2005 |
$ | 505 | $ | 255 | $ | 250 | $ | — | ||||||||
Additions |
299 | 109 | — | 190 | ||||||||||||
Payments |
(799 | ) | (364 | ) | (245 | ) | (190 | ) | ||||||||
Restructuring liabilities
at December 31, 2006 |
$ | 5 | $ | — | $ | 5 | $ | — | ||||||||
Corporate office relocation — In November 2005, the Company announced the closing of
its corporate office in Middlebury, Connecticut, and the relocation of certain corporate functions
to the CCP location in Bridgeton, Missouri, the outsourcing of other functions, and the move of the
remaining functions to a new location in Arlington, Virginia. The amounts recorded in 2006 and
2005 primarily relate to severance for employees at the Middlebury office. Following is a
rollforward of restructuring liabilities by type for the corporate office relocation (amounts in
thousands):
| One-time | ||||
| Termination | ||||
| Benefits [a] | ||||
Restructuring liabilities
at December 31, 2004 |
$ | — | ||
Additions |
172 | |||
Payments |
(15 | ) | ||
Restructuring liabilities
at December 31, 2005 |
$ | 157 | ||
Additions |
217 | |||
Payments |
(374 | ) | ||
Restructuring liabilities
at December 31, 2006 |
$ | — | ||
Shutdown of Woods U.S. manufacturing — During 2002, a major restructuring occurred at
the Woods business unit. After significant study and research into different sourcing
alternatives, Katy decided that Woods would source all of its products from Asia. In December
2002, Woods shut down all U.S. manufacturing facilities, which were in suburban Indianapolis and in
southern Indiana. In 2006, outstanding liabilities were removed as no additional restructuring
activity was anticipated. All 2005 activity reflects payments on the non-cancelable lease accrual.
During 2004, a charge of $0.3 million was recorded for the shutdown and relocation of a
procurement office in Asia and was offset by a credit of $0.3 million to reverse a non-cancelable
lease accrual based on a change in usage of a leased facility that was previously impaired.
Following is a rollforward of restructuring liabilities by type for the shutdown of Woods U.S.
manufacturing (amounts in thousands):
| One-time | Contract | |||||||||||
| Termination | Termination | |||||||||||
| Total | Benefits [a] | Costs [b] | ||||||||||
Restructuring liabilities at December 31, 2004 |
$ | 261 | $ | 20 | $ | 241 | ||||||
Additions |
— | — | — | |||||||||
Reductions |
— | — | — | |||||||||
Payments |
(176 | ) | — | (176 | ) | |||||||
Currency translation and other |
110 | — | 110 | |||||||||
Restructuring liabilities at December 31, 2005 |
$ | 195 | $ | 20 | $ | 175 | ||||||
Additions |
— | — | — | |||||||||
Reductions |
(115 | ) | (19 | ) | (96 | ) | ||||||
Payments |
(80 | ) | (1 | ) | (79 | ) | ||||||
Restructuring liabilities at December 31, 2006 |
$ | — | $ | — | $ | — | ||||||
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Shutdown of Woods Canada manufacturing — In 2003, the Company approved a plan to shut
down the manufacturing operation in Toronto, Ontario and source substantially all of its products
from Asia. Management believed that this action was necessary in order to implement a more
competitive cost structure to combat pricing pressure by producers in Asia. In connection with
this shutdown, the Company also anticipated the sale and leaseback of this facility, which would
provide additional liquidity. In December 2003, Woods Canada closed this manufacturing facility in
Toronto, Ontario, but was unable to complete the sale/leaseback transaction at that time.
Accordingly, the charge for the non-cancelable lease accrual was recorded in the first quarter of
2004, upon the completion of the sale/leaseback transaction. The idle capacity was a direct result
of the elimination of the manufacturing function from this facility. A portion of the facility was
available for sublease at the time the accrual was established. In 2005, a charge of $0.2 million
was recorded for an adjustment to the non-cancelable lease accruals. In 2004, Woods Canada
incurred a charge of $0.8 million for a non-cancelable lease accrual associated with a
sale/leaseback transaction and idle capacity as a result of the shutdown of manufacturing. Also in
2004, Woods Canada recorded less than $0.1 million for additional severance. Management believes
that no more costs will be incurred for this activity, except for potential adjustments to
non-cancelable lease liabilities. Following is a rollforward of restructuring liabilities by type
for the shutdown of Woods Canada manufacturing (amounts in thousands):
| One-time | Contract | |||||||||||
| Termination | Termination | |||||||||||
| Total | Benefits [a] | Costs [b] | ||||||||||
Restructuring liabilities at December 31, 2004 |
$ | 808 | $ | 54 | $ | 754 | ||||||
Additions |
153 | — | 153 | |||||||||
Reductions |
(19 | ) | (19 | ) | — | |||||||
Payments |
(242 | ) | (34 | ) | (208 | ) | ||||||
Currency translation and other |
17 | (1 | ) | 18 | ||||||||
Restructuring liabilities at December 31, 2005 |
$ | 717 | $ | — | $ | 717 | ||||||
Additions |
— | — | — | |||||||||
Reductions |
(14 | ) | — | (14 | ) | |||||||
Payments |
(220 | ) | — | (220 | ) | |||||||
Currency translation |
8 | — | 8 | |||||||||
Restructuring liabilities at December 31, 2006 |
$ | 491 | $ | — | $ | 491 | ||||||
Consolidation of administrative functions for CCP — In 2002, in order to streamline
processes and eliminate duplicate functions, the Company initiated a plan to centralize certain
administrative and back office functions into Bridgeton, Missouri from certain businesses within
the Maintenance Products Group. This plan was anticipated to be completed in 2004 upon the
transfer of functions from the Lawrence, Massachusetts facility (see Consolidation of Glit
facilities above); however the closure was delayed and subsequently contributed to the delay in
this plan until completion in 2005. Katy has incurred primarily severance costs over the past
three years for this integration of back office and administrative functions. The most significant
project is the centralization of the customer service functions for the Continental, Glit, Wilen,
and Disco business units. Following is a rollforward of restructuring liabilities by type for the
consolidation of administrative functions for CCP (amounts in thousands):
| One-time | ||||
| Termination | ||||
| Benefits [a] | ||||
Restructuring liabilities
at December 31, 2004 |
$ | — | ||
Additions |
21 | |||
Payments |
(21 | ) | ||
Restructuring liabilities
at December 31, 2005 |
$ | — | ||
Additions |
— | |||
Payments |
— | |||
Restructuring liabilities
at December 31, 2006 |
$ | — | ||
Other — During 2004, costs were incurred for the closure of CCP’s metals facility in
Santa Fe Springs, California ($0.1 million) and for the closure of CCP’s facility in Canada and the
subsequent consolidation into the Woods Canada facility ($0.1 million).
