Filed by Bowne Pure Compliance
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For the fiscal year ended: December 31, 2007
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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)
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Delaware
(State or other jurisdiction of
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75-1277589
(IRS Employer Identification No.) |
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| 2461 South Clark Street, Suite 630, Arlington, Virginia
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22202 |
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(Zip Code) |
Registrant’s telephone number, including area code: (703) 236-4300
Securities registered pursuant to Section 12(b) of the Act:
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(Title of each class)
Common Stock, $1.00 par value
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(Name of each exchange on which registered)
OTC Bulletin Board
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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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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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 OTC Bulletin Board on June 30, 2007),
as of June 30, 2007 was $6,237,764. As of February 29, 2008, 7,951,176 shares of common stock,
$1.00 par value, were outstanding, the only class of the registrant’s common stock.
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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 2008 annual meeting — Part III.
PART I
Item 1. BUSINESS
Katy Industries, Inc. (“Katy” or the “Company”) was organized as a Delaware corporation in
1967. Our principal business is the manufacturing and distribution of commercial cleaning
products. We also manufacture and distribute storage products. The Company’s business units
operate within a framework of policies and goals aligned under a corporate group. Katy’s
corporate group is responsible for overall planning, financial management, acquisitions,
dispositions, and other related administrative matters.
Operations
Selected operating data for our only reporting unit, Maintenance Products
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 reporting unit.
The Maintenance Products Group’s principal business is the manufacturing and
distribution of commercial cleaning products. We also manufacture and distribute storage
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. Storage products are primarily sold through major home improvement and mass market
retail outlets. Total revenues and operating income for the Maintenance Products Group during
2007 were $187.8 million and $0.6 million, respectively. The group accounted for all of the
Company’s continuing revenues in 2007. Total assets for the group were $85.1 million at December
31, 2007. See Note 17 to the Consolidated Financial Statements of Katy included in Part II, Item 8
for a reconciliation of the operating amounts to the consolidated amounts.
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, Wilen, CCP Canada and Gemtex. CCP is headquartered in Bridgeton, Missouri near St.
Louis, has additional operations in California, Georgia and Canada, and was created mainly for the
purpose of simplifying our business transactions and improving our customer relationships by
allowing customers to order products from various CCP divisions on one purchase order. Our
business units are:
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®. Contico® is a registered trademark used under license from
Contico Europe Limited.
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® and Contico Container brand names.
The CCP Canada business unit is a distributor of primarily plastic products for the
commercial and sanitary maintenance markets in Canada.
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 Gemtex business unit 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®.
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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®, Kleenfast®, Glit/Microtron®, Fiber Naturals®, Big Boss II®, Blue Ice
®, Brillo®,
BAB-O®, Old Dutch® and Twister™ brand names. 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.
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: Wilen®, Wax-o-matic® and Rototech®.
We have restructured many of our operations in order to maintain what we believe is 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 approximately
$3.6 million in restructuring expenses since the beginning of 2005. With leases expiring on
December 31, 2008 for our largest facility in Bridgeton, Missouri, the Company anticipates entering
into a new lease agreement which will utilize significantly less square footage in order to improve
the overhead cost structure. As a result, the Company anticipates incurring approximately $1.2
million in the non-cash write off of fixed assets for assets expected to be sold or abandoned in
2008. 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.
See Licenses, Patents and Trademarks below for further discussion regarding
the trademarks used by Katy companies.
Other Operations
Katy’s other operations included a 45% equity investment in a shrimp farming
operation in Nicaragua, Sahlman Holding Company, Inc. (“Sahlman”), and a 100% interest in Savannah
Energy Systems Company (“SESCO”), the limited partner in a waste-to-energy facility.
On December 20, 2007 the Company sold its equity investment in Sahlman for $3.0 million and
recorded a $0.8 million gain on the transaction as reflected within the equity in income of equity
method investment on the Consolidated Statements of Operations. See Note 6 to the Consolidated
Financial Statements of Katy included in Part II, Item 8.
On June 27, 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
$0.6 million within continuing operations in 2006 given the reduction in the face amount due to
Montenay as agreed upon in the original partnership interest purchase agreement. See Note 8 to the
Consolidated Financial Statements of Katy included in Part II, Item 8.
Discontinued Operations
Over the past two years, we identified and sold certain business units that we considered
non-core to the future operations of the Company. On November 30, 2007 we sold the Electrical
Products Group, which was comprised of the Woods Industries, Inc. (“Woods US”) and Woods
Industries (Canada), Inc. (“Woods Canada”) business units. The Electrical Products Group’s
principal business was the design and distribution of consumer electrical corded products.
Products were sold principally to national home improvement and mass merchant retailers in the
United States and Canada. The Electrical Products Group was sold for gross proceeds of
approximately $49.8 million, including amounts placed into escrow of $6.8 million. At December
31, 2007 we have approximately $7.7 million being held within escrow, which relates to the filing
of a foreign tax certificate and the sale of specific inventory. We have deferred gain
recognition of approximately $0.9 million of the escrow receivable as further steps were required
to realize these funds at December 31, 2007. We expect to receive approximately $7.1 million
during the first half of 2008 with the remaining funds being received during the last half of
2008. A gain (net of tax) of $1.3 million was recognized in 2007 in connection with this sale.
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The Contico Manufacturing, Ltd. (“CML”) business unit, 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., was sold on June 6, 2007 for gross
proceeds of approximately $10.6 million, including a receivable of $0.6 million associated with
final working capital levels. A gain (net of tax) of $7.1 million was recognized in 2007. CML
was formerly part of the Maintenance Products Group.
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 gross proceeds of approximately
$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. In 2007, the real estate assets associated with the business
unit were sold for $4.5 million, which resulted in a gain of approximately $1.9 million.
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 gross proceeds
of approximately $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.
Markets and Competition
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. We do not have one single customer that comprises greater than ten
percent of consolidated net sales.
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. We also market certain of our products to the construction trade, and resin
fiber disks and other abrasive disks to the OEM trade. 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 producer in this industry; however, our ability to remain a
low cost producer 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 to mass merchant and discount club
retailers in the U.S. and Canada. 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 become a
low cost producer in the industry is highly dependent on the price of our raw materials, primarily
thermoplastic 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
restructuring efforts. Our restructuring efforts have and will include consolidation of
facilities and headcount reductions.
Backlog
Our aggregate backlog position for the Maintenance Products Group was $6.3 million and $4.2
million as of December 31, 2007 and 2006, respectively. The orders placed in 2007 are believed to
be firm. Based on historical experience, substantially all orders are expected to be shipped
during 2008.
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Raw Materials
Our operations have not experienced significant difficulties in obtaining raw
materials, fuels, parts or supplies for their activities during the year ended December 31, 2007,
but no prediction can be made as to possible future supply problems or production disruptions
resulting from possible shortages. We are also subject to uncertainties involving labor relations
issues at entities involved in our supply chain, both at suppliers and in the transportation and
shipping area. Our Continental, Container 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. After a steady increase in 2005, prices of plastic
resins, such as polyethylene and polypropylene, have remained relatively stable on average in 2006
and the first half of 2007; however, prices did increase steadily over the last six months of
2007. 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. 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 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 2008 and beyond.
Employees
As of December 31, 2007, we employed 920 people, of which 283 were members of
various labor unions. Our labor relations are generally satisfactory and there have been no
strikes in recent years. In December 2007, one of our expiring union contracts was renewed for a
term of three years, covering approximately 201 employees. The next union contract set to expire,
covering approximately 82 employees, will expire in January, 2010. Our operations can also be
impacted by labor relations issues involving other entities within 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 2008, 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 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 Contico®; Continental®;
Glit®, Microtron®, Brillo®, and Kleenfast® (Glit); Wilen®; and Trim-Kut® (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 in the future.
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 with
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.
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Item 1A. RISK FACTORS
In addition to other information and risk disclosures contained in this report, we encourage
you to consider the risk factors discussed below 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 results 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 stock price has been, and likely will continue to be, volatile.
The market price of our common stock has experienced fluctuations and is likely to fluctuate
significantly in the future. Our stock price may fluctuate for a number of reasons, including:
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announcements concerning us or our competitors; |
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quarterly variations in operating results; |
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introduction or abandonment of new technologies or products; |
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divestiture or acquisition of business groups or units; |
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limited trading in our stock; |
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changes in product pricing policies; |
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changes in governmental regulations affecting us; and |
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changes in earnings estimates by analysts or changes in accounting policies. |
These potential factors, as well as general economic, political and market conditions, such as
armed hostilities, acts of terrorism, civil disturbances, recessions, international currency
fluctuations, or tariffs and other trade barriers, may materially and adversely affect the market
price of our common stock. In addition, stock markets have experienced significant price and
volume volatility in the past. This volatility has had a substantial effect on the market prices
of securities of many public companies for reasons frequently unrelated or disproportionate to the
operating performance of the specific companies. If these broad market fluctuations continue, they
may adversely affect the market price of our common stock.
Our common stock is quoted on the OTC Bulletin Board, which may have an unfavorable impact on our
stock price and liquidity.
Our common stock is quoted on the OTC Bulletin Board under the ticker symbol “KATY.” The OTC
Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less
liquidity than the New York Stock Exchange. Quotes for stocks included on the OTC Bulletin Board
are not listed in the financial sections of newspapers as are those for the New York Stock
Exchange. Therefore, prices for securities traded solely on the OTC Bulletin Board may be
difficult to obtain and holders of our
common stock may be unable to resell their securities at or near their original offering price or
at any price. The quotation of our shares on the OTC Bulletin Board may result in a less liquid
market available for existing and potential stockholders to trade shares of our common stock, could
depress the trading price of our common stock and could have a long-term adverse impact on our
ability to raise capital in the future.
We are dependent upon a continuous supply of raw materials from third party suppliers and would be
harmed by a significant, prolonged disruption in supply.
Our reliance on foreign suppliers and commodity markets to secure thermoplastic resins and
other 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. There is no assurance that we
could obtain the required raw materials from other sources on as favorable terms. As a result, any
significant delay in or disruption of the supply of our raw materials or commodities could have an
adverse affect on our ability to meet our commitments to our customers, substantially increase our
cost of materials, require product reformulation or require qualification of new suppliers, any of
which could materially adversely affect our business, results of operations or financial condition.
We believe that our supply management practices are based on an appropriate balancing of the
foreseeable risks and the costs of alternative practices and, although we do not anticipate any
loss of our supply sources, the unavailability of some raw materials, should it occur, may have an
adverse effect on our results of operations and financial condition.
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Price increases in raw materials could adversely affect our operating results and financial
condition.
The prices for certain raw materials used in our operations, specifically thermoplastic resin,
have demonstrated volatility over the past few years. The volatility of resin prices is expected
to continue and may be affected by numerous factors beyond our control, including domestic and
international economic conditions, labor costs, the price of oil production levels, competition,
import duties and tariffs and currency exchange rates. We attempt to reduce our exposure to
increases in those costs through a variety of programs, including opportunistic buying of product
in the spot market, entering into contracts with suppliers, and seeking substitute materials.
However, there can be no assurance that we will be able to offset increased raw material costs
through price increases and there may be a delay from quarter to quarter between the timing of raw
material cost increases and price increases on our products. If we are unable to offset increased
raw material costs, our production costs may increase and our margins may decrease, which may have
a material adverse effect on our results of operations.
Fluctuations in the price, quality and availability of certain portions of our finished goods due
to greater reliance on third party suppliers could negatively impact our results of operations.
Because we are dependent on third party 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 and
our ability to maintain close, mutually beneficial relationships with our third party suppliers is
important to the ongoing profitability of our business. Unfavorable fluctuations in the price,
quality and availability of these finished goods products could negatively affect our ability to
meet the demands of our customers and could result in a decrease in our sales and earnings.
Our inability to successfully execute our facility consolidation and acquisition integration plans
could adversely affect our business and results of operations.
During the past five years, we have consolidated several of our manufacturing, distribution
and office facilities. The success of these consolidations and any future acquisitions 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 future-acquired 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 entered into these organizational changes. Any of the foregoing could adversely affect
our business and results of operations.
Our inability to implement our strategy of continuously improving our productivity and streamlining
our operations could have an adverse effect on our financial condition and results of operations.
During the past five years, 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. We must
continuously improve our manufacturing efficiencies by the use of Lean Manufacturing and other
methods in order to reduce our overhead structure. In
addition, in the future we will need to develop efficiencies within the sourcing/purchasing and
administration areas of our operations. The plans and programs we may implement in the future for
the purpose of improving efficiencies may not be completed substantially as planned, may be more
costly to implement than expected and may not have the positive profit-enhancing impact
anticipated. In the event we are unable to continue to improve our productivity and streamline our
operations, our financial condition and results of operations may be harmed. In addition, over the
past two years we identified and sold certain business assets that we considered non-core to our
future operations for the purpose of increasing our financial condition. There is no assurance
that the sale of the assets will lead to increased profitability and our strategy of divestiture of
non-core assets may not be successful in the long-term.
Historically, we have had a high amount of debt, and the cost of servicing our debt may adversely
affect our liquidity and financial condition, limit our ability to grow and compete, and prevent us
from fulfilling our obligations under our indebtedness.
Historically, we have had a high amount of debt on which we are required to make interest and
principal payments. As of December 31, 2007, we had $13.5 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 indebtedness places significant demands on our cash resources, which may:
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make it more difficult for us to satisfy our outstanding debt obligations; |
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require us to dedicate a substantial portion or even all of our cash flow from
operations to payments on our debt, thereby reducing the amount of our cash flow
available for working capital, capital expenditures, acquisitions, and other general
corporate purposes; |
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increase the amount of interest expense that will have to pay because some of our
borrowings are at variable rates of interest, which, if increased, will result in higher
interest payments; |
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limit our flexibility in planning for, or reacting to, changes in our business and the
industries in which we compete; |
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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; |
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limit our ability to borrow additional funds; and |
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increase our vulnerability to existing and future adverse economic and industry
conditions. |
Our ability to make scheduled payments of principal or interest on our debt, or to refinance
such debt, will depend upon our future operating performance, which is subject to general economic
and competitive conditions and to financial, business and other factors, many of which we cannot
control. There can be no assurance that our business will continue to generate sufficient cash
flow from operations in the future to service our debt or meet our other cash needs. Should we
fail to generate sufficient cash flows from operations to service our debt, we may be required to
refinance all or a portion of our existing debt, sell assets at inopportune times or obtain
additional financing to meet our debt obligations and other cash needs. We cannot assure you that
any such refinancing, sale of assets or additional financing would be possible on terms and
conditions, including but not limited to the interest rate, which we would find acceptable.
We are obligated to comply with financial and other covenants in our debt agreements that could
restrict our operating activities, and the failure to comply with such covenants could result in
defaults that accelerate the payment under our debt.
The agreements relating to our outstanding debt, including our Second Amended and Restated
Loan with Bank of America, N.A. (the “Bank of America Credit Agreement”), contain a number of
restrictive covenants that limit our ability to, among other things:
| |
• |
|
make certain distributions, investments and other restricted payments; |
| |
• |
|
limit the ability of restricted subsidiaries to make payments to us; |
| |
• |
|
enter into transactions with affiliates; |
| |
• |
|
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, our credit facility requires us to maintain at least
$5.0 million in borrowing availability which represents our eligible collateral base less
outstanding borrowings and letters of credit. The borrowing availability requirement contained in
our credit facility may restrict our operations and our ability to fund capital expenditures,
operations and business opportunities in a normal manner. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Bank of America Credit Agreement” for
further discussion.
The failure to comply with the covenants contained in our debt agreements could subject us to
default remedies, including the acceleration of all or a substantial portion of our existing
indebtedness. As of December 31, 2007, we were in compliance with all such covenants. If we were
to breach any of our debt covenants and did not cure the breach within any applicable cure period,
our lenders could require us to repay the debt immediately, and, if the debt is secured, could
immediately begin proceedings to take possession of the property securing the loan. Some of our
debt arrangements contain cross-default provisions, which means that the lenders under those debt
arrangements can place us in default and require immediate repayment of their debt if we breach and
fail to cure a covenant under certain of our other debt obligations. As a result, any default
under our debt covenants could have an adverse effect on our financial condition, our results of
operations, our ability to meet our obligations and the market value of our shares.
9
Work stoppages or other labor issues at our facilities or those of our suppliers could adversely
affect our operations.
At December 31, 2007, we employed approximately 920 persons in our various businesses, of
which approximately 31% were subject to collective bargaining or similar arrangements. As a
result, we are subject to the risk of work stoppages and other labor-relations matters. These
collective bargaining agreements expire at various times. The next union contract set to expire,
covering approximately 82 employees, will expire in January 2010. If our union employees were to
engage in a strike, work stoppage or other slowdown, we could experience a significant disruption
of our operations or higher ongoing labor costs. We believe our relationships with our union
employees are good, but these relationships could deteriorate. Any failure by us to reach a new
agreement upon expiration of such union contracts may have a material adverse effect on our
business, results of operations, or financial condition. 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. If any of our suppliers experiences a material work
stoppage, that supplier may interrupt supply of our necessary production components. This could
cause a delay or reduction in our production facilities relating to these products, which could
have a material adverse effect on our business, results of operations, or financial condition.
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 are not aware of any assertions that our trademarks or tradenames infringe upon the
proprietary rights of third parties, but we cannot assure that third parties will not claim
infringement by us in the future. Any such claim, whether or not it has merit, could be
time-consuming, result in costly litigation, cause delays in introducing new products in the future
or require us to enter into royalty or licensing agreements. As a result, any such claim could
have a material adverse effect on our business, results of operations and financial condition.
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, a telecommunications failure, the failure of our
computer system or a computer virus or other interruption caused by weather, natural disasters or
any similar event could disrupt our operations and result in lost sales.
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 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. Our
competitive position in the markets in which we participate is, in part, subject to external
factors. For example, supply and demand for certain of our products is driven by end-use markets
and worldwide capacities which, in turn, impact demand for and pricing of our products. Many of
our direct competitors are part of large multi-national companies and may have more resources than
we do. Any increase in competition may result in lost market share or reduced prices, which could
result in reduced gross profit margins. This may impair our 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.
10
Failure to maintain effective internal control over financial reporting could have material adverse
effect on our business, results of operations, financial condition and stock price.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management
on internal control over financial reporting, including management’s assessment of the
effectiveness of such control. Changes to our business will necessitate ongoing changes to our
internal control systems and processes. Internal control over financial reporting may not prevent
or detect misstatements because of its inherent limitations, including the possibility of human
error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal
controls can provide only reasonable assurance with respect to the preparation and fair
presentation of financial statements. In addition, projections of any evaluation of effectiveness
of internal control over financial reporting to future periods are subject to the risk that the
control may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. If we fail to maintain the adequacy of our
internal controls, including any failure to implement required new or improved controls, or if we
experience difficulties in their implementation, our business, results of operations and financial
condition could be materially adversely harmed, we could fail to meet our reporting obligations and
there could be a material adverse effect on our stock price.
Changes in significant laws and government regulations affecting environmental compliance and
income taxes could adversely affect our business and results of operations.
We are subject to many environmental and safety regulations with respect to our operating
facilities that may result in unanticipated costs or liabilities. Most of our 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. We may incur substantial costs, including fines, damages and criminal penalties
or civil sanctions, or experience interruptions in our operations for actual or alleged violations
or compliance requirements arising under environmental laws. Our operations could result in
violations under environmental laws, including spills or other releases of hazardous substances to
the environment. Given the nature of our business, violations of environmental laws may result in
restrictions imposed on our operating activities or substantial fines, penalties, damages or other
costs, including costs as a result of private litigation. In addition, we 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 our operations.
Costs beyond those currently anticipated may be required under existing and future environmental
laws.
At any point in time, many of our 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.
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 our
defense. 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. We are currently a party to various lawsuits. See “Legal
Proceedings.”
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
11
Item 2. PROPERTIES
As of December 31, 2007, our total building floor area owned or leased was 2,022,000 square
feet, of which 185,000 square feet were owned and 1,837,000 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 |
|
Office, Manufacturing, Distribution |
|
Continental, Contico, Container |
Chino |
|
Distribution |
|
Continental, Contico, Glit, Wilen, Disco |
|
|
|
|
|
Georgia |
|
|
|
|
Atlanta |
|
Office, Manufacturing, Distribution |
|
Wilen |
McDonough |
|
Office, Manufacturing, Distribution |
|
Glit, Wilen, Disco |
Wrens* |
|
Office, Manufacturing, Distribution |
|
Glit |
Washington** |
|
Manufacturing |
|
Glit |
|
|
|
|
|
Missouri |
|
|
|
|
Bridgeton |
|
Office, Manufacturing, Distribution |
|
Continental, Contico |
Hazelwood |
|
Manufacturing |
|
Contico |
|
|
|
|
|
Virginia |
|
|
|
|
Arlington |
|
Corporate Headquarters |
|
Corporate |
|
|
|
|
|
CANADA |
|
|
|
|
Ontario |
|
|
|
|
Toronto |
|
Office, Manufacturing, Distribution |
|
Gemtex, CCP Canada |
|
|
|
| |
|
|
| |
| * |
|
Facility is owned. |
| |
| ** |
|
In 2007, we consolidated all of our abrasives operations in Washington, Georgia into our
Wrens, Georgia (“Wrens”) facility. The facility is currently available for sublease. |
These business units are all part of the Maintenance Products Group reportable segment at December
31, 2007. 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
2007.
12
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On April 9, 2007, the Company announced that the New York Stock Exchange (“NYSE”) intended to
suspend trading of the Company’s shares of common stock due to noncompliance with the continuing
listing standards of the NYSE. The Company did not meet the required market capitalization level
of $75.0 million over a consecutive thirty day trading period or the required total stockholders’
equity of not less than $75.0 million. The shares of Katy were suspended from trading on the NYSE
at the close of business on April 12, 2007. With the expectation that the NYSE would delist the
Company’s shares, the Company pursued conducting the trading of its shares on another exchange or
quotation system. On April 16, 2007, the Company announced that the OTC Bulletin Board (“OTCBB”)
began reporting trades of its common stock effective immediately, under the ticker symbol “KATY.”
The following table sets forth high and low sales prices for the common stock in composite
transactions as reported on the NYSE composite tape through April 12, 2007 and subsequently on the
OTCBB composite tape.
| |
|
|
|
|
|
|
|
|
| Period |
|
High |
|
|
Low |
|
2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
2.72 |
|
|
$ |
2.00 |
|
Second Quarter |
|
|
2.20 |
|
|
|
1.05 |
|
Third Quarter |
|
|
1.65 |
|
|
|
1.10 |
|
Fourth Quarter |
|
|
2.00 |
|
|
|
0.75 |
|
|
|
|
|
|
|
|
|
|
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 |
|
As of February 29, 2008, there were 562 holders of record of our common stock, in addition to
approximately 800 holders in street name, and there were 7,951,176 shares of common stock
outstanding.
Dividend Policy
Dividends are paid at the discretion of our 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, 2007 is set forth in Item 12, “Security Ownership of Certain
Beneficial Owners and Management.”
13
Share Repurchase Plan
On December 5, 2005, the Company announced the resumption of a 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. In 2007,
1,300 shares of common stock, none of which were completed in the fourth quarter, were repurchased
on the open market for $3.4 thousand. The following table sets forth the repurchases made under
this program:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Approximate |
|
| |
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Dollar Value |
|
| |
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
of 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 |
|
|
$0.9 million |
2006 |
|
|
40,800 |
|
|
$ |
2.71 |
|
|
|
40,800 |
|
|
|
|
|
2007 |
|
|
1,300 |
|
|
$ |
2.61 |
|
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
45,300 |
|
|
$ |
2.68 |
|
|
|
45,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: $1.0 million in shares announced
on December 5, 2005. This authorization does not have an expiration date.