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A rollforward of all restructuring and related reserves since December 31, 2004 is as follows
(amounts in thousands):
| One-time | Contract | |||||||||||||||
| Termination | Termination | |||||||||||||||
| Total | Benefits [a] | Costs [b] | Other [c] | |||||||||||||
Restructuring and related liabilities at December 31, 2004 |
$ | 4,454 | $ | 807 | $ | 3,647 | $ | — | ||||||||
Additions |
1,170 | 506 | 516 | 148 | ||||||||||||
Reductions |
(80 | ) | (19 | ) | (61 | ) | — | |||||||||
Payments |
(2,252 | ) | (861 | ) | (1,243 | ) | (148 | ) | ||||||||
Currency translation and other |
127 | (1 | ) | 128 | — | |||||||||||
Restructuring and related liabilities at December 31, 2005 |
$ | 3,419 | $ | 432 | $ | 2,987 | $ | — | ||||||||
Additions |
516 | 326 | — | 190 | ||||||||||||
Reductions |
(628 | ) | (19 | ) | (609 | ) | — | |||||||||
Payments |
(2,354 | ) | (739 | ) | (1,425 | ) | (190 | ) | ||||||||
Currency translation |
8 | — | 8 | — | ||||||||||||
Restructuring and related liabilities at December 31, 2006 [d] |
$ | 961 | $ | — | $ | 961 | $ | — | ||||||||
| [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. Total maximum potential amount of lease loss, excluding any sublease
rentals, is $1.8 million as of December 31, 2006. The Company has included $0.8 million as an
offset for sublease rentals. |
|
| [c] | Includes charges associated with moving inventory, machinery and equipment, and consolidation
of administrative and operational functions. |
|
| [d] | Katy expects to substantially complete its restructuring program in 2007. The remaining
severance, restructuring and related costs for these initiatives are expected to be approximately
$0.3 million. |
The table below details activity in restructuring and related reserves by operating segment
since December 31, 2004 (amounts in thousands):
| Maintenance | Electrical | |||||||||||||||
| Products | Products | |||||||||||||||
| Total | Group | Group | Corporate | |||||||||||||
Restructuring and related liabilities at
December 31, 2004 |
$ | 4,454 | $ | 3,385 | $ | 1,069 | $ | — | ||||||||
Additions |
1,170 | 845 | 153 | 172 | ||||||||||||
Reductions |
(80 | ) | (61 | ) | (19 | ) | — | |||||||||
Payments |
(2,252 | ) | (1,819 | ) | (418 | ) | (15 | ) | ||||||||
Currency translation and other |
127 | — | 127 | — | ||||||||||||
Restructuring and related liabilities at
December 31, 2005 |
$ | 3,419 | $ | 2,350 | $ | 912 | $ | 157 | ||||||||
Additions |
516 | 299 | — | 217 | ||||||||||||
Reductions |
(628 | ) | (499 | ) | (129 | ) | — | |||||||||
Payments |
(2,354 | ) | (1,680 | ) | (300 | ) | (374 | ) | ||||||||
Currency translation |
8 | — | 8 | — | ||||||||||||
Restructuring and related liabilities at
December 31, 2006 |
$ | 961 | $ | 470 | $ | 491 | $ | — | ||||||||
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The table below summarizes the future obligations for severance, restructuring and other
related charges by operating segment detailed above (amounts in thousands):
| Maintenance | Electrical | |||||||||||||||
| Products | Products | |||||||||||||||
| Total | Group | Group | Corporate | |||||||||||||
2007 |
$ | 419 | $ | 186 | $ | 233 | $ | — | ||||||||
2008 |
336 | 94 | 242 | — | ||||||||||||
2009 |
75 | 59 | 16 | — | ||||||||||||
2010 |
63 | 63 | — | — | ||||||||||||
2011 |
68 | 68 | — | — | ||||||||||||
Total Payments |
$ | 961 | $ | 470 | $ | 491 | $ | — | ||||||||
Note 20. ACQUISITION
During the third quarter of 2005, CCP acquired substantially all of the assets and assumed
certain liabilities of Washington International Non-Wovens, LLC (“WIN”), based in Washington,
Georgia. The purchase price was approximately $1.7 million, including $0.6 million of assumed
debt, and was allocated to the acquired net assets and intangible lease asset at their estimated
fair values. The WIN acquisition is not material for purposes of presenting pro forma financial
information. This acquired business is part of the Glit business unit in the Maintenance Products
Group.
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Note 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
For all periods presented, net sales and gross profit excludes amounts related to the United
Kingdom consumer plastics and Metal Truck Box business units as these units are classified as
discontinued operations as discussed further in Note 7. In addition, see Note 2 for further
discussion on restatement of prior financial information:
| Consolidated Statements of Operations | 2006 | |||||||||||||||
| (Amounts in thousands, except per share data) | 1st Qtr | 2nd Qtr | ||||||||||||||
| Previously | Previously | |||||||||||||||
| reported | Restated | reported | Restated | |||||||||||||
Net sales |
$ | 75,818 | $ | 75,818 | $ | 88,618 | $ | 88,618 | ||||||||
Cost of goods sold (A)(D) |
65,407 | 65,553 | 76,149 | 76,392 | ||||||||||||
Gross profit |
10,411 | 10,265 | 12,469 | 12,226 | ||||||||||||
Selling, general and administrative expenses (B)(C) |
12,481 | 12,289 | 12,064 | 11,873 | ||||||||||||
Severance, restructuring and related charges |
782 | 782 | 71 | 71 | ||||||||||||
Loss (gain) on sale of assets |
102 | 102 | (48 | ) | (48 | ) | ||||||||||
Operating (loss) income |
(2,954 | ) | (2,908 | ) | 382 | 330 | ||||||||||
Gain on SESCO joint venture transaction (E) |
— | — | — | 563 | ||||||||||||
Interest expense (E) |
(1,740 | ) | (1,771 | ) | (1,743 | ) | (1,775 | ) | ||||||||
Other, net |
341 | 341 | 83 | 83 | ||||||||||||
(Loss)
income from continuing operations before
provision for income taxes |
(4,353 | ) | (4,338 | ) | (1,278 | ) | (799 | ) | ||||||||
Provision for income taxes from continuing operations |
(262 | ) | (262 | ) | (406 | ) | (406 | ) | ||||||||
(Loss) income from continuing operations |
(4,615 | ) | (4,600 | ) | (1,684 | ) | (1,205 | ) | ||||||||
Loss from operations of discontinued businesses
(net of tax) (E) |
(420 | ) | (389 | ) | (268 | ) | (699 | ) | ||||||||
Gain (loss) on sale of discontinued businesses
(net of tax) (E) |
— | — | 70 | (30 | ) | |||||||||||
Loss before cumulative effect of a change in
accounting principle |
(5,035 | ) | (4,989 | ) | (1,882 | ) | (1,934 | ) | ||||||||
Cumulative effect of a change in accounting
principle (net of tax) |
(756 | ) | (756 | ) | — | — | ||||||||||
Net loss |
(5,791 | ) | (5,745 | ) | (1,882 | ) | (1,934 | ) | ||||||||
Payment-in-kind of dividends on convertible
preferred stock |
— | — | — | — | ||||||||||||
Net loss attributable to common stockholders |
$ | (5,791 | ) | $ | (5,745 | ) | $ | (1,882 | ) | $ | (1,934 | ) | ||||
Loss per share of common stock — Basic and diluted |
||||||||||||||||
(Loss) income from continuing operations
attributable to common stockholders |
$ | (0.58 | ) | $ | (0.57 | ) | $ | (0.21 | ) | $ | (0.15 | ) | ||||
Discontinued operations (net of tax) |
(0.05 | ) | (0.05 | ) | (0.03 | ) | (0.09 | ) | ||||||||
Cumulative effect of a change in accounting principle |
(0.10 | ) | (0.10 | ) | — | — | ||||||||||
Net loss attributable to common stockholders |
$ | (0.73 | ) | $ | (0.72 | ) | $ | (0.24 | ) | $ | (0.24 | ) | ||||
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Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Amounts in thousands, except per share data)
| 2006 | ||||||||||||||||
| 3rd Qtr | 4th Qtr | |||||||||||||||
| Previously | Previously | |||||||||||||||
| reported | Restated | reported | Restated | |||||||||||||
Net sales |
$ | 121,217 | $ | 121,217 | $ | 110,513 | $ | 110,513 | ||||||||
Cost of goods sold (A)(D) |
104,912 | 105,120 | 98,227 | 98,404 | ||||||||||||
Gross profit |
16,305 | 16,097 | 12,286 | 12,109 | ||||||||||||
Selling, general and administrative expenses (B)(C) |
11,753 | 11,753 | 10,641 | 10,641 | ||||||||||||
Severance, restructuring and related charges |
738 | 738 | (1,703 | ) | (1,703 | ) | ||||||||||
Loss (gain) on sale of assets |
49 | 49 | 364 | 364 | ||||||||||||
Operating (loss) income |
3,765 | 3,557 | 2,984 | 2,807 | ||||||||||||
Gain on SESCO joint venture transaction (E) |
— | — | — | — | ||||||||||||
Interest expense (E) |
(1,715 | ) | (1,724 | ) | (1,839 | ) | (1,844 | ) | ||||||||
Other, net |
42 | 42 | (164 | ) | (164 | ) | ||||||||||
(Loss) income from continuing operations before
provision for income taxes |
2,092 | 1,875 | 981 | 799 | ||||||||||||
Provision for income taxes from continuing operations |
(553 | ) | (553 | ) | (1,105 | ) | (1,105 | ) | ||||||||
(Loss) income from continuing operations |
1,539 | 1,322 | (124 | ) | (306 | ) | ||||||||||
Loss from operations of discontinued businesses
(net of tax) (E) |
(151 | ) | (142 | ) | (204 | ) | (199 | ) | ||||||||
Gain (loss) on sale of discontinued businesses
(net of tax) (E) |
(3,200 | ) | (3,200 | ) | (2,175 | ) | (2,175 | ) | ||||||||
Loss before cumulative effect of a change in
accounting principle |
(1,812 | ) | (2,020 | ) | (2,503 | ) | (2,680 | ) | ||||||||
Cumulative effect of a change in accounting
principle (net of tax) |
— | — | — | — | ||||||||||||
Net loss |
(1,812 | ) | (2,020 | ) | (2,503 | ) | (2,680 | ) | ||||||||
Payment-in-kind of dividends on convertible
preferred stock |
— | — | — | — | ||||||||||||
Net loss attributable to common stockholders |
$ | (1,812 | ) | $ | (2,020 | ) | $ | (2,503 | ) | $ | (2,680 | ) | ||||
Loss per share of common stock — Basic and diluted |
||||||||||||||||
(Loss) income from continuing operations attributable
to common stockholders |
$ | 0.19 | $ | 0.17 | $ | (0.01 | ) | $ | (0.04 | ) | ||||||
Discontinued operations (net of tax) |
(0.42 | ) | (0.42 | ) | (0.30 | ) | (0.30 | ) | ||||||||
Cumulative effect of a change in accounting principle |
— | — | — | — | ||||||||||||
Net loss attributable to common stockholders |
$ | (0.23 | ) | $ | (0.25 | ) | $ | (0.31 | ) | $ | (0.34 | ) | ||||
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Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Amounts in thousands, except per share data)
| 2005 | ||||||||||||||||
| 1st Qtr | 2nd Qtr | |||||||||||||||
| Previously | Previously | |||||||||||||||
| reported | Revised | reported | Revised | |||||||||||||
Net sales |
$ | 86,511 | $ | 86,511 | $ | 90,048 | $ | 90,048 | ||||||||
Cost of goods sold (A)(D) |
77,757 | 77,757 | 79,301 | 79,301 | ||||||||||||
Gross profit |
8,754 | 8,754 | 10,747 | 10,747 | ||||||||||||
Selling, general and administrative expenses (B)(C) |
11,380 | 11,763 | 14,858 | 14,858 | ||||||||||||
Impairments of goodwill |
— | — | — | — | ||||||||||||
Impairments of other long-lived assets |
— | — | — | — | ||||||||||||
Severance, restructuring and related charges |
172 | 172 | 466 | 466 | ||||||||||||
Loss (gain) on sale of assets |
186 | 186 | (352 | ) | (352 | ) | ||||||||||
Operating (loss) income |
(2,984 | ) | (3,367 | ) | (4,225 | ) | (4,225 | ) | ||||||||
Equity in income of equity method investment |
— | — | — | — | ||||||||||||
Interest expense (E) |
(1,224 | ) | (1,264 | ) | (1,350 | ) | (1,392 | ) | ||||||||
Other, net |
(46 | ) | (46 | ) | 34 | 34 | ||||||||||
(Loss) income from continuing operations before
provision for income taxes |
(4,254 | ) | (4,677 | ) | (5,541 | ) | (5,583 | ) | ||||||||
Provision for income taxes from continuing operations |
(329 | ) | (329 | ) | (89 | ) | (89 | ) | ||||||||
(Loss) income from continuing operations |
(4,583 | ) | (5,006 | ) | (5,630 | ) | (5,672 | ) | ||||||||
Loss from operations of discontinued businesses
(net of tax) (E) |
(65 | ) | (25 | ) | (416 | ) | (374 | ) | ||||||||
(Loss) income before cumulative effect of a change in
accounting principle |
(4,648 | ) | (5,031 | ) | (6,046 | ) | (6,046 | ) | ||||||||
Cumulative effect of a change in accounting
principle (net of tax) |
— | — | — | — | ||||||||||||
Net (loss) income |
(4,648 | ) | (5,031 | ) | (6,046 | ) | (6,046 | ) | ||||||||
Payment-in-kind of dividends on convertible
preferred stock |
— | — | — | — | ||||||||||||
Net (loss) income attributable to common stockholders |
$ | (4,648 | ) | $ | (5,031 | ) | $ | (6,046 | ) | $ | (6,046 | ) | ||||
(Loss) income per share of common stock — Basic and diluted |
||||||||||||||||
(Loss) income from continuing operations attributable
to common stockholders |
$ | (0.58 | ) | $ | (0.63 | ) | $ | (0.71 | ) | $ | (0.71 | ) | ||||
Discontinued operations (net of tax) |
(0.01 | ) | (0.00 | ) | (0.05 | ) | (0.05 | ) | ||||||||
Cumulative effect of a change in accounting principle |
— | — | — | — | ||||||||||||
Net (loss) income attributable to common stockholders |
$ | (0.59 | ) | $ | (0.63 | ) | $ | (0.76 | ) | $ | (0.76 | ) | ||||
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Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Amounts in thousands, except per share data)
| 2005 | ||||||||||||||||
| 3rd Qtr | 4th Qtr | |||||||||||||||
| Previously | Previously | |||||||||||||||
| reported | Revised | reported | Restated | |||||||||||||
Net sales |
$ | 133,165 | $ | 133,165 | $ | 113,666 | $ | 113,666 | ||||||||
Cost of goods sold (A)(D) |
116,402 | 116,402 | 99,255 | 99,461 | ||||||||||||
Gross profit |
16,763 | 16,763 | 14,411 | 14,205 | ||||||||||||
Selling, general and administrative expenses (B)(C) |
12,820 | 12,820 | 13,257 | 13,308 | ||||||||||||
Impairments of goodwill |
— | — | 1,574 | 1,574 | ||||||||||||
Impairments of other long-lived assets |
— | — | 538 | 538 | ||||||||||||
Severance, restructuring and related charges |
254 | 254 | 198 | 198 | ||||||||||||
Loss (gain) on sale of assets |
(176 | ) | (176 | ) | (35 | ) | (35 | ) | ||||||||
Operating (loss) income |
3,865 | 3,865 | (1,121 | ) | (1,378 | ) | ||||||||||
Equity in income of equity method investment |
— | — | 600 | 600 | ||||||||||||
Interest expense (E) |
(1,457 | ) | (1,487 | ) | (1,539 | ) | (1,570 | ) | ||||||||
Other, net |
215 | 215 | 4 | 4 | ||||||||||||
(Loss) income from continuing operations before
provision for income taxes |
2,623 | 2,593 | (2,056 | ) | (2,344 | ) | ||||||||||
Provision for income taxes from continuing operations |
(304 | ) | (304 | ) | (886 | ) | (886 | ) | ||||||||
(Loss) income from continuing operations |
2,319 | 2,289 | (2,942 | ) | (3,230 | ) | ||||||||||
Loss from operations of discontinued businesses
(net of tax) (E) |
(986 | ) | (956 | ) | (854 | ) | (823 | ) | ||||||||
(Loss) income before cumulative effect of a change in
accounting principle |
1,333 | 1,333 | (3,796 | ) | (4,053 | ) | ||||||||||
Cumulative effect of a change in accounting
principle (net of tax) |
— | — | — | — | ||||||||||||
Net (loss) income |
1,333 | 1,333 | (3,796 | ) | (4,053 | ) | ||||||||||
Payment-in-kind of dividends on convertible
preferred stock |
— | — | — | — | ||||||||||||
Net (loss) income attributable to common stockholders |
$ | 1,333 | $ | 1,333 | $ | (3,796 | ) | $ | (4,053 | ) | ||||||
(Loss) income per share of common stock — Basic and diluted |
||||||||||||||||
(Loss) income from continuing operations attributable
to common stockholders |
$ | 0.29 | $ | 0.29 | $ | (0.37 | ) | $ | (0.41 | ) | ||||||
Discontinued operations (net of tax) |
(0.12 | ) | (0.12 | ) | (0.11 | ) | (0.10 | ) | ||||||||
Cumulative effect of a change in accounting principle |
— | — | — | — | ||||||||||||
Net (loss) income attributable to common stockholders |
$ | 0.17 | $ | 0.17 | $ | (0.48 | ) | $ | (0.51 | ) | ||||||
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Consolidated Balance Sheets
(Amounts in thousands)
(Amounts in thousands)
| March 31, 2006 | ||||||||
| Previously | ||||||||
| Assets | reported | Restated | ||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 3,001 | $ | 3,001 | ||||
Trade accounts receivable, net |
46,503 | 46,503 | ||||||
Inventories, net |
67,960 | 67,608 | ||||||
Other current assets |
3,822 | 3,822 | ||||||
Asset held for sale |
— | — | ||||||
Total current assets |
121,286 | 120,934 | ||||||
OTHER ASSETS: |
||||||||
Goodwill |
665 | 665 | ||||||
Intangibles, net |
6,827 | 6,827 | ||||||
Other |
8,605 | 8,414 | ||||||
Total other assets |
16,097 | 15,906 | ||||||
Property and equipment, net |
56,157 | 56,157 | ||||||
Total assets |
$ | 193,540 | $ | 192,997 | ||||
Liabilities and Stockholders’ Equity |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 27,379 | $ | 27,379 | ||||