14
Item 6. SELECTED FINANCIAL DATA
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
(Amounts in Thousands, except per share data and percentages) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
187,771 |
|
|
$ |
192,416 |
|
|
$ |
200,085 |
|
|
$ |
221,390 |
|
|
$ |
233,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loss from continuing operations [a] |
|
$ |
(13,881 |
) |
|
$ |
(8,661 |
) |
|
$ |
(22,466 |
) |
|
$ |
(48,595 |
) |
|
$ |
(26,306 |
) |
Discontinued operations [b] |
|
|
12,380 |
|
|
|
(2,962 |
) |
|
|
8,669 |
|
|
|
12,474 |
|
|
|
16,942 |
|
Cumulative effect of a change in accounting principle [b] [c] |
|
|
— |
|
|
|
(756 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(1,501 |
) |
|
|
(12,379 |
) |
|
|
(13,797 |
) |
|
|
(36,121 |
) |
|
|
(9,364 |
) |
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(1,501 |
) |
|
$ |
(12,379 |
) |
|
$ |
(13,797 |
) |
|
$ |
(50,870 |
) |
|
$ |
(15,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share of common stock — Basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to
common stockholders |
|
$ |
(1.75 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.83 |
) |
|
$ |
(8.03 |
) |
|
$ |
(3.96 |
) |
Discontinued operations |
|
|
1.56 |
|
|
|
(0.37 |
) |
|
|
1.09 |
|
|
|
1.58 |
|
|
|
2.06 |
|
Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
(0.09 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(0.19 |
) |
|
$ |
(1.55 |
) |
|
$ |
(1.74 |
) |
|
$ |
(6.45 |
) |
|
$ |
(1.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
98,564 |
|
|
$ |
182,694 |
|
|
$ |
212,094 |
|
|
$ |
224,464 |
|
|
$ |
241,708 |
|
Total liabilities |
|
|
62,108 |
|
|
|
140,662 |
|
|
|
157,390 |
|
|
|
155,879 |
|
|
|
139,416 |
|
Stockholders’ equity |
|
|
36,456 |
|
|
|
42,032 |
|
|
|
54,704 |
|
|
|
68,585 |
|
|
|
102,292 |
|
Long-term debt, including current maturities |
|
|
13,453 |
|
|
|
56,871 |
|
|
|
57,660 |
|
|
|
58,737 |
|
|
|
39,663 |
|
Impairments of long-lived assets [f] |
|
|
— |
|
|
|
— |
|
|
|
2,112 |
|
|
|
29,974 |
|
|
|
11,161 |
|
Severance, restructuring and related charges [f] |
|
|
2,581 |
|
|
|
17 |
|
|
|
956 |
|
|
|
2,621 |
|
|
|
5,949 |
|
Depreciation and amortization [f] |
|
|
7,294 |
|
|
|
7,628 |
|
|
|
7,699 |
|
|
|
10,779 |
|
|
|
17,599 |
|
Capital expenditures [f] |
|
|
4,403 |
|
|
|
3,733 |
|
|
|
8,210 |
|
|
|
9,773 |
|
|
|
10,181 |
|
Working capital [g] |
|
|
15,622 |
|
|
|
48,564 |
|
|
|
48,132 |
|
|
|
59,855 |
|
|
|
43,439 |
|
Ratio of debt to capitalization |
|
|
27.0 |
% |
|
|
57.5 |
% |
|
|
51.3 |
% |
|
|
46.1 |
% |
|
|
27.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — Basic and diluted |
|
|
7,951,231 |
|
|
|
7,966,742 |
|
|
|
7,948,749 |
|
|
|
7,883,265 |
|
|
|
8,214,712 |
|
Number of employees |
|
|
920 |
|
|
|
1,172 |
|
|
|
1,544 |
|
|
|
1,793 |
|
|
|
1,808 |
|
Cash dividends declared per common share |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
| |
|
|
| |
| [a] |
|
Includes distributions on preferred securities in 2003. |
| |
| [b] |
|
Presented net of tax. |
| |
| [c] |
|
This amount is stock compensation expense recorded with the adoption of Statement of Financial
Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. |
| |
| [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. |
15
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 Company’s raw material inventory records, management
and the Company’s Audit Committee determined on August 6, 2007 that the Company’s previously issued
consolidated financial statements for the years ended December 31, 2006 and 2005 should no longer
be relied upon. The Company’s decision to restate its consolidated financial statements was based
on facts obtained by management and the results of an independent investigation of the physical raw
material inventory counting process at CCP. These procedures resulted in the identification of the
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. The Company filed on August 17, 2007 an amended Annual Report on Form 10-K/A as of
December 31, 2006 and an amended Quarterly Report on Form 10-Q/A as of March 31, 2007 in order to
restate the consolidated financial statements. All amounts included in this Annual Report for the
above periods have been properly reflected for 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 one
reporting unit: Maintenance Products. Three businesses formerly included in the Maintenance
Products Group (CML, Metal Truck Box and CEL), and the Electrical Products reporting unit have
been classified as discontinued operations for the periods prior to their sale. These business
units were sold in 2007 and 2006.
The Company’s management has been focused on various restructuring and cost reduction
initiatives. The Company’s focus will be to improve revenue growth and reduce 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 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.
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”), which corresponds with changes in floor space in
buildings, hotels, schools, and airports. In addition, the commercial cleaning product market
should be favorably impacted 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 raw material 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.
Key elements in achieving profitability in the Maintenance Products Group include 1)
improving 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. Currently, the customer service and administrative functions for the CCP
divisions of Continental, Glit, Wilen, and Disco are performed 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 improves customer service in that our customers’
purchasing processes are simplified, as is follow up on order status, billing, collection and
other related functions. We believe that this increases customer loyalty, helps in attracting new
customers and leads to increased top line sales.
16
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Amounts in Millions, except per share data and percentages) |
|
| |
|
$ |
|
|
% to Sales |
|
|
$ |
|
|
% to Sales |
|
|
$ |
|
|
% to Sales |
|
Net sales |
|
$ |
187.8 |
|
|
|
100.0 |
|
|
$ |
192.4 |
|
|
|
100.0 |
|
|
$ |
200.1 |
|
|
|
100.0 |
|
Cost of goods sold |
|
|
167.5 |
|
|
|
89.2 |
|
|
|
167.3 |
|
|
|
87.0 |
|
|
|
185.7 |
|
|
|
92.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
20.3 |
|
|
|
10.8 |
|
|
|
25.1 |
|
|
|
13.0 |
|
|
|
14.4 |
|
|
|
7.2 |
|
Selling, general and administrative expenses |
|
|
26.0 |
|
|
|
(13.8 |
) |
|
|
30.5 |
|
|
|
(15.8 |
) |
|
|
35.4 |
|
|
|
(17.7 |
) |
Impairments of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.1 |
|
|
|
(1.1 |
) |
Severance, restructuring and related charges |
|
|
2.6 |
|
|
|
(1.4 |
) |
|
|
— |
|
|
|
(0.0 |
) |
|
|
1.0 |
|
|
|
(0.5 |
) |
Loss (gain) on sale of assets |
|
|
2.4 |
|
|
|
(1.3 |
) |
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(10.7 |
) |
|
|
(5.7 |
) |
|
|
(5.8 |
) |
|
|
(3.0 |
) |
|
|
(23.8 |
) |
|
|
(11.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investment |
|
|
0.8 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
Gain on SESCO joint venture transaction |
|
|
— |
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Interest expense |
|
|
(4.6 |
) |
|
|
|
|
|
|
(4.2 |
) |
|
|
|
|
|
|
(3.8 |
) |
|
|
|
|
Other, net |
|
|
(0.1 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before benefit from
income taxes |
|
|
(14.6 |
) |
|
|
|
|
|
|
(9.2 |
) |
|
|
|
|
|
|
(26.9 |
) |
|
|
|
|
Benefit from income taxes from continuing operations |
|
|
0.7 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(13.9 |
) |
|
|
|
|
|
|
(8.7 |
) |
|
|
|
|
|
|
(22.5 |
) |
|
|
|
|
Income from operations of discontinued businesses (net of tax) |
|
|
2.3 |
|
|
|
|
|
|
|
2.5 |
|
|
|
|
|
|
|
8.7 |
|
|
|
|
|
Gain (loss) on sale of discontinued businesses (net of tax) |
|
|
10.1 |
|
|
|
|
|
|
|
(5.4 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loss before cumulative effect of a change in accounting principle |
|
|
(1.5 |
) |
|
|
|
|
|
|
(11.6 |
) |
|
|
|
|
|
|
(13.8 |
) |
|
|
|
|
Cumulative effect of a change in accounting principle (net of tax) |
|
|
— |
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1.5 |
) |
|
|
|
|
|
$ |
(12.4 |
) |
|
|
|
|
|
$ |
(13.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share of common stock — Basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(1.75 |
) |
|
|
|
|
|
$ |
(1.09 |
) |
|
|
|
|
|
$ |
(2.83 |
) |
|
|
|
|
Discontinued operations (net of tax) |
|
|
1.56 |
|
|
|
|
|
|
|
(0.37 |
) |
|
|
|
|
|
|
1.09 |
|
|
|
|
|
Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
|
|
|
|
(0.09 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.19 |
) |
|
|
|
|
|
$ |
(1.55 |
) |
|
|
|
|
|
$ |
(1.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS OF OPERATIONS
2007 COMPARED TO 2006
Net sales from our only reporting segment, the Maintenance Products Group, decreased from
$192.4 million during the year ended December 31, 2006 to $187.8 million during the year ended
December 31, 2007, a decrease of 2.4%. Overall, this decline was primarily due to lower volume of
4.2% offset by higher pricing of 1.5% and favorable currency translation of 0.3%. Activity within
the business units selling into the janitorial markets as well as lower volume at our Glit business
unit due to reduced building industry activity were the primary reasons for the volume shortfall
for the year ended December 31, 2007.
Higher pricing resulted from the implementation of selling price increases across the
Maintenance Products Group, which took effect in the fourth quarter of 2006 and the first quarter
of 2007. The implementation of price increases was in response to the accelerating cost of our
primary raw materials, packaging materials, utilities and freight.
Gross margins were 10.8% in the year ended December 31, 2007, a decrease of 2.2 percentage
points from the year ended December 31, 2006. Margins were adversely impacted by lower volume and
production inefficiencies at our Glit business as well as an unfavorable variance in our LIFO
adjustment of $1.8 million primarily resulting from the addition of a current year incremental
layer and the change in resin prices. Selling, general and administrative expenses (“SG&A”) as a
percentage of sales were 13.8% in 2007 which is lower than 15.8% in 2006 as a result of lower
requirements under the Company’s incentive compensation program and self-insurance programs as well
as various cost improvements implemented in the past year.
17
Severance, Restructuring and Related Charges
Operating results for the year ended December 31, 2007 were adversely impacted by severance,
restructuring and related charges of $2.6 million. Charges in 2007 related to changes in lease
assumptions for the Hazelwood abandoned facility. In addition, the Company incurred severance,
restructuring and related charges with the closure of the Washington, Georgia facility. Upon
ceasing use of the facility, costs included the impairment of assets and other costs associated
with abandoning the facility. 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). Refer to further discussion on severance and restructuring charges on Page 23 and Note
19 to the Consolidated Financial Statements in Part II, Item 8.
Other
In 2007, the Company recognized $0.8 million in equity income from the Sahlman investment
compared to no net income being recognized in 2006. On December 20, 2007, the Company sold its
equity investment to Sahlman for $3.0 million, which resulted in a gain of $0.8 million being
reflected within the equity in income of equity method investment.
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
$0.6 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.
Interest expense increased by $0.4 million in 2007 versus 2006 primarily as a result of $0.9
million of debt issuance costs being written off due to entering into the Second Amended and
Restated Credit Agreement with Bank of America. This expense is partially offset by lower average
borrowings and interest rates. The benefit from income taxes for 2007 and 2006 reflects a benefit
of $0.8 million which offsets a tax provision reflected under discontinued operations for domestic
income taxes. The benefit from income taxes for 2007 also reflects state income and FIN 48
provisions of $0.1 million. The benefit from income taxes for 2006 also reflects state income tax
and miscellaneous tax provisions of $0.3 million.
With the sale of the Metal Truck Box, U.K. consumer plastics, CML, Woods US, and Woods Canada
business units over the past two years, all activity associated with these units is classified as
discontinued operations. Income from operations, net of tax, for these business units was
approximately $2.3 million in 2007 compared to income of $2.5 million in 2006. Gain on sale of
discontinued businesses in 2007 includes a gain of $8.4 million recorded for the sales of the CML,
Woods US and Woods Canada business units. Additionally, gains (losses) related to the U.K.
consumer plastics business unit were recorded in 2007 of $1.9 million for the separate sale of the
real estate assets and ($0.2) million as a result of finalizing the working capital adjustment.
Loss on sale of discontinued businesses in 2006 includes a $50 thousand loss on the sale of the
Metal Truck Box business unit, and a $5.4 million loss on the sale of the U.K. consumer plastics
business unit.
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”). Overall, we reported a net loss of
($1.5) million [($0.19) per share] for the year ended December 31, 2007, versus a net loss of
($12.4) million [($1.55) per share] in the same period of 2006.
2006 COMPARED TO 2005
Our net sales decreased from $200.1 million during the year ended December 31, 2005 to $192.4
million during the year ended December 31, 2006, a decrease of 3.9%. Overall, this decline was
primarily due to lower volume of 8.9% offset by higher pricing of 4.8% 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-than-typical number of major hurricanes in 2006.
18
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.
Gross margins were 13.0% in the year ended December 31, 2006, an increase of 5.8 percentage
points from the year ended December 31, 2005. Margins were positively impacted by improved
operating performance at our Glit business, higher pricing levels in 2006 as well as positive
impact from the liquidation of last-in, first-out inventory. Selling, general and administrative
expenses (“SG&A”) as a percentage of sales were 15.8% in 2006, which is lower than 17.7% in 2005
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.
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 $1.0 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
($0.1 million). Refer to further discussion on severance and restructuring charges on Page 23 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 $0.4
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
$0.6 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.
The benefit from income taxes for 2006 and 2005 reflects a benefit of $0.8 million and $4.5
million, respectively, which offsets a tax provision reflected under discontinued operations for
domestic income taxes. The benefit from income taxes for 2006 also reflects state income tax and
miscellaneous tax provisions of $0.3 million. The benefit from income taxes for 2005 also
reflects a state income tax provision of $0.1 million.
19
With the sale of the Metal Truck Box, U.K. consumer plastics, CML, Woods US, and Woods Canada
business units over the past two years, all activity associated with these units are classified as
discontinued operations. Income from operations, net of tax, for these business units was
approximately $2.5 million in 2006 compared to income of $8.7 million in 2005. Loss on sale of
discontinued businesses in 2006 includes a $50 thousand loss on the sale of the Metal Truck Box
business unit, and a $5.4 million loss on the sale of the U.K. consumer plastics business unit.
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”). Overall, we reported a net loss of
($12.4) million [($1.55) per share] for the year ended December 31, 2006, versus a net loss of
($13.8) million [($1.74) per share] in the same period of 2005.
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, 2007, we had cash and cash equivalents of $2.0 million versus cash and cash
equivalents of $7.4 million at December 31, 2006. Also as of December 31, 2007, we had outstanding
borrowings of $13.5 million [27% of
total capitalization], under the Bank of America Credit Agreement with unused borrowing
availability on the Revolving Credit Facility of $11.0 million. As of December 31, 2006, we had
outstanding borrowings of $56.9 million [58% of total capitalization] with unused borrowing
availability of $13.9 million. We used cash flow in operations of $10.1 million during the year
ended December 31, 2007 versus the $2.7 million provided by operations during the year ended
December 31, 2006. Cash flow from operations was lower in 2007 than 2006 primarily as a result of
lower operating earnings along with an increase in inventory levels.
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 November 30, 2007, Katy Industries, Inc. entered into the Second Amended and Restated
Credit Agreement with Bank of America (the “Bank of America Credit Agreement”). The Bank of
America Credit Agreement is a $50.6 million credit facility with a $10.6 million term loan (“Term
Loan”) and a $40.0 million revolving loan (“Revolving Credit Facility”), including a $10.0 million
sub-limit for letters of credit. The Bank of America Credit Agreement replaces the previous credit
agreement (“Previous Credit Agreement”) as originally entered into on April 20, 2004. The Bank of
America Credit Agreement is an asset-based lending agreement and only involves one bank compared to
a syndicate of four banks under the Previous Credit Agreement.
The Revolving Credit Facility has an expiration date of November 30, 2010 and its borrowing
base is determined by eligible inventory and accounts receivable. 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. 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 of the Company (65% of the capital stock of certain foreign
subsidiaries of the Company), and all present and future assets and properties of the Company.
The Company’s Term Loan balance immediately prior to the Bank of America Credit Agreement was
$10.0 million. The annual amortization on the new Term Loan, paid quarterly, will be $1.5 million,
beginning March 1, 2008, with final payment due November 30, 2010. The Term Loan is collateralized
by the Company’s property, plant and equipment.
The Bank of America Credit Agreement requires the Company to maintain a minimum level of
availability such that its eligible collateral must exceed the sum of its outstanding borrowings
under the Revolving Credit Facility and letters of credit by at least $5.0 million. 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 our casualty insurance programs. At December 31,
2007, total outstanding letters of credit were $6.0 million.
20
Borrowings under the Bank of America Credit Agreement will bear interest, at the Company’s
option, at either a rate equal to the bank’s base rate or LIBOR plus a margin based on levels of
borrowing availability. Interest rate margins for the Revolving Credit Facility under the
applicable LIBOR option will range from 2.00% to 2.50% on borrowing availability levels of $20.0
million to less than $10.0 million, respectively. For the Term Loan, interest rate margins under
the applicable LIBOR option will range from 2.25% to 2.75%. Financial covenants such as minimum
fixed charge coverage and leverage ratios are excluded from the Bank of America Credit Agreement.
If the Company is unable to comply with the terms of the agreement, it could seek to obtain an
amendment to the Bank of America Credit Agreement and pursue increased liquidity through additional
debt financing and/or the sale of assets. It is possible, however, the Company may not be able to
obtain further amendments from the lender or secure additional debt financing or liquidity through
the sale of assets on favorable terms or at all. However, the Company believes that it will be
able to comply with all covenants throughout 2008.
On April 20, 2004, the Company completed its Previous Credit Agreement which was a $93.0
million facility with a $13.0 million Term Loan and an $80.0 million Revolving Credit Facility.
The Previous Credit Agreement was amended eight times from April 20, 2004 to March 8, 2007 due to
various reasons such as declining profitability and timing of certain restructuring payments. The
amendments adjusted certain financial covenants such that the fixed charge coverage ratio and
consolidated leverage ratio were eliminated and a minimum availability was set. In addition, the
Company was limited on maximum allowable capital expenditures and was required to pay interest at
the highest level of interest rate margins set in the Previous Credit Agreement. On March 8, 2007,
the Company also reduced its revolving credit facility from $90.0 million to $80.0 million.
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 over the life of the agreement was 4.49%. The interest rate swap expired on August 17,
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,
2007. For the years ended December 31, 2007, 2006 and 2005, the Company had amortization of debt
issuance costs, included within interest expense, of $2.0 million, $1.2 million and $1.1 million,
respectively. Included in amortization of debt issuance costs in 2007 is approximately $0.6
million of debt issuance costs written off due to the reduction in the number of banks included in
the Bank of America Credit Agreement, and $0.3 million written off due to the reduction in the
Revolving Credit Facility on March 8, 2007. The Company incurred $0.2 million, $0.3 million and
$0.2 million associated with either entering into the Bank of America Credit Agreement or amending
the Previous Credit Agreement, as discussed above, for the years ended December 31, 2007, 2006 and
2005, respectively.
The Revolving Credit Facility under the Bank of America Credit Agreement requires lockbox
agreements which provide for all Company 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, will cause 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. The Company does not
expect to repay, or be required to repay, within one year, the balance of the Revolving Credit
Facility, which will be classified as a current liability. The MAE clause, which is a fairly
typical requirement in commercial credit agreements, allows the lender to require the loan to
become due if it determines there has been a material adverse effect on 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 November 30, 2010.
21
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, 2007, 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] |
|
$ |
2,853 |
|
|
$ |
2,853 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Term loans |
|
|
10,600 |
|
|
|
1,500 |
|
|
|
9,100 |
|
|
|
— |
|
|
|
— |
|
Interest on debt [b] |
|
|
2,159 |
|
|
|
842 |
|
|
|
1,317 |
|
|
|
— |
|
|
|
— |
|
Operating leases [c] |
|
|
12,495 |
|
|
|
6,324 |
|
|
|
4,651 |
|
|
|
1,210 |
|
|
|
310 |
|
Severance and restructuring [c] |
|
|
552 |
|
|
|
106 |
|
|
|
233 |
|
|
|
125 |
|
|
|
88 |
|
Postretirement benefits [d] |
|
|
4,839 |
|
|
|
668 |
|
|
|
1,223 |
|
|
|
845 |
|
|
|
2,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
$ |
33,498 |
|
|
$ |
12,293 |
|
|
$ |
16,524 |
|
|
$ |
2,180 |
|
|
$ |
2,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
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 |
|
$ |
423 |
|
|
$ |
423 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Stand-by letters of credit |
|
|
5,613 |
|
|
|
5,613 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Commitments |
|
$ |
6,036 |
|
|
$ |
6,036 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| [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 November of 2010. |
| |
| [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. The amount also
assumes the principal balance of the Revolving Credit Facility remains constant through its
expiration date of November 30, 2010 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
represent obligations associated with restructuring activities. The line entitled “Severance and
restructuring” represents the remaining obligations associated with restructuring activities, net
of the future non-cancelable lease rentals. The Consolidated Balance Sheets at December 31, 2007
and 2006, include $1.5 million and $1.0 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] |
|
Benefits consist of postretirement 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. |
The amounts presented in the table above may not necessarily reflect the actual future cash
funding requirements of the Company because the actual timing of the future payments made may vary
from the stated contractual obligation. In addition, due to the uncertainty with respect to the
timing of future cash flows associated with the Company’s unrecognized tax benefits at December 31,
2007, the Company is unable to make reasonably reliable estimates of the period of cash settlement
with the respective taxing authority. Therefore, $2.1 million of unrecognized tax benefits have
been excluded from the contractual obligations table above. See Note 14 to the Consolidated
Financial Statements in Part II, Item 8 for a discussion on income taxes.
Off-balance Sheet Arrangements
None.
22
Cash Flow
Liquidity was positively impacted during 2007 as a result of the proceeds from the sale of
discontinued businesses which offset funds used for working capital requirements, capital
expenditures and reduction of debt levels. We used $10.1 million of operating cash compared to
operating cash provided during 2006 of $2.7 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 used in operating activities before changes in operating assets and discontinued
operations was $2.0 million in 2007 versus cash provided of $1.2 million in 2006. 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, loss on the sale of assets and the equity
income from our equity method investment. We used $8.2 million of cash related to operating assets
and liabilities in 2007 compared to $1.7 million in cash being provided in 2006. Our operating
cash flow was impacted in 2007 by increased inventory levels of $5.3 million and reduction of
accrued expenses of $5.5 million. By the end of 2007, we were turning our inventory at 7.1 times
per year versus 6.9 times per year in 2006. Cash of $1.1 million and $2.4 million was used in 2007
and 2006, respectively, to satisfy severance, restructuring and related obligations.
Investing Activities
Capital expenditures from continuing operations totaled $4.4 million in 2007 as compared to
$3.7 million in 2006 as spending for capital-related restructuring activities and new property and
equipment continued to slow down as compared to 2005. In 2007, we sold the Woods US, Woods Canada
and CML business units, the real estate assets of the CEL business unit, and our equity investment
in Sahlman for $55.6 million, excluding any amounts still held in escrow or outstanding as of
December 31, 2007. In 2006, we sold the CEL and the Metal Truck Box business units for $4.7
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 2007 and 2006 for net proceeds from continuing operations of $0.2 million and $0.3
million, respectively. In 2007 and 2006, proceeds from dispositions were reduced by capital
expenditures of $0.4 million and $1.0 million, respectively, made by these businesses. In 2005, we
acquired substantially all of the assets and assumed certain liabilities of Washington
International Non-Wovens, LLC.