Accrued compensation |
3,714 | 3,714 | ||||||
Accrued expenses |
36,482 | 36,482 | ||||||
Current maturities, long-term debt |
2,857 | 2,857 | ||||||
Revolving credit agreement |
50,477 | 50,477 | ||||||
Total current liabilities |
120,909 | 120,909 | ||||||
LONG-TERM DEBT, less current maturities |
12,143 | 12,143 | ||||||
OTHER LIABILITIES |
10,642 | 10,642 | ||||||
Total liabilities |
143,694 | 143,694 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 18 and 21) |
— | — | ||||||
STOCKHOLDERS’ EQUITY |
||||||||
15% Convertible preferred stock, $100 par value, authorized |
||||||||
1,200,000 shares, issued and outstanding 1,131,551
shares, liquidation value $113,155 |
108,256 | 108,256 | ||||||
Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,304 shares |
9,822 | 9,822 | ||||||
Additional paid-in capital |
26,829 | 26,880 | ||||||
Accumulated other comprehensive income |
3,167 | 3,167 | ||||||
Accumulated deficit |
(76,206 | ) | (76,800 | ) | ||||
Treasury stock, at cost |
(22,022 | ) | (22,022 | ) | ||||
Total stockholders’ equity |
49,846 | 49,303 | ||||||
Total liabilities and stockholders’ equity |
$ | 193,540 | $ | 192,997 | ||||
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Consolidated Balance Sheets
(Amounts in thousands)
(Amounts in thousands)
| June 30, 2006 | ||||||||
| Previously | ||||||||
| Assets | reported | Restated | ||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 4,565 | $ | 4,565 | ||||
Trade accounts receivable, net |
54,102 | 54,102 | ||||||
Inventories, net |
57,522 | 56,927 | ||||||
Other current assets |
3,653 | 3,653 | ||||||
Asset held for sale |
— | — | ||||||
Total current assets |
119,842 | 119,247 | ||||||
OTHER ASSETS: |
||||||||
Goodwill |
665 | 665 | ||||||
Intangibles, net |
6,563 | 6,563 | ||||||
Other |
9,706 | 9,706 | ||||||
Total other assets |
16,934 | 16,934 | ||||||
Property and equipment, net |
53,604 | 53,604 | ||||||
Total assets |
$ | 190,380 | $ | 189,785 | ||||
Liabilities and Stockholders’ Equity |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 28,714 | $ | 28,714 | ||||
Accrued compensation |
3,583 | 3,583 | ||||||
Accrued expenses |
38,208 | 38,208 | ||||||
Current maturities, long-term debt |
2,857 | 2,857 | ||||||
Revolving credit agreement |
49,056 | 49,056 | ||||||
Total current liabilities |
122,418 | 122,418 | ||||||
LONG-TERM DEBT, less current maturities |
10,248 | 10,248 | ||||||
OTHER LIABILITIES |
8,764 | 8,764 | ||||||
Total liabilities |
141,430 | 141,430 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 18 and 21) |
— | — | ||||||
STOCKHOLDERS’ EQUITY |
||||||||
15% Convertible preferred stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 1,131,551
shares, liquidation value $113,155 |
108,256 | 108,256 | ||||||
Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,304 shares |
9,822 | 9,822 | ||||||
Additional paid-in capital |
26,969 | 27,020 | ||||||
Accumulated other comprehensive income |
4,045 | 4,045 | ||||||
Accumulated deficit |
(78,088 | ) | (78,734 | ) | ||||
Treasury stock, at cost |
(22,054 | ) | (22,054 | ) | ||||
Total stockholders’ equity |
48,950 | 48,355 | ||||||
Total liabilities and stockholders’ equity |
$ | 190,380 | $ | 189,785 | ||||
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Consolidated Balance Sheets
(Amounts in thousands)
(Amounts in thousands)
| September 30, 2006 | ||||||||
| Previously | ||||||||
| Assets | reported | Restated | ||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 4,117 | $ | 4,117 | ||||
Trade accounts receivable, net |
66,966 | 66,966 | ||||||
Inventories, net |
60,247 | 59,444 | ||||||
Other current assets |
4,376 | 4,376 | ||||||
Asset held for sale |
12,152 | 12,152 | ||||||
Total current assets |
147,858 | 147,055 | ||||||
OTHER ASSETS: |
||||||||
Goodwill |
665 | 665 | ||||||
Intangibles, net |
6,481 | 6,481 | ||||||
Other |
9,253 | 9,253 | ||||||
Total other assets |
16,399 | 16,399 | ||||||
Property and equipment, net |
42,436 | 42,436 | ||||||
Total assets |
$ | 206,693 | $ | 205,890 | ||||
Liabilities and Stockholders’ Equity |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 42,936 | $ | 42,936 | ||||
Accrued compensation |
4,008 | 4,008 | ||||||
Accrued expenses |
38,659 | 38,659 | ||||||
Current maturities, long-term debt |
2,857 | 2,857 | ||||||
Revolving credit agreement |
49,729 | 49,729 | ||||||
| 3,434 | 3,434 | |||||||
Total current liabilities |
141,623 | 141,623 | ||||||
LONG-TERM DEBT, less current maturities |
9,510 | 9,510 | ||||||
OTHER LIABILITIES |
9,012 | 9,012 | ||||||
Total liabilities |
160,145 | 160,145 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 18 and 21) |
— | — | ||||||
STOCKHOLDERS’ EQUITY |
||||||||
15% Convertible preferred stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 1,131,551
shares, liquidation value $113,155 |
108,256 | 108,256 | ||||||
Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,304 shares |
9,822 | 9,822 | ||||||
Additional paid-in capital |
26,968 | 27,019 | ||||||
Accumulated other comprehensive income |
3,362 | 3,362 | ||||||
Accumulated deficit |
(79,900 | ) | (80,754 | ) | ||||
Treasury stock, at cost |
(21,960 | ) | (21,960 | ) | ||||
Total stockholders’ equity |
46,548 | 45,745 | ||||||
Total liabilities and stockholders’ equity |
$ | 206,693 | $ | 205,890 | ||||
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A summary of the restatement and out-of-period adjustments and revisions and their
corresponding impact on (loss) income from continuing operations are as follows:
| 2006 Quarters | 2006 Fiscal | |||||||||||||||||||
| 1st | 2nd | 3rd | 4th | Year | ||||||||||||||||
(Loss) income from continuing operations |
||||||||||||||||||||
As previously reported |
$ | (4,615 | ) | $ | (1,684 | ) | $ | 1,539 | $ | (124 | ) | $ | (4,884 | ) | ||||||
Inventory restatement (A) |
(146 | ) | (243 | ) | (208 | ) | (41 | ) | (638 | ) | ||||||||||
Deferred compensation (C) |
192 | 191 | — | — | 383 | |||||||||||||||
Inventory reserves (D) |
— | — | — | (136 | ) | (136 | ) | |||||||||||||
Revision of SESCO (E) |
(31 | ) | 531 | (9 | ) | (5 | ) | 486 | ||||||||||||
As restated |
$ | (4,600 | ) | $ | (1,205 | ) | $ | 1,322 | $ | (306 | ) | $ | (4,789 | ) | ||||||
| 2005 Quarters | 2005 Fiscal | |||||||||||||||||||
| 1st | 2nd | 3rd | 4th | Year | ||||||||||||||||
(Loss) income from continuing operations |
||||||||||||||||||||
As previously reported |
$ | (4,583 | ) | $ | (5,630 | ) | $ | 2,319 | $ | (2,942 | ) | $ | (10,836 | ) | ||||||
Inventory restatement (A) |
— | — | — | (206 | ) | (206 | ) | |||||||||||||
Accelerated vesting of stock options (B) |
— | — | — | (51 | ) | (51 | ) | |||||||||||||
Deferred compensation (C) |
(383 | ) | — | — | — | (383 | ) | |||||||||||||
Revision of SESCO (E) |
(40 | ) | (42 | ) | (30 | ) | (31 | ) | (143 | ) | ||||||||||
As restated |
$ | (5,006 | ) | $ | (5,672 | ) | $ | 2,289 | $ | (3,230 | ) | $ | (11,619 | ) | ||||||
| (A) | The Company recorded an adjustment to raw material inventory and costs of goods sold as
it related to an overstatement of raw material inventory when completing physical
inventories. |
|
| (B) | The Company recorded non-cash compensation expense and corresponding impact to
additional paid in capital related to stock options which would have not otherwise vested
but for an accelerated vesting. |
|
| (C) | The Company recorded an adjustment to compensation expense and other assets associated
with a retirement compensation program. |
|
| (D) | The Company recorded an adjustment to inventory and costs of goods sold associated with
our lower of cost or market valuation. |
|
| (E) | The Company previously inappropriately reported the results of the SESCO operation as
discontinued operations. The financial information was revised to reflect SESCO within
continuing operations. |
See Note 2 for further discussion of these adjustments from the restatement of prior financial
information. The restatement did not affect net cash used in operating activities, net cash used
in investing activities and net cash provided by financing activities in 2006 and 2005.
During 2005, the Company recorded the following quarterly pre-tax charges for severance,
restructuring and related charges and impairments of long-lived assets:
| 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | |||||||||||||
Severance, restructuring and related charges |
$ | 172 | $ | 466 | $ | 254 | $ | 198 | ||||||||
Impairments of long-lived assets |
$ | — | $ | — | $ | — | $ | 2,112 | ||||||||
In the fourth quarter of 2005, the Company determined that certain items previously
classified as severance, restructuring and related charges during the first three quarters of 2005
of $1.1 million should have been classified as costs of goods sold ($0.7 million) and selling,
general and administrative expenses ($0.4 million). These misclassifications did not impact the
Company’s reported net income (loss), income (loss) from continuing operations or cash flows from
operations. Additionally, the impact to the Company’s reported gross profit in these quarters was
not significant. The amounts presented in the quarterly information above have been reclassified
to reflect the correct treatment for these costs throughout the year.
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The sum of basic and diluted loss (earnings) per share of common stock does not total to the
basic and diluted loss per share reported in the Consolidated Statements of Operations or Note 9
due to the fluctuation of shares outstanding throughout the years ending December 31, 2006 and
2005.
Note 22. SUPPLEMENTAL BALANCE SHEET INFORMATION
The following table provides detail regarding other assets shown on the Consolidated Balance
Sheets:
| As Restated, see Note 2 | ||||||||
| December 31, | ||||||||
| 2006 | 2005 | |||||||
Debt issuance costs, net |
$ | 2,885 | $ | 3,750 | ||||
Equity method investment in unconsolidated
affiliate |
2,217 | 2,217 | ||||||
Rabbi trust assets |
1,455 | 838 | ||||||
Notes receivable — sale of business |
1,200 | — | ||||||
Other |
1,233 | 1,455 | ||||||
Total |
$ | 8,990 | $ | 8,260 | ||||
The following table provides detail regarding accrued expenses shown on the Consolidated
Balance Sheets:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
Contingent liabilities |
$ | 15,705 | $ | 15,413 | ||||
Advertising and rebates |
11,594 | 11,979 | ||||||
Accrued income taxes |
1,649 | 775 | ||||||
Commissions |
1,215 | 1,118 | ||||||
Professional services |
847 | 644 | ||||||
Accrued SARs |
567 | — | ||||||
Non-cancelable lease liabilities — restructuring |
428 | 837 | ||||||
SESCO note payable to Montenay |
400 | 1,100 | ||||||
Other restructuring |
— | 117 | ||||||
Other |
5,782 | 5,730 | ||||||
Total |
$ | 38,187 | $ | 37,713 | ||||
Contingent liabilities consist of accruals for estimated losses associated with environmental
issues, the uninsured portion of general and product liability and workers’ compensation claims,
and a purchase price adjustment associated with the purchase of a subsidiary.
The following table provides detail regarding other liabilities shown on the Consolidated
Balance Sheets:
| December 31, | ||||||||
| 2006 | 2005 | |||||||
Pension and postretirement benefits |
$ | 3,763 | $ | 2,475 | ||||
Deferred compensation |
2,983 | 3,552 | ||||||
Non-cancelable lease liabilities — restructuring |
703 | 1,941 | ||||||
SESCO note payable to Montenay |
— | 1,487 | ||||||
Other |
953 | 1,042 | ||||||
Total |
$ | 8,402 | $ | 10,497 | ||||
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Note 23. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest and income taxes is as follows:
| Years Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Interest |
$ | 5,486 | $ | 3,953 | $ | 2,411 | ||||||
Income taxes |
$ | 1,067 | $ | 1,789 | $ | 759 | ||||||
A significant non-cash transaction for 2006 includes the $1.2 million promissory note
received as part of the sale of the Metal Truck Box business unit. See Note 6 for further
discussion.
A significant non-cash transaction for 2005 includes $2.0 million of non-cash compensation
expense related to C. Michael Jacobi, former President and Chief Executive Officer. Under the
Chief Executive Officer’s Plan, Mr. Jacobi was granted 978,572 stock options. Mr. Jacobi was also
granted 71,428 stock options under the Company’s 1997 Incentive Plan. Upon Mr. Jacobi’s
retirement in May 2005, all but 300,000 of these options were cancelled. All of the remaining
options are under the 2001 Chief Executive Officer’s Plan. The Company recognized $2.0 million of
non-cash compensation expense related to his 1,050,000 options using the intrinsic method of
accounting under APB 25, because he would not have otherwise vested in these options but for the
March 2004 accelerated vesting.
A significant non-cash transaction for 2004 includes the accrual of PIK dividends on the
Convertible Preferred Stock of $14.7 million. The PIK dividends are recorded at fair value. In
this case, each convertible preferred share is translated to its common equivalent (16.6667 common
shares per each convertible preferred share) and multiplied by $6.00, which is the value of each
common share equivalent given the proceeds from the issuance of the Convertible Preferred Stock.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
| (a) | Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our filings with the Securities and Exchange Commission (“SEC”) is
reported within the time periods specified in the SEC’s rules, and that such information is
accumulated and communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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 were not effective at the
reasonable assurance level because of the identification of material weaknesses in our internal
control over financial reporting described further below.
In the second quarter of 2007, management of the Company noted discrepancies in its physical
raw material inventory levels and the corresponding perpetual inventory records. These
discrepancies led the Company to initiate an internal investigation which resulted in the
identification of errors in the physical inventory count of raw material used for valuation
purposes at one of the Company’s wholly-owned subsidiaries.
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When management became aware of the issues referenced above, the Company, including the Audit
Committee, initiated an investigation of the matter. Management has discussed the investigation,
the resolution of the problems and the strengthening of internal controls with the Audit Committee.
Based on the results of the investigation, management and the Audit Committee determined that
(a) the errors were caused by intentional acts of a CCP employee who improperly accounted for
physical quantity of raw material inventory and who has since been dismissed; (b) the scope of the
errors were contained in fiscal 2005, fiscal 2006 and the three months ended March 31, 2007; and
(c) the errors were concentrated in the area discussed above.