Financing Activities
Cash flows from financing activities in 2007 and 2006 reflect the reduction of our debt
obligations as cash provided by either operations or proceeds from the sale of businesses exceeded
the requirements from investing activities. Overall, debt decreased $43.4 million and $0.8 million
in 2007 and 2006, respectively. Direct debt costs, primarily associated with the debt
modifications and refinance transactions, totaled $0.2 million and $0.3 million in 2007 and 2006,
respectively. During 2007 and 2006, the Company acquired 1,300 and 40,800 shares of common stock
on the open market under the cost method for approximately $3.4 thousand and $0.1 million,
respectively. During 2005, 3,200 shares of common stock were repurchased on the open market for
approximately $7.5 thousand.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
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 2007, 2006 and
2005, which are included as a component of selling, general and administrative expense. We expect
to pay $0.5 million annually in future years.
SEVERANCE, RESTRUCTURING AND RELATED CHARGES
The Company has 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 and the consolidation of the Glit
facilities. These initiatives resulted from the on-going strategic reassessment of the Company’s
various businesses as well as the markets in which they operate.
23
A summary of charges (reductions) by major initiative is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Amounts in Thousands) |
|
Consolidation of Glit facilities |
|
$ |
1,699 |
|
|
$ |
299 |
|
|
$ |
724 |
|
Consolidation of St. Louis
manufacturing/distribution facilities |
|
|
882 |
|
|
|
(499 |
) |
|
|
39 |
|
Corporate office relocation |
|
|
— |
|
|
|
217 |
|
|
|
172 |
|
Consolidation of administrative functions for CCP |
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
Total severance, restructuring and related costs |
|
$ |
2,581 |
|
|
$ |
17 |
|
|
$ |
956 |
|
|
|
|
|
|
|
|
|
|
|
A rollforward of all restructuring reserves since December 31, 2005 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
One-time |
|
|
Contract |
|
|
|
|
| |
|
|
|
|
|
Termination |
|
|
Termination |
|
|
|
|
| |
|
Total |
|
|
Benefits [a] |
|
Costs [b] |
|
Other [c] |
Restructuring liabilities
at December 31, 2005 |
|
$ |
2,507 |
|
|
$ |
412 |
|
|
$ |
2,095 |
|
|
$ |
— |
|
Additions |
|
|
516 |
|
|
|
326 |
|
|
|
— |
|
|
|
190 |
|
Reductions |
|
|
(499 |
) |
|
|
— |
|
|
|
(499 |
) |
|
|
— |
|
Payments |
|
|
(2,054 |
) |
|
|
(738 |
) |
|
|
(1,126 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities
at December 31, 2006 |
|
$ |
470 |
|
|
$ |
— |
|
|
$ |
470 |
|
|
$ |
— |
|
Additions |
|
|
2,656 |
|
|
|
151 |
|
|
|
2,332 |
|
|
|
173 |
|
Reductions |
|
|
(75 |
) |
|
|
— |
|
|
|
(75 |
) |
|
|
— |
|
Payments |
|
|
(909 |
) |
|
|
(151 |
) |
|
|
(585 |
) |
|
|
(173 |
) |
Other |
|
|
(689 |
) |
|
|
— |
|
|
|
(689 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities
at December 31, 2007 |
|
$ |
1,453 |
|
|
$ |
— |
|
|
$ |
1,453 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| [a] |
|
Includes severance, benefits, and other employee-related costs associated with the employee
terminations. No obligations remain at December 31, 2007. |
| |
| [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 $3.1 million as of December 31, 2007. The Company has included $1.6 million as an
offset for sublease rentals. |
| |
| [c] |
|
Includes charges associated with equipment removal and cleanup of abandoned facilities. No
obligations remain at December 31, 2007. |
The remaining severance, restructuring and other related charges for these initiatives are
expected to be approximately $0.3 million, primarily related to the consolidation of the Glit
facilities program. With leases expiring on December 31, 2008 for our largest facility in
Bridgeton, Missouri, the Company anticipates entering into a new lease agreement which will utilize
significantly less square footage in order to improve the overhead cost structure. As a result,
the Company anticipates incurring approximately $1.2 million in the non-cash write off of fixed
assets for assets expected to be sold or abandoned in 2008.
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 2008
We experienced lower volume performance during 2007 in nearly all of the Maintenance Products
Group business units. This lower volume has been partially offset by the impact of price increases
made over the past two years. Given the
steady increase of resin and other raw materials pricing in the last six months of 2007, we
anticipate pricing levels to increase in 2008 to offset the impact of this cost increase. We
believe the Company will have volume improvements in most of our business units in 2008.
24
We believe that the significant quality, shipping and production issues present at our Glit
business unit over the past few years have been resolved. The Glit business unit improved its
quality level and has executed the consolidation of the Pineville, North Carolina and Washington,
Georgia operations into the Wrens, Georgia facility over the past two years. However, our
operating results of Glit will be highly dependent on the overall volume within the business unit
and the unit’s ability to improve productivity.
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, Container and Contico businesses. After a steady increase in 2005, prices of plastic
resins, such as polyethylene and polypropylene, have remained relatively stable on average in 2006
and the first half of 2007; however, prices did increase steadily over the last six months of
2007. 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. 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 within the past few years in the prices of
primary raw materials used in our products and inflation in other costs such as packaging
materials, utilities and freight. In a climate of rising raw material costs, we have experienced
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 beyond 2008.
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. We have and expect to continue 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. With leases expiring on December 31, 2008
for our largest facility in Bridgeton, Missouri, the Company anticipates entering into a new lease
agreement which will utilize significantly less square footage in order to improve the overhead
cost structure. As a result, the Company anticipates incurring approximately $1.2 million in the
non-cash write off of fixed assets for assets expected to be sold or abandoned in 2008.
SG&A expenses as a percentage of sales were lower in 2007 versus 2006 and should be lower as a
percentage of sales in 2008 primarily from cost improvements made in the past year. We will
continue to evaluate the possibility of further consolidation of administrative processes and other
SG&A expenses.
Interest rates dropped in 2007. Ultimately, we cannot predict the future levels of interest
rates. Under the Bank of America Credit Agreement the Company’s interest rate margins on all of
our outstanding borrowings and letters of credit are lower as of December 31, 2007 as compared to
the average level during 2007 given the completion of the Bank of America Credit Agreement on
November 30, 2007.
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
subsidiary, Glit/Gemtex, Ltd., a full valuation allowance on the net deferred tax asset position
was recorded at December 31, 2007 and 2006, and we do not expect to record the benefit of any
deferred tax assets that may be generated in 2008. We will continue to record current expense,
within continuing and discontinued operations, associated with foreign and state income taxes.
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. We expect to use cash flow in
2008 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.
The Company was in compliance with the covenants of the Bank of America Credit Agreement as of
December 31, 2007. The Bank of America Credit Agreement requires the Company to maintain a minimum
level of availability (eligible
collateral base less outstanding borrowings and letters of credit) such that its eligible
collateral must exceed the sum of its outstanding borrowings and letters of credit by at least $5.0
million.
25
If we are unable to comply with the terms of the Bank of America Credit Agreement, we could
seek to obtain 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
the Bank of America Credit Agreement throughout 2008. 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. However, the Company may not be able to secure liquidity
through the sale of assets on favorable terms or at all.
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:
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• |
|
Increases in the cost of, or in some cases continuation of, the current price levels
of thermoplastic resins, paper board packaging, and other raw materials. |
| |
| |
• |
|
Our inability to reduce product costs, including manufacturing, sourcing, freight, and other product costs. |
| |
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• |
|
Our inability to reduce administrative costs through consolidation of functions and systems improvements. |
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• |
|
Our inability to protect our intellectual property rights adequately. |
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• |
|
Our inability to reduce our raw materials costs. |
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• |
|
Our inability to grow our revenue. |
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• |
|
Our inability to achieve product price increases, especially as they relate to
potentially higher raw material costs. |
| |
| |
• |
|
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 controls 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.
26
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 – On January 1, 2006, the Company adopted SFAS No. 123R,
Share-Based Payment (“SFAS No. 123R”), using the modified prospective method. Under this method,
compensation cost recognized during the year ended December 31, 2007 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 and b) compensation cost for outstanding stock appreciation rights as of December
31, 2007 based on the December 31, 2007 fair value estimated in accordance with SFAS No. 123R.
Compensation cost recognized during the year ended December 31, 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 outstanding stock appreciation rights as of December 31, 2006
based on the December 31, 2006 fair value estimated in accordance with SFAS No. 123R.
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.
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 $1.4 million and $3.9 million, respectively, as of
December 31, 2007 and 2006. The change in reserve balances was due to the sale of the Electrical
Products business as described further in Note 7 to the Consolidated Financial Statements of Katy
included in Part II, Item 8. At December 31, 2006 our reserves excluding discontinued operations
were $1.6 million.
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 determined. 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.
27
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 in accordance with SFAS No. 144, which are
discussed in Notes 4 and 5 to the Consolidated Financial Statements in Part II, Item 8.
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, 2007, we had a valuation allowance of $66.3 million. During the year ended December 31, 2007,
we reduced the valuation allowance by $0.7 million. 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.
We also apply the interpretations prescribed by FASB Interpretation No. (“FIN”) 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”) in accounting for the uncertainty in income taxes
recognized in our Consolidated Financial Statements. FIN 48 provides guidance for the recognition
and measurement in financial statements for uncertain tax positions taken or expected to be taken
in a tax return. The evaluation of a tax position in accordance with FIN 48 is a two-step process,
the first step being recognition. We determine whether it is more-likely-than-not that a tax
position will be sustained upon tax examination, including resolution of any related appeals or
litigation, based on only the technical merits of the position. The technical merits of a tax
position derive from both statutory and judicial authority (legislation and statutes, legislative
intent, regulations, rulings, and case law) and their applicability to the facts and circumstances
of the tax position. If a tax position does not meet the more-likely-than-not recognition
threshold, the benefit of that position is not recognized in the financial statements. The second
step is measurement. A tax position that meets the more-likely-than-not recognition threshold is
measured to determine the amount of benefit to recognize in the financial statements. The tax
position is measured as the largest amount of benefit that is greater than 50 percent likely of
being realized upon ultimate resolution with a taxing authority.
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, 2007 are adequate and that the judgment applied is appropriate,
such estimated liabilities could differ materially from what will actually transpire in the future.
28
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 – We have initiated several cost
reduction and facility consolidation initiatives including, (1) the closure or consolidation of
manufacturing, distribution and office facilities, and (2) the centralization of business units.
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 2007. 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
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our interest obligations on outstanding debt at December 31, 2007 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.
29
The following table presents as of December 31, 2007, our financial instruments, rates of
interest and indications of fair value:
Expected Maturity Dates
(Amounts in Thousands)
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|
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|
|
| |
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2008 |
|
|
2009 |
|
|
2010 |
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|
2011 |
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|
2012 |
|
|
Thereafter |
|
|
Total |
|
|
Fair Value |
|
ASSETS |
|
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|
|
|
|
|
|
|
|
|
|
|
|
Temporary cash investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Average interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
INDEBTEDNESS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Average interest rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Variable rate debt |
|
$ |
1,500 |
|
|
$ |
1,500 |
|
|
$ |
10,453 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
13,453 |
|
|
$ |
13,453 |
|
Average interest rate |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.57 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreign Exchange Risk
We are exposed to fluctuations in the Canadian dollar. In addition, we make significant U.S.
dollar purchases from suppliers in Honduras, Pakistan, China, Taiwan, and the Philippines. An
adverse change in foreign currency exchange rates of these 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,
2007 is $3.4 million. A 10% change in foreign currency exchange rates would amount to $0.3 million
change in our net investment in foreign subsidiaries at December 31, 2007.