In connection with the Company’s evaluation of the restatement described above, management has
concluded that the restatement is the result of previously unidentified material weaknesses in the
Company’s internal control over financial reporting. A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim consolidated financial statements will not be
prevented or detected.
The Company believes the above errors resulted from the following material weaknesses in
internal control over financial reporting:
| • | The Company did not maintain a proper level of segregation of duties, specifically the
verification process of physical raw material inventory on hand and the operational
handling of this inventory; and |
| • | The Company did not maintain sufficient oversight of the raw material inventory counting
and reconciliation process. |
As discussed below, these control deficiencies resulted in the restatement of the Company’s
consolidated financial statements for December 31, 2005 and 2006, March 31, 2006 and 2007, June 30,
2006, and September 30, 2006. Additionally, these control deficiencies could result in further
misstatements to inventory and cost of goods sold, which could result in a material misstatement to
the annual or interim consolidated financial statements that could not be prevented or detected.
Accordingly, management determined that these control deficiencies represented material weaknesses
in internal control over financial reporting.
Remediation of Material Weaknesses
The Company has undertaken the following steps during the second and third quarters of 2007 to
address the above material weaknesses within our internal controls over physical counting of
inventory:
| • | Completed a full resin physical inventory by independent employees not involved in the
operational handling and reporting of resin inventory; |
| • | Completed a full comparison of the physical resin inventory to the general ledger and
recorded the appropriate adjustment; |
| • | Verified the automated measurement systems with third parties as well as the physical
observation of the resin inventory by independent employees; |
| • | Initiated weekly physical counts of resin inventory and completed a comparison to the
perpetual inventory system for any differences with any significant differences
investigated by management. We will continue to perform these weekly physical counts until
management believes the process and related controls are operating as designed; and |
| • | Reviewed and adjusted, as necessary, procedures and personnel involved in the physical
inventory counting of resin. |
Management and the Board of Directors are committed to the remediation and continued
improvement of our internal control over financial reporting. We have dedicated and will continue
to dedicate significant resources to this remediation effort and believe that we have made
significant progress in reestablishing effective internal controls over financial reporting
associated with the above raw material inventory counting process.
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| (b) | Change in Internal Controls |
There have been no changes in Katy’s internal control over financial reporting during the
quarter ended December 31, 2006 that has materially affected, or is reasonably likely to
materially affect Katy’s internal control over financial reporting.
Other
Matters
Glit — Inventory
As noted in our Annual Report on Form 10-K for the year ended December 31, 2004, our Glit
facility in Wrens, Georgia lacks a perpetual inventory system and relies on quarterly physicals to
value inventory. Throughout 2004, we adjusted our material cost of sales estimate (for preparation
of non-quarter-end interim financial statements) to reflect rising material cost of sales.
Also during 2004 and 2005, the Wrens facility experienced significant personnel turnover,
consolidation of other operations (consistent with our strategy of consolidating our abrasives
operations into the Wrens facility), and manufacturing disruption events such as the production
interruption caused by the air handling system fire in October 2004. Management determined that
key inventory processes, such as receiving, production reporting, scrap, and shipping, required
improvement.
The following is a summary of the specific actions that have been taken to correct the
internal control deficiencies and related status as of December 31, 2006:
| • | Implementation of short term corrective actions in shipping and receiving —
Revised shipping, receiving, physical inventory, period end cut-off and returned goods
procedures have been issued. Training to reinforce the importance of the physical
verification was provided to all appropriate material handlers. Products loaded for
shipment are now verified against system generated bill of ladings. A receiving log
was implemented in the first quarter of 2005 and is reviewed at least weekly by the
distribution manager. |
| • | Establishment of improved interim recording of raw material usage — The
shop floor module in PRMS (the facility’s ERP system) was activated on July 1, 2005.
Large raw material variances continue to be reviewed and/or isolated by work order to
allow bill of material (“BOM”) corrections as required. Miscellaneous inventory
transactions are being downloaded and reviewed at least weekly by cost accounting. In
2005, a supplemental system was also re-implemented to allow the daily review of costed
non-woven production runs to identify process or material variances. The output of
this system yields a daily cost per yard of non-woven material produced, as well as an
average cost per yard over multiple batches/runs. This information was used as a
reference point and allowed material cost verifications with PRMS formula BOMs. During
the third quarter of 2006, the Company discontinued the supplemental system given the
higher level of accuracy being obtained from the shop floor module in PRMS. |
| • | Reestablishment of a monthly physical inventory until the PRMS perpetual
inventory process is re-implemented — This location’s monthly physical inventory
was reinstituted for the February 2005 accounting close. We continue taking a monthly
physical inventory throughout 2005 and 2006. Over the past year, overall accuracy,
based on inventory value, continues to significantly improve. |
| • | Establishment of security measures to mitigate the risk of theft — All
employees were issued parking permits to help identify on-site traffic of
non-employees. A security camera system was installed and became operational in June
2005. Cameras provide monitoring of key plant areas by both security personnel and key
managers. |
| • | Improvement in bill of material and routing accuracy — In July 2005, a BOM
accuracy project was completed which encompassed the review of the most significant
BOMs across all product lines. Efforts are now ongoing to review remaining BOMs,
prioritizing based on sales volumes and comparative analysis with other BOMs of like
material/sizes. All remaining significant BOMs, based on volume levels, were updated
by February 1, 2006. |
| • | Proper staffing and planning of PRMS re-implementation — The PRMS
re-implementation was completed at the end of July 2005. The Material Planning and
Scheduling module of PRMS was completed in the fourth quarter of 2005. The total
re-implementation was facilitated by a consultant with expertise with both PRMS and ERP
system implementation across varied industries. |
| • | Establishment of procedures for production reporting and inventory
transactions — Detailed procedures for reporting of production in PRMS have been
issued. The implementation of scanning for inventory transactions was completed in
August and documented procedures were completed in September, 2005. Any additional
procedures will be finalized and documented when they are validated. |
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| • | Activation of PRMS production and inventory system — The system was fully
activated on February 1, 2006 which allows the accumulation and reporting of
transactions, maintenance of perpetual inventory records, and the calculation of
standard cost and related variances. The system will continue to operate in parallel
with the monthly physical inventory until all significant variances will be identified
and corrected. |
We believe that we have made significant progress in the items noted above. With the
implementation of PRMS production and inventory system and the other internal controls implemented,
we can conclude the Company can rely on the adequacy of inventory controls (without the monthly
physical inventory counts) at the Wrens, Georgia facility as of December 31, 2006.
Item 9B. OTHER INFORMATION
None.
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Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the directors of Katy is incorporated herein by reference to
the information set forth under the section entitled “Election of Directors” in the Proxy Statement
of Katy Industries, Inc. for its 2007 Annual Meeting.
Information regarding executive officers of Katy is incorporated herein by reference to the
information set forth under the section entitled “Information Concerning Directors and Executive
Officers” in the Proxy Statement of Katy Industries, Inc. for its 2007 Annual Meeting.
Information regarding compliance with Section 16 of the Securities Exchange Act of
1934 is incorporated herein by reference to the information set forth under the Section entitled
“Section 16(a) Beneficial Ownership Reporting Compliance” for its 2007 Annual Meeting.
Information regarding Katy’s Code of Ethics is incorporated herein by reference to the
information set forth under the Section entitled “Code of Ethics” in the Proxy Statement of Katy
Industries, Inc. for its 2007 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers is incorporated herein by reference
to the information set forth under the section entitled “Executive Compensation” in the Proxy
Statement of Katy Industries, Inc. for its 2007 Annual Meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information regarding beneficial ownership of stock by certain beneficial owners and by
management of Katy is incorporated by reference to the information set forth under the section
“Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” in the
Proxy Statement of Katy Industries, Inc. for its 2007 Annual Meeting.