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 2008 for a further discussion of our raw
materials.
30
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, 2007
and 2006, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007 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 14 to the consolidated financial statements, the Company changed the manner in
which it accounts for uncertain tax positions as of January 1, 2007.
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in
which it accounts for stock based compensation as of January 1, 2006.
As discussed in Note 11 to the consolidated financial statements, the Company changed the manner in
which it accounts for pensions and other post-retirement plans for the year ended December 31,
2006.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 14, 2008
31
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 and 2006
(Amounts in Thousands)
ASSETS
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,015 |
|
|
$ |
7,392 |
|
Trade accounts receivable, net of allowances of
$261 and $2,213 |
|
|
18,077 |
|
|
|
55,014 |
|
Inventories, net |
|
|
26,160 |
|
|
|
54,980 |
|
Receivable from disposition |
|
|
6,799 |
|
|
|
— |
|
Other current assets |
|
|
2,520 |
|
|
|
2,991 |
|
Asset held for sale |
|
|
— |
|
|
|
4,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
55,571 |
|
|
|
124,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
665 |
|
|
|
665 |
|
Intangibles, net |
|
|
4,853 |
|
|
|
6,435 |
|
Other |
|
|
3,470 |
|
|
|
8,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
8,988 |
|
|
|
16,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT |
|
|
|
|
|
|
|
|
Land and improvements |
|
|
336 |
|
|
|
336 |
|
Buildings and improvements |
|
|
9,666 |
|
|
|
9,669 |
|
Machinery and equipment |
|
|
96,650 |
|
|
|
119,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,652 |
|
|
|
129,708 |
|
Less — Accumulated depreciation |
|
|
(72,647 |
) |
|
|
(87,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
34,005 |
|
|
|
41,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
98,564 |
|
|
$ |
182,694 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
32
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 and 2006
(Amounts in Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
14,995 |
|
|
$ |
33,684 |
|
Accrued compensation |
|
|
2,629 |
|
|
|
3,518 |
|
Accrued expenses |
|
|
22,325 |
|
|
|
38,187 |
|
Current maturities, long-term debt |
|
|
1,500 |
|
|
|
1,125 |
|
Revolving credit agreement |
|
|
2,853 |
|
|
|
43,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
44,302 |
|
|
|
120,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, less current maturities |
|
|
9,100 |
|
|
|
11,867 |
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES |
|
|
8,706 |
|
|
|
8,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
62,108 |
|
|
|
140,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Notes 18 and 22) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
| |
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 |
|
|
27,338 |
|
|
|
27,120 |
|
Accumulated other comprehensive (loss) income |
|
|
(1,112 |
) |
|
|
2,242 |
|
Accumulated deficit |
|
|
(85,915 |
) |
|
|
(83,434 |
) |
Treasury stock, at cost, 1,871,128 shares
and 1,869,827 shares, respectively |
|
|
(21,933 |
) |
|
|
(21,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
36,456 |
|
|
|
42,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
98,564 |
|
|
$ |
182,694 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
33
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
(Amounts in Thousands, Except Per Share Data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
Net sales |
|
$ |
187,771 |
|
|
$ |
192,416 |
|
|
$ |
200,085 |
|
Cost of goods sold |
|
|
167,517 |
|
|
|
167,347 |
|
|
|
185,646 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
20,254 |
|
|
|
25,069 |
|
|
|
14,439 |
|
Selling, general and administrative expenses |
|
|
25,985 |
|
|
|
30,450 |
|
|
|
35,456 |
|
Impairments of goodwill |
|
|
— |
|
|
|
— |
|
|
|
1,574 |
|
Impairments of other long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
538 |
|
Severance, restructuring and related charges |
|
|
2,581 |
|
|
|
17 |
|
|
|
956 |
|
Loss (gain) on sale of assets |
|
|
2,434 |
|
|
|
412 |
|
|
|
(329 |
) |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(10,746 |
) |
|
|
(5,810 |
) |
|
|
(23,756 |
) |
Equity in income of equity method investment |
|
|
783 |
|
|
|
— |
|
|
|
600 |
|
Gain on SESCO joint venture transaction |
|
|
— |
|
|
|
563 |
|
|
|
— |
|
Interest expense |
|
|
(4,565 |
) |
|
|
(4,221 |
) |
|
|
(3,803 |
) |
Other, net |
|
|
(72 |
) |
|
|
278 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before benefit from
income taxes |
|
|
(14,600 |
) |
|
|
(9,190 |
) |
|
|
(26,842 |
) |
Benefit from income taxes from continuing operations |
|
|
719 |
|
|
|
529 |
|
|
|
4,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(13,881 |
) |
|
|
(8,661 |
) |
|
|
(22,466 |
) |
Income from operations of discontinued businesses (net of tax) |
|
|
2,259 |
|
|
|
2,443 |
|
|
|
8,669 |
|
Gain (loss) on sale of discontinued businesses (net of tax) |
|
|
10,121 |
|
|
|
(5,405 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in accounting principle |
|
|
(1,501 |
) |
|
|
(11,623 |
) |
|
|
(13,797 |
) |
Cumulative effect of a change in accounting principle (net of tax) |
|
|
— |
|
|
|
(756 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,501 |
) |
|
$ |
(12,379 |
) |
|
$ |
(13,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share of common stock — Basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(1.75 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.83 |
) |
Discontinued operations (net of tax) |
|
|
1.56 |
|
|
|
(0.37 |
) |
|
|
1.09 |
|
Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
(0.09 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.19 |
) |
|
$ |
(1.55 |
) |
|
$ |
(1.74 |
) |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
34
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
(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 (Loss) |
|
|
Deficit |
|
|
Stock |
|
|
Loss |
|
|
Equity |
|
Balance, January 1, 2005 |
|
|
1,131,551 |
|
|
$ |
108,256 |
|
|
|
9,822,204 |
|
|
$ |
9,822 |
|
|
$ |
25,111 |
|
|
$ |
4,564 |
|
|
$ |
(57,258 |
) |
|
$ |
(21,910 |
) |
|
|
|
|
|
$ |
68,585 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(15,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
) |
Stock compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,004 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
2,004 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(48 |
) |
|
|
— |
|
|
|
— |
|
|
|
(627 |
) |
|
|
|
|
|
|
(675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
1,131,551 |
|
|
$ |
108,256 |
|
|
|
9,822,204 |
|
|
$ |
9,822 |
|
|
$ |
27,067 |
|
|
$ |
3,158 |
|
|
$ |
(71,055 |
) |
|
$ |
(22,544 |
) |
|
|
|
|
|
$ |
54,704 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,379 |
) |
|
|
— |
|
|
$ |
(12,379 |
) |
|
|
(12,379 |
) |
Foreign currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
686 |
|
|
|
— |
|
|
|
— |
|
|
|
686 |
|
|
|
686 |
|
Interest rate swap |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(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 |
|
|
1,131,551 |
|
|
$ |
108,256 |
|
|
|
9,822,304 |
|
|
$ |
9,822 |
|
|
$ |
27,120 |
|
|
$ |
2,242 |
|
|
$ |
(83,434 |
) |
|
$ |
(21,974 |
) |
|
|
|
|
|
$ |
42,032 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,501 |
) |
|
|
— |
|
|
$ |
(1,501 |
) |
|
|
(1,501 |
) |
Foreign currency translation
adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,551 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,551 |
) |
|
|
(4,551 |
) |
Interest rate swap |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(76 |
) |
|
|
— |
|
|
|
— |
|
|
|
(76 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penion and other postretirement
benefits |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,273 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
1,273 |
|
Adoption of FIN 48 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(980 |
) |
|
|
— |
|
|
|
|
|
|
|
(980 |
) |
Purchase of treasury stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Stock compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
262 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
262 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(44 |
) |
|
|
— |
|
|
|
— |
|
|
|
44 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
1,131,551 |
|
|
$ |
108,256 |
|
|
|
9,822,304 |
|
|
$ |
9,822 |
|
|
$ |
27,338 |
|
|
$ |
(1,112 |
) |
|
$ |
(85,915 |
) |
|
$ |
(21,933 |
) |
|
|
|
|
|
$ |
36,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
35
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
(Amounts in Thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,501 |
) |
|
$ |
(12,379 |
) |
|
$ |
(13,797 |
) |
(Income) loss from discontinued operations |
|
|
(12,380 |
) |
|
|
2,962 |
|
|
|
(8,669 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(13,881 |
) |
|
|
(9,417 |
) |
|
|
(22,466 |
) |
Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
756 |
|
|
|
— |
|
Depreciation and amortization |
|
|
7,294 |
|
|
|
7,628 |
|
|
|
7,699 |
|
Impairments of goodwill |
|
|
— |
|
|
|
— |
|
|
|
1,574 |
|
Impairments of other long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
538 |
|
Write-off and amortization of debt issuance costs |
|
|
2,007 |
|
|
|
1,178 |
|
|
|
1,122 |
|
Write-off of assets due to lease termination |
|
|
751 |
|
|
|
— |
|
|
|
— |
|
Stock option expense |
|
|
262 |
|
|
|
587 |
|
|
|
2,004 |
|
Loss (gain) on sale of assets |
|
|
2,434 |
|
|
|
412 |
|
|
|
(329 |
) |
Equity in income of equity method investment |
|
|
(783 |
) |
|
|
— |
|
|
|
(600 |
) |
Deferred income taxes |
|
|
(48 |
) |
|
|
14 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,964 |
) |
|
|
1,158 |
|
|
|
(10,218 |
) |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,383 |
|
|
|
3,272 |
|
|
|
5,813 |
|
Inventories |
|
|
(5,330 |
) |
|
|
7,045 |
|
|
|
9,428 |
|
Other assets |
|
|
(220 |
) |
|
|
(283 |
) |
|
|
933 |
|
Accounts payable |
|
|
60 |
|
|
|
(3,076 |
) |
|
|
(3,277 |
) |
Accrued expenses |
|
|
(5,541 |
) |
|
|
(1,062 |
) |
|
|
(1,135 |
) |
Other, net |
|
|
1,399 |
|
|
|
(4,236 |
) |
|
|
(2,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,249 |
) |
|
|
1,660 |
|
|
|
9,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing operations |
|
|
(10,213 |
) |
|
|
2,818 |
|
|
|
(595 |
) |
Net cash provided by (used in) discontinued operations |
|
|
74 |
|
|
|
(75 |
) |
|
|
7,454 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(10,139 |
) |
|
|
2,743 |
|
|
|
6,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures of continuing operations |
|
|
(4,403 |
) |
|
|
(3,733 |
) |
|
|
(8,210 |
) |
Acquisition of subsidiary, net of cash acquired |
|
|
— |
|
|
|
— |
|
|
|
(1,115 |
) |
Proceeds from sale of assets, net |
|
|
246 |
|
|
|
289 |
|
|
|
901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations |
|
|
(4,157 |
) |
|
|
(3,444 |
) |
|
|
(8,424 |
) |
Net cash provided by (used in) discontinued operations |
|
|
55,195 |
|
|
|
3,738 |
|
|
|
(970 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
51,038 |
|
|
|
294 |
|
|
|
(9,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings of revolving loans |
|
|
(41,026 |
) |
|
|
1,934 |
|
|
|
1,165 |
|
(Decrease) increase in book overdraft |
|
|
(1,903 |
) |
|
|
(1,534 |
) |
|
|
3,621 |
|
Proceeds of term loans |
|
|
573 |
|
|
|
1,364 |
|
|
|
— |
|
Repayments of term loans |
|
|
(2,965 |
) |
|
|
(4,086 |
) |
|
|
(2,857 |
) |
Direct costs associated with debt facilities |
|
|
(236 |
) |
|
|
(312 |
) |
|
|
(151 |
) |
Repurchases of common stock |
|
|
(3 |
) |
|
|
(111 |
) |
|
|
(7 |
) |
Proceeds from the exercise of stock options |
|
|
— |
|
|
|
147 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing operations |
|
|
(45,560 |
) |
|
|
(2,598 |
) |
|
|
1,771 |
|
Net cash (used in) provided by discontinued operations |
|
|
(570 |
) |
|
|
(1,071 |
) |
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(46,130 |
) |
|
|
(3,669 |
) |
|
|
2,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(146 |
) |
|
|
(397 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5,377 |
) |
|
|
(1,029 |
) |
|
|
(104 |
) |
Cash and cash equivalents, beginning of period |
|
|
7,392 |
|
|
|
8,421 |
|
|
|
8,525 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
2,015 |
|
|
$ |
7,392 |
|
|
$ |
8,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from sale of discontinued operations |
|
$ |
6,799 |
|
|
$ |
1,200 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
36
KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2007 and 2006
(Amounts in Thousands, Except Per Share Data)
Note 1. ORGANIZATION OF THE BUSINESS
The Company is organized into one reporting segment: the Maintenance Products Group. The
activities of the Maintenance Products Group include the manufacture and distribution of a variety
of commercial cleaning supplies and storage 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
As a result of accounting errors in the Company’s raw material inventory records, management
and the Company’s Audit Committee determined on August 6, 2007 that the Company’s previously issued
consolidated financial statements for the years ended December 31, 2006 and 2005 should no longer
be relied upon. The Company’s decision to restate its consolidated financial statements was based
on facts obtained by management and the results of an independent investigation of the physical raw
material inventory counting process at CCP. These procedures resulted in the identification of the
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. The Company filed on August 17, 2007 an amended Annual Report on Form 10-K/A as of
December 31, 2006 and an amended Quarterly Report on Form 10-Q/A as of March 31, 2007 in order to
restate the consolidated financial statements. All amounts included in this Annual Report for the
above periods have been properly reflected for the restatement.