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Equity Compensation Plan Information
The following table represents information as of December 31, 2006 with respect to
equity compensation plans under which shares of the Company’s common stock are authorized for
issuance:
| Number of Securities | ||||||||||||
| Remaining Available for | ||||||||||||
| Number of Securities to | Weighted-average | Future Issuances Under Equity | ||||||||||
| Be Issued on Exercise of | Exercise Price of | Compensation Plans | ||||||||||
| Outstanding Option, | Outstanding Options, | (Excluding Securities | ||||||||||
| Plan Category | Warrants and Rights | Warrants and Rights | Reflected in Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
Equity Compensation
Plans Approved by
Stockholders |
753,173 | $ | 4.92 | 721,748 | ||||||||
Equity Compensation
Plans Not Approved
by
Stockholders |
1,763,108 | $ | 3.56 | — | ||||||||
Total |
2,516,281 | 721,748 | ||||||||||
Equity Compensation Plans Not Approved by Stockholders
On June 28, 2001, the Company entered into an employment agreement with C. Michael Jacobi,
President and Chief Executive Officer. To induce Mr. Jacobi to enter into the employment
agreement, on June 28, 2001, the Compensation Committee of the Board of Directors approved the Katy
Industries, Inc. 2001 Chief Executive Officer’s Plan. Under this plan, Mr. Jacobi was granted
978,572 stock options. Pursuant to approval by the Katy Board of Directors, the stock options
granted to Mr. Jacobi under this plan were vested in March 2004. Upon Mr. Jacobi’s retirement in
May 2005, all but 300,000 of these options were cancelled.
On September 4, 2001, the Company entered into an employment agreement with Amir Rosenthal,
Vice President, Chief Financial Officer, General Counsel and Secretary. To induce Mr. Rosenthal to
enter into the employment agreement, on September 4, 2001, the Compensation Committee of the Board
of Directors approved the Katy Industries, Inc. 2001 Chief Financial Officer’s Plan. Under this
plan, Mr. Rosenthal was granted 123,077 stock options. Pursuant to approval by the Katy Board of
Directors, the stock options granted to Mr. Rosenthal under this plan were vested in March 2004.
On November 21, 2002, the Board of Directors approved the 2002 Stock Appreciation Rights Plan
(the “2002 SAR Plan”), authorizing the issuance of up to 1,000,000 stock appreciation rights
(“SARs”). Vesting of the SARs occurs ratably over three years from the date of issue. The 2002
SAR Plan provides limitations on redemption by holders, specifying that no more than 50% of the
cumulative number of vested SARs held by an employee could be exercised in any one calendar year.
The SARs expire ten years from the date of issue. The Board approved grants on November 22, 2002,
of 717,175 SARs to 60 individuals with an exercise price of $3.15, which equaled the market price
of Katy’s stock on the grant date. In addition, 50,000 SARs were granted to four individuals
during 2003 and 275,000 SARs were granted to fifteen individuals during 2004. No SARs were
granted in 2005. In 2006, 20,000 SARs were granted to one individual with an exercise price of
$3.16. In addition in 2006, 2,000 SARs each were granted to three directors with a Stand-Alone
Stock Appreciation Rights Agreement. These 6,000 SARs each vest immediately and have an exercise
price of $2.08. At December 31, 2006, Katy had 598,281 SARs outstanding at a weighted average
exercise price of $4.18. Compensation income associated with the vesting of stock appreciation
rights was $0.9 million and $0.1 million in 2005 and 2004, respectively. The 2002 SAR Plan also
provides that in the event of a Change in Control of the Company, all outstanding SARs may become
fully vested. In accordance with the 2002 SAR Plan, a “Change in Control” is deemed to have
occurred upon any of the following events: 1) a sale of 100 percent of the Company’s outstanding
capital stock, as may be outstanding from time to time; 2) a sale of all or substantially all of
the Company’s operating subsidiaries or assets; or 3) a transaction or series of transactions in
which any third party acquires an equity ownership in the Company greater than that held by KKTY
Holding Company, L.L.C. and in which Kohlberg & Co., L.L.C. relinquishes its right to nominate a
majority of the candidates for election to the Board of Directors.
On June 1, 2005, the Company entered into an employment agreement with Anthony T. Castor III,
President and Chief Executive Officer. To induce Mr. Castor to enter into the employment
agreement, on July 15, 2005, the Compensation Committee of the Board of Directors approved the Katy Industries, Inc. 2005 Chief Executive
Officer’s Plan. Under this plan, Mr. Castor was granted 750,000 stock options.
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions with
management is incorporated herein by reference to the information set forth under the section
entitled “Executive Compensation” in the Proxy Statement of Katy Industries, Inc. for its 2007
Annual Meeting.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accountant fees and services is incorporated herein by
reference to the information set forth under the section entitled “Proposal 2 — Ratification of
the Independent Public Auditors” in the Proxy Statement of Katy Industries, Inc. for its 2007
Annual Meeting.
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Part IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | 1. Financial Statements |
The following financial statements of Katy are set forth in Part II, Item 8, of this Form
10-K/A Amendment No. 1:
| - Consolidated Balance Sheets as of December 31, 2006 and 2005 | ||
| - Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 | ||
| - Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004 | ||
| - Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 | ||
| - Notes to Consolidated Financial Statements |
2. Financial Statement Schedules
The financial statement schedule filed with this report is listed on the “Index to
Financial Statement Schedules” on page 98 of this Form 10-K/A Amendment No. 1.
3. Exhibits
The exhibits filed with this report are listed on the “Exhibit Index.”
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 17, 2007
|
KATY INDUSTRIES, INC. | |
| Registrant |
/S/ Anthony T. Castor III
Anthony T. Castor III
President and Chief Executive Officer
Anthony T. Castor III
President and Chief Executive Officer
/S/ Amir Rosenthal
Amir Rosenthal
Vice President, Chief Financial Officer,
General Counsel and Secretary
Amir Rosenthal
Vice President, Chief Financial Officer,
General Counsel and Secretary
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Table of Contents
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm |
99 | |||
Schedule II — Valuation and Qualifying
Accounts |
100 | |||
Consent of Independent Registered Public Accounting Firm |
Exhibit 23 |
All other schedules are omitted because they are not applicable, or not required, or because the
required information is included in the Consolidated Financial Statements of Katy or the Notes
thereto.
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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Katy Industries, Inc.:
Our audits of the consolidated financial statements referred to in our report dated March 16, 2007,
except for the restatement described in Note 2 to the consolidated financial statements as to which
the date is August 17, 2007, appearing in the 2006 Annual Report to Shareholders of Katy
Industries, Inc. (which report and consolidated financial statements are incorporated by reference
in this Annual Report on Form 10-K/A) also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K/A. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 16, 2007, except for the restatement described in Note 2 to the consolidated financial statements as to which the date is August 17, 2007
March 16, 2007, except for the restatement described in Note 2 to the consolidated financial statements as to which the date is August 17, 2007
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KATY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts in Thousands)
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Amounts in Thousands)
| Balance at | Additions | Balance at | ||||||||||||||||||
| Beginning | Charged to | Write-offs | Other | End | ||||||||||||||||
| Accounts Receivable Reserves | of Year | Expense | to Reserves | Adjustments | of Year | |||||||||||||||
Year ended December 31, 2006 |
||||||||||||||||||||
Trade receivables |
$ | 2,445 | $ | 3,008 | $ | (3,188 | ) | $ | (52 | ) | $ | 2,213 | ||||||||
Sales allowances |
14,071 | 32,413 | (27,855 | ) | (736 | ) | 17,893 | |||||||||||||
| $ | 16,516 | $ | 35,421 | $ | (31,043 | ) | $ | (788 | ) | $ | 20,106 | |||||||||
Year ended December 31, 2005 |
||||||||||||||||||||
Trade receivables |
$ | 2,827 | $ | 3,283 | $ | (3,663 | ) | $ | (2 | ) | $ | 2,445 | ||||||||
Sales allowances |
14,571 | 31,768 | (32,575 | ) | 307 | 14,071 | ||||||||||||||
| $ | 17,398 | $ | 35,051 | $ | (36,238 | ) | $ | 305 | $ | 16,516 | ||||||||||
Year ended December 31, 2004 |
||||||||||||||||||||
Trade receivables |
$ | 3,029 | $ | 3,096 | $ | (2,985 | ) | $ | (313 | ) | $ | 2,827 | ||||||||
Long-term notes receivable |
105 | 250 | (355 | ) | — | — | ||||||||||||||
Sales allowances |
11,355 | 31,955 | (28,791 | ) | 52 | 14,571 | ||||||||||||||
| $ | 14,489 | $ | 35,301 | $ | (32,131 | ) | $ | (261 | ) | $ | 17,398 | |||||||||
| Balance at | Additions | Balance at | ||||||||||||||||||
| Beginning | Charged to | Write-offs | Other | End | ||||||||||||||||
| Inventory Reserves | of Year | Expense | to Reserves | Adjustments | of Year | |||||||||||||||
Year ended December 31, 2006 |
$ | 4,548 | $ | 1,115 | $ | (1,239 | ) | $ | (519 | ) | $ | 3,905 | * | |||||||
Year ended December 31, 2005 |
$ | 4,671 | $ | 952 | $ | (1,043 | ) | $ | (32 | ) | $ | 4,548 | ||||||||
Year ended December 31, 2004 |
$ | 5,630 | $ | 1,727 | $ | (2,766 | ) | $ | 80 | $ | 4,671 | |||||||||
| Balance at | Balance at | |||||||||||||||||||
| Beginning | Other | End | ||||||||||||||||||
| Income Tax Valuation Allowances | of Year | Provision | Reversals | Adjustments | of Year | |||||||||||||||
Year ended December 31, 2006 |
$ | 64,794 | $ | 2,177 | $ | — | $ | — | $ | 66,971 | * | |||||||||
Year ended December 31, 2005 |
$ | 60,028 | $ | 4,766 | $ | — | $ | — | $ | 64,794 | * | |||||||||
Year ended December 31, 2004 |
$ | 46,171 | $ | 13,857 | $ | — | $ | — | $ | 60,028 | ||||||||||
| * | As Restated, see Note 2 |
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KATY INDUSTRIES, INC.
EXHIBIT INDEX
DECEMBER 31, 2006
EXHIBIT INDEX
DECEMBER 31, 2006
| Exhibit | ||||||
| Number | Exhibit Title | Page | ||||
2
|
Preferred Stock Purchase and Recapitalization Agreement, dated as of June 2, 2001 (incorporated by reference to Annex B to the Company’s Proxy Statement on Schedule 14A filed June 8, 2001). | * | ||||
3.1
|
The Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K on July 13, 2001). | * | ||||
3.2
|
The By-laws of the Company, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed May 15, 2001). | * | ||||
4.1
|
Rights Agreement dated as of January 13, 1995 between Katy and Harris Trust and Savings Bank as Rights Agent (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-A filed January 17, 1995). | * | ||||
4.1a
|
First Amendment to Rights Agreement, dated as of October 30, 1996, between Katy and Harris Trust and Savings Bank as Rights Agent (incorporated by reference to Exhibit 4.1(a) of the Company’s Quarterly Report on Form 10-Q filed August 9, 2006). | * | ||||
4.1b
|
Second Amendment to Rights Agreement, dated as of January 8, 1999, between Katy and LaSalle National Bank as Rights Agent (incorporated by reference to Exhibit 4.1(b) of the Company’s Annual Report on Form 10-K filed March 18, 1999). | * | ||||
4.1c
|
Third Amendment to Rights Agreement, dated as of March 30, 2001, between Katy and LaSalle Bank, N.A. as Rights Agent (incorporated by reference to Exhibit (e) (3) to the Company’s Solicitation/Recommendation Statement on Schedule 14D-9 filed April 25, 2001). | * | ||||
4.1d
|
Forth Amendment to Rights Agreement, dated as of June 2, 2001, between Katy and LaSalle Bank N.A. as Rights Agent (incorporated by reference to Exhibit 4.1(d) of the Company’s Quarterly Report on Form 10-Q filed August 9, 2006). | * | ||||
10.1
|
Amended and Restated Katy Industries, Inc. 1995 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed August 9, 2006). | * | ||||
10.2
|
Katy Industries, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Katy’s Registration Statement on Form S-8 filed June 21, 1995). | * | ||||
10.3
|
Katy Industries, Inc. Supplemental Retirement and Deferral Plan effective as of June 1, 1995 (incorporated by reference to Exhibit 10.4 to Company’s Annual Report on Form 10-K filed April 1, 1996). | * | ||||
10.4
|
Katy Industries, Inc. Directors’ Deferred Compensation Plan effective as of June 1, 1995 (incorporated by reference to Exhibit 10.5 to Company’s Annual Report on Form 10-K filed April 1, 1996). | * | ||||
10.5
|
Employment Agreement dated as of June 1, 2005 between Anthony T. Castor III and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 15, 2005). | * | ||||
10.6
|
Katy Industries, Inc. 2005 Chief Executive Officer’s Plan (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed August 15, 2005). | * | ||||
10.7
|
Employment Agreement dated as of September 1, 2001 between Amir Rosenthal and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q dated November 14, 2001). | * | ||||
10.8
|
Amendment dated as of October 1, 2004 to the Employment Agreement dated as of September 1, 2001 between Amir Rosenthal and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q dated November 10, 2004). | * | ||||
10.9
|
Katy Industries, Inc. 2001 Chief Financial Officer’s Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q dated November 14, 2001). | * | ||||
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| Exhibit | ||||||
| Number | Exhibit Title | Page | ||||
10.10
|
Katy Industries, Inc. 2002 Stock Appreciation Rights Plan, dated November 21, 2002, (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K dated April 15, 2003). | * | ||||
10.11
|
Katy Industries, Inc. Executive Bonus Plan dated December 2001 (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K dated April 15, 2005). | * | ||||
10.12
|
Amended and Restated Loan Agreement dated as of April 20, 2004 with Fleet Capital Corporation, (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q dated May 10, 2004). | * | ||||
10.13
|
First Amendment to Amended and Restated Loan Agreement dated as of June 29, 2004 with Fleet Capital Corporation, (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q dated August 16, 2004). | * | ||||
10.14
|
Second Amendment to Amended and Restated Loan Agreement dated as of March 29, 2005 with Fleet Capital Corporation (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed April 1, 2005). | * | ||||
10.15
|
Third Amendment to Amended and Restated Loan Agreement dated as of April 13, 2005 with Fleet Capital Corporation (incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K dated April 15, 2005). | * | ||||
10.16
|
Fourth Amendment to Amended and Restated Loan Agreement dated as of June 8, 2005 with Fleet Capital Corporation (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q dated August 15, 2005). | * | ||||
10.17
|
Fifth Amendment to Amended and Restated Loan Agreement dated as of August 4, 2005 with Fleet Capital Corporation (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q dated August 15, 2005). | * | ||||
10.18
|
Sixth Amendment to Amended and Restated Loan Agreement dated as of March 9, 2006 with Bank of America, N.A. (incorporated by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K dated March 31, 2006). | * | ||||
10.19
|
Seventh Amendment to Amended and Restated Loan Agreement dated as of November 27, 2006 with Bank of America, N.A. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed November 28, 2006). | * | ||||
10.20
|
Eighth Amendment to Amended and Restated Loan Agreement dated as of March 8, 2007 with Bank of America, N.A. (incorporate by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 12, 2007). | * | ||||
10.21
|
ISDA Master Agreement and Schedule dated as of August 11, 2005, between Bank of America, N.A. and Katy Industries, Inc. and Transaction Confirmation dated as of August 16, 2005 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q dated November 15, 2005). | * | ||||
10.22
|
Amended and Restated Katy Industries, Inc. 1997 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.20 of the Company’s Quarterly Report on Form 10-Q filed August 9, 2006). | * | ||||
10.23
|
Stand-Alone Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed September 6, 2006). | * | ||||
21
|
Subsidiaries of registrant | ** | ||||
23
|
Consent of Independent Registered Public Accounting Firm | ** | ||||
31.1
|
CEO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ** | ||||
31.2
|
CFO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ** | ||||
32.1
|
CEO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | **# | ||||
32.2
|
CFO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | **# | ||||
| * | Indicates incorporated by reference. |
|
| ** | Indicates filed herewith. |
|
| # | These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C.
1350, and are not being filed for purposes of Section 18 of the Securities and Exchange Act of
1934, as amended, and are not to be incorporated by reference into any filing of Katy Industries,
Inc. whether made before or after the date hereof, regardless of any general incorporation language
in such filing. |
102