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, 2007 are discussed in Note 7.
The Company previously owned 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 did
not have significant influence over the operation. Sahlman is engaged in the business of shrimp
farming in Nicaragua. As of December 31, 2007, the Company had no investment in the business due
to the sale of its shares to Sahlman as further described in Note 6.
Use of Estimates and Reclassifications – 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.
Certain reclassifications associated with the presentation of discontinued operations were
made to the prior year amounts in order to consistently reflect the continuing business.
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.
37
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 2007, 2006 and 2005 were $0.8 million, $0.8 million and
$0.9 million, respectively.
Accounts Receivable and Allowance for Doubtful Accounts – Trade accounts receivable
are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts
is the Company’s best estimate of the amount of probable credit losses in its existing accounts
receivable. The Company determines the allowance based on its historical write-off experience.
The Company reviews its allowance for doubtful accounts quarterly, which includes a review of past
due balances over 90 days and over a specified amount for collectibility. All other balances are
reviewed on a pooled basis by market distribution channels. Account balances are charged off
against the allowance when the Company determines it is probable the receivable will not be
recovered. The Company does not have any off-balance-sheet credit exposure related to its
customers.
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, 2007 and 2006,
approximately 62% and 22%, 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. The change in percentage for inventory accounted
for using the LIFO method was due to the sale of the Electrical Products business as described
further in Note 7. At December 31, 2006 approximately 55% of inventories excluding discontinued
operations were accounted for using the LIFO method of costing. Current cost, as determined using
the FIFO method, exceeded LIFO cost by $4.0 million and $3.5 million at December 31, 2007 and
2006, respectively. The components of inventories are:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Amounts in Thousands) |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
17,022 |
|
|
$ |
14,777 |
|
Work in process |
|
|
763 |
|
|
|
613 |
|
Finished goods |
|
|
13,762 |
|
|
|
46,973 |
|
Inventory reserves |
|
|
(1,376 |
) |
|
|
(3,905 |
) |
LIFO reserve |
|
|
(4,011 |
) |
|
|
(3,478 |
) |
|
|
|
|
|
|
|
|
|
$ |
26,160 |
|
|
$ |
54,980 |
|
|
|
|
|
|
|
|
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.
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
2007, 2006 and 2005 was $6.8 million, $7.1 million, and $7.1 million, respectively.
38
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, 2007 an asset of $0.3 million and related
liability of $0.8 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, 2005 is included in the table below
(amounts in thousands):
| |
|
|
|
|
SFAS No. 143 Obligation at December 31, 2005 |
|
$ |
1,068 |
|
Accretion expense |
|
|
49 |
|
|
|
|
|
SFAS No. 143 Obligation at December 31, 2006 |
|
$ |
1,117 |
|
Accretion expense |
|
|
42 |
|
Changes in estimates |
|
|
(173 |
) |
Write-off from sale of discontinued businesses |
|
|
(157 |
) |
|
|
|
|
SFAS No. 143 Obligation at December 31, 2007 |
|
$ |
829 |
|
|
|
|
|
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 from continuing operations (included in other, net in the
Consolidated Statements of Operations) of $38 thousand, $0.3 million, and $10 thousand, in 2007,
2006 and 2005, 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 in 2005. Compensation expense associated with stock awards was $22.1 thousand in
2005. No
compensation expense associated with restricted stock awards was recognized in 2005.
Compensation income (expense) for stock awards and stock appreciation rights is recorded in
selling, general and administrative expenses in the Consolidated Statements of Operations.
39
On January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”),
which sets accounting requirements for “share-based” compensation to employees, requires companies
to recognize the grant date fair value of stock options and other equity-based compensation issued
to employees and disallows the use of intrinsic value method of accounting for stock compensation.
The Company adopted SFAS No. 123R using the modified prospective method. Under this method,
compensation cost recognized during the year ended December 31, 2007 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 and b) compensation cost for outstanding stock appreciation rights as of December
31, 2007 based on the December 31, 2007 fair value estimated in accordance with SFAS No. 123R.
Compensation cost recognized during the year ended December 31, 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 outstanding stock appreciation rights 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 13 for descriptions of Stock
Incentive Plans) included in the Consolidated Statements of Operations for the years ended December
31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense |
|
$ |
270 |
|
|
$ |
398 |
|
Cumulative effect of a change in
accounting principle |
|
|
— |
|
|
|
756 |
|
|
|
|
|
|
|
|
|
|
$ |
270 |
|
|
$ |
1,154 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, total compensation expense consists of
compensation expense associated with stock appreciation rights of approximately $8 thousand and
$0.6 million, respectively, and compensation expense associated with stock options of
approximately $0.3 million and $0.6 million, respectively. 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 $1.41 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
$1.55. 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 by averaging the
minimum and maximum lives expected for each award. In addition, the Company estimated volatility
by considering its historical stock volatility over a term comparable to the remaining expected
life of each award. The risk-free interest rate 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 assumptions for expected term, volatility and risk-free rate are
presented in the table below:
| |
|
|
Expected term (years)
|
|
5.3 - 6.5 |
Volatility
|
|
53.8% - 57.6% |
Risk-free interest rate
|
|
3.98% - 4.48% |
40
The fair value for stock appreciation rights, a liability award, was estimated at the
effective date of SFAS No. 123R, and December 31, 2007 and 2006, using a Black-Scholes option
pricing model. The Company estimated the expected term to be equal to the average between the
minimum and maximum lives expected for each award. In addition, the Company estimated volatility
by considering its historical stock volatility over a term comparable to the remaining expected
life of each award. The risk-free interest rate 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. The assumptions for expected term, volatility and risk-free rate are
presented in the table below:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Expected term (years) |
|
|
3.0 - 4.7 |
|
|
|
3.0 - 5.5 |
|
Volatility |
|
|
85.4% - 97.1 |
% |
|
|
52.6% - 56.5 |
% |
Risk-free interest rate |
|
|
3.07% - 3.26 |
% |
|
|
4.69% - 4.72 |
% |
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 year ended December 31, 2005 because these awards were not
accounted for using the fair value recognition method during that period. 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 year ended |
|
| |
|
December 31, 2005 |
|
|
|
|
|
|
Net loss attributable to common stockholders, as reported |
|
$ |
(13,797 |
) |
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 |
) |
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(12,086 |
) |
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
Basic and diluted-as reported |
|
$ |
(1.74 |
) |
|
|
|
|
Basic and diluted-pro forma |
|
$ |
(1.52 |
) |
|
|
|
|
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 years ended December 31, 2007 and 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 was classified as a
hedge under SFAS No. 133, changes in the fair value of the derivative were offset against the
change in fair value of the hedged liability through earnings, or recognized in other comprehensive
income until the hedged item was recognized in earnings. Hedge ineffectiveness associated with the
swap was reported by the Company in interest expense.
The agreement had 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 hedged 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 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, with changes in fair market value included in other comprehensive income. The Company
reported insignificant losses for 2007, 2006 and 2005 as a result of hedge ineffectiveness.
41
New
Accounting Pronouncements – As discussed in Note 14, the Company adopted,
effective January 1, 2007, 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.
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.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No.
159 permits entities to elect to measure many financial instruments and certain other items at fair
value, with unrealized gains and losses related to these financial instruments reported in earnings
at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact this statement may have in its
future financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer in a
business combination (a) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (b)
recognizes and measures the goodwill acquired in a business combination or a gain from a bargain
purchase, and (c) determines what information to disclose to enable users of financial statements
to evaluate the nature and financial effects of the business combination. SFAS No. 141R will be
applied prospectively to business combinations that have an acquisition date on or after January
1, 2009. The provisions of SFAS 141R will not impact the Company’s consolidated financial
statements for prior periods.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 requires the
recognition of a noncontrolling interest, or minority interest, as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net income attributable
to the noncontrolling interest will be included in consolidated net income on the face of the
income statement. SFAS No. 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. The Company is currently evaluating the
impact this statement may have in its future financial statements.
Note 4. GOODWILL AND INTANGIBLE ASSETS
Below is a summary of activity in the goodwill accounts since December 31, 2004 (amounts in
thousands):
| |
|
|
|
|
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 |
|
Impairment charge |
|
|
— |
|
|
|
|
|
Goodwill at December 31, 2007 |
|
$ |
665 |
|
|
|
|
|
42
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, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
| |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Patents |
|
$ |
1,031 |
|
|
$ |
(734 |
) |
|
$ |
297 |
|
|
$ |
1,511 |
|
|
$ |
(1,065 |
) |
|
$ |
446 |
|
Customer lists |
|
|
10,231 |
|
|
|
(8,240 |
) |
|
|
1,991 |
|
|
|
10,454 |
|
|
|
(8,111 |
) |
|
|
2,343 |
|
Tradenames |
|
|
5,054 |
|
|
|
(2,489 |
) |
|
|
2,565 |
|
|
|
5,612 |
|
|
|
(2,345 |
) |
|
|
3,267 |
|
Other |
|
|
441 |
|
|
|
(441 |
) |
|
|
— |
|
|
|
441 |
|
|
|
(62 |
) |
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,757 |
|
|
$ |
(11,904 |
) |
|
$ |
4,853 |
|
|
$ |
18,018 |
|
|
$ |
(11,583 |
) |
|
$ |
6,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of Katy’s intangible assets are definite long-lived intangibles. Katy recorded
amortization expense on intangible assets from continuing operations of $0.5 million, $0.6 million
and $0.6 million in 2007, 2006 and 2005, respectively. The year ended December 31, 2007 includes a
write-off of other intangible assets for approximately $0.4 million associated with the impairment
of the Washington, Georgia leased facility. Estimated aggregate future amortization expense
related to intangible assets is as follows (amounts in thousands):
| |
|
|
|
|
2008 |
|
$ |
489 |
|
2009 |
|
|
468 |
|
2010 |
|
|
438 |
|
2011 |
|
|
411 |
|
2012 |
|
|
386 |
|
Thereafter |
|
|
2,661 |
|
|
|
|
|
Total |
|
$ |
4,853 |
|
|
|
|
|
Note 5. IMPAIRMENTS OF GOODWILL AND OTHER INTANGIBLE 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 years ended December 31, 2007 and
2006, no impairments were noted as cash flows support that no impairment was present.
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.
Note 6. EQUITY METHOD INVESTMENT
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 an 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.
43
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 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.
In 2005, the Company recorded $0.6 million in equity income from operations as a result of
Sahlman’s improving financial performance. No net 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 net investment in Sahlman reflected a
$2.2 million balance.
On December 20, 2007, the Company sold its interest in the equity investment to Sahlman for
$3.0 million. The cash proceeds were used to reduce the outstanding borrowings under the Revolving
Credit Agreement. As a result, the Company recorded a $0.8 million gain on the sale of the equity
investment in 2007 within the equity in income of equity method investment line on the Consolidated
Statements of Operations. The Company has no continuing rights or obligations with Sahlman.
During 2007, prior to the sale of the interest in the equity investment, the Company did not record
any net equity earnings as Sahlman’s performance was driven primarily from non-core asset sales.
Note 7. DISCONTINUED OPERATIONS
Five of Katy’s operations have been classified as discontinued operations as of and for the
years ended December 31, 2007, 2006 and 2005 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 approximately $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 the 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.
During the first quarter of 2007, the Company incurred an additional $0.2 million loss as a result
of finalizing the working capital adjustment. Management and the board of directors determined
that this business is not a core component of the Company’s long-term business strategy.
On June 6, 2007, the Company sold the CML business unit for gross proceeds of approximately
$10.6 million, including a receivable of $0.6 million associated with final working capital levels.
These proceeds were used to pay off related portions of the Term Loan and the Revolving Credit
Facility. The Company recorded a gain of $7.1 million in 2007 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.
On November 30, 2007, the Company sold the Woods US and Woods Canada business units for gross
proceeds of approximately $49.8 million, including amounts placed into escrow of $6.8 million.
These proceeds were used to pay off related portions of the Term Loan and the Revolving Credit
Facility. At December 31, 2007 the Company has approximately $7.7 million being held within
escrow, which relates to the filing of a foreign tax certificate and the sale of specific
inventory. The Company has deferred gain recognition of approximately $0.9 million of the escrow
receivable as further steps were required to realize these funds at December 31, 2007. The Company
expects to receive approximately $7.1 million during the first half of 2008 with the remaining
funds being received during the last half of 2008. The Company recorded a gain of $1.3 million in
2007 in connection with this sale. Management and the board of directors determined that these
business units are not a core component of the Company’s long-term business strategy.
44
The Company did not separately identify the related assets and liabilities of the discontinued
business units on the Consolidated Balance Sheets, except for the Asset Held for Sale. Following
is a summary of the major asset and liability categories, along with any remaining receivables or
payables, for these discontinued operations as of December 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
Current assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
— |
|
|
$ |
35,742 |
|
Inventories, net |
|
|
— |
|
|
|
34,529 |
|
Other current assets |
|
|
8,034 |
|
|
|
1,905 |
|
|
|
|
|
|
|
|
|
|
$ |
8,034 |
|
|
$ |
72,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets: |
|
|
|
|
|
|
|
|
Intangibles, net |
|
$ |
— |
|
|
$ |
807 |
|
Other |
|
|
600 |
|
|
|
2,001 |
|
Property and equipment, net |
|
|
— |
|
|
|
2,459 |
|
|
|
|
|
|
|
|
|
|
$ |
600 |
|
|
$ |
5,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
30 |
|
|
$ |
17,007 |
|
Accrued compensation |
|
|
— |
|
|
|
352 |
|
Accrued expenses |
|
|
148 |
|
|
|
11,083 |
|
|
|
|
|
|
|
|
|
|
$ |
178 |
|
|
$ |
28,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
$ |
— |
|
|
$ |
735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income: |
|
$ |
— |
|
|
$ |
4,871 |
|
|
|
|
|
|
|
|
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 were 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 discontinued business units have been segregated as
discontinued operations on the Consolidated Statements of Operations. Selected financial data for
discontinued operations is summarized as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
Net sales |
|
$ |
166,691 |
|
|
$ |
225,235 |
|
|
$ |
255,112 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income |
|
$ |
4,939 |
|
|
$ |
5,291 |
|
|
$ |
14,474 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax gain (loss) on sale of discontinued businesses |
|
$ |
10,121 |
|
|
$ |
(5,405 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
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.
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.
45
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.
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. As a result of the above transaction, the Company recorded a gain of $0.6
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.
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, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Amounts in Thousands) |
|
|
|
|
|
|
|
|
|
|
Term loan payable under the Bank of America Credit Agreement, interest based on
LIBOR and Prime Rates (7.5% - 8.0%), due through 2010 |
|
$ |
10,600 |
|
|
$ |
12,992 |
|
Revolving loans payable under the Bank of America Credit Agreement, interest based on
LIBOR and Prime Rates (7.75%) |
|
|
2,853 |
|
|
|
43,879 |
|
|
|
|
|
|
|
|
Total debt |
|
|
13,453 |
|
|
|
56,871 |
|
Less revolving loans, classified as current (see below) |
|
|
(2,853 |
) |
|
|
(43,879 |
) |
Less current maturities |
|
|
(1,500 |
) |
|
|
(1,125 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
9,100 |
|
|
$ |
11,867 |
|
|
|
|
|
|
|
|
Aggregate remaining scheduled maturities of the Term Loan as of December 31, 2007 are as
follows (in thousands):
| |
|
|
|
|
2008 |
|
$ |
1,500 |
|
2009 |
|
|
1,500 |
|
2010 |
|
|
7,600 |
|
|
|
|
|
Total |
|
$ |
10,600 |
|
|
|
|
|
On November 30, 2007, Katy Industries, Inc. entered into the Second Amended and Restated
Credit Agreement with Bank of America (the “Bank of America Credit Agreement”). The Bank of
America Credit Agreement is a $50.6 million credit facility with a $10.6 million term loan (“Term
Loan”) and a $40.0 million revolving loan (“Revolving Credit Facility”), including a $10.0 million
sub-limit for letters of credit. The Bank of America Credit Agreement replaces the previous credit
agreement (“Previous Credit Agreement”) as originally entered into on April 20, 2004. The Bank of
America Credit Agreement is an asset-based lending agreement and only involves one bank compared to
a syndicate of four banks under the Previous Credit Agreement.
The Revolving Credit Facility has an expiration date of November 30, 2010 and its borrowing
base is determined by eligible inventory and accounts receivable. 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. 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 of the Company (65% of the capital stock of certain foreign
subsidiaries of the Company), and all present and future assets and properties of the Company.
The Company’s Term Loan balance immediately prior to the Bank of America Credit Agreement was
$10.0 million. The annual amortization on the new Term Loan, paid quarterly, will be $1.5 million,
beginning March 1, 2008, with final payment due November 30, 2010. The Term Loan is collateralized
by the Company’s property, plant and equipment.
The Bank of America Credit Agreement requires the Company to maintain a minimum level of
availability such that its eligible collateral must exceed the sum of its outstanding borrowings
under the Revolving Credit Facility and letters of
credit by at least $5.0 million. 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 our casualty insurance programs. At December 31, 2007, total outstanding letters of
credit were $6.0 million.
46
Borrowings under the Bank of America Credit Agreement will bear interest, at the Company’s
option, at either a rate equal to the bank’s base rate or LIBOR plus a margin based on levels of
borrowing availability. Interest rate margins for the Revolving Credit Facility under the
applicable LIBOR option will range from 2.00% to 2.50% on borrowing availability levels of $20.0
million to less than $10.0 million, respectively. For the Term Loan, interest rate margins under
the applicable LIBOR option will range from 2.25% to 2.75%. Financial covenants such as minimum
fixed charge coverage and leverage ratios are excluded from the Bank of America Credit Agreement.
If the Company is unable to comply with the terms of the agreement, it could seek to obtain an
amendment to the Bank of America Credit Agreement and pursue increased liquidity through additional
debt financing and/or the sale of assets. It is possible, however, the Company may not be able to
obtain further amendments from the lender or secure additional debt financing or liquidity through
the sale of assets on favorable terms or at all. However, the Company believes that it will be
able to comply with all covenants throughout 2008.
On April 20, 2004, the Company completed its Previous Credit Agreement which was a $93.0
million facility with a $13.0 million Term Loan and an $80.0 million Revolving Credit Facility.
The Previous Credit Agreement was amended eight times from April 20, 2004 to March 8, 2007 due to
various reasons such as declining profitability and timing of certain restructuring payments. The
amendments adjusted certain financial covenants such that the fixed charge coverage ratio and
consolidated leverage ratio were eliminated and a minimum availability was set. In addition, the
Company was limited on maximum allowable capital expenditures and was required to pay interest at
the highest level of interest rate margins set in the Previous Credit Agreement. On March 8, 2007,
the Company also reduced its revolving credit facility from $90.0 million to $80.0 million.
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 over the life of the agreement was 4.49%. The interest rate swap expired on August 17,
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,
2007. For the years ended December 31, 2007, 2006 and 2005, the Company had amortization of debt
issuance costs, included within interest expense, of $2.0 million, $1.2 million and $1.1 million,
respectively. Included in amortization of debt issuance costs in 2007 is approximately $0.6
million of debt issuance costs written off due to the reduction in the number of banks included in
the Bank of America Credit Agreement, and $0.3 million written off due to the reduction in the
Revolving Credit Facility on March 8, 2007. The Company incurred $0.2 million, $0.3 million and
$0.2 million associated with either entering into the Bank of America Credit Agreement or amending
the Previous Credit Agreement, as discussed above, for the years ended December 31, 2007, 2006 and
2005, respectively.
The Revolving Credit Facility under the Bank of America Credit Agreement requires lockbox
agreements which provide for all Company 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, will cause 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. The Company does not
expect to repay, or be required to repay, within one year, the balance of the Revolving Credit
Facility, which will be classified as a current liability. The MAE clause, which is a fairly
typical requirement in commercial credit agreements, allows the lender to require the loan to
become due if it determines there has been a material adverse effect on 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 November 30, 2010.
47
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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(13,881 |
) |
|
$ |
(8,661 |
) |
|
$ |
(22,466 |
) |
Discontinued operations (net of tax) |
|
|
12,380 |
|
|
|
(2,962 |
) |
|
|
8,669 |
|
Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
(756 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,501 |
) |
|
$ |
(12,379 |
) |
|
$ |
(13,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — Basic and Diluted |
|
|
7,951 |
|
|
|
7,967 |
|
|
|
7,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amount: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(1.75 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.83 |
) |
Discontinued operations (net of tax) |
|
|
1.56 |
|
|
|
(0.37 |
) |
|
|
1.09 |
|
Cumulative effect of a change in accounting principle |
|
|
— |
|
|
|
(0.09 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.19 |
) |
|
$ |
(1.55 |
) |
|
$ |
(1.74 |
) |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, 2006 and 2005, zero, 150,000, and 920,000 options were in-the-money
and 1,632,200, 1,568,000, and 936,350 options were out-of-the money, respectively. At December 31,
2007, 2006 and 2005, 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.
48
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 Application |
|
|
|
|
|
|
After Application |
|
| |
|
of SFAS No. 158 |
|
|
Adjustments |
|
|
of 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 |
) |
The following table presents the funded status of the Company’s pension and postretirement
benefit plans for the years ended December 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
|
Other Benefits |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
| |
|
(Amounts in Thousands) |
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
1,539 |
|
|
$ |
1,634 |
|
|
$ |
3,831 |
|
|
$ |
2,801 |
|
Service cost |
|
|
13 |
|
|
|
9 |
|
|
|
— |
|
|
|
— |
|
Interest cost |
|
|
90 |
|
|
|
90 |
|
|
|
155 |
|
|
|
209 |
|
Actuarial (gain) loss |
|
|
(63 |
) |
|
|
(43 |
) |
|
|
(1,118 |
) |
|
|
1,093 |
|
Benefits paid |
|
|
(181 |
) |
|
|
(151 |
) |
|
|
(261 |
) |
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
1,398 |
|
|
$ |
1,539 |
|
|
$ |
2,607 |
|
|
$ |
3,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
1,297 |
|
|
$ |
1,239 |
|
|
$ |
— |
|
|
$ |
— |
|
Actuarial return on plan assets |
|
|
89 |
|
|
|
106 |
|
|
|
— |
|
|
|
— |
|
Employer contributions |
|
|
142 |
|
|
|
102 |
|
|
|
261 |
|
|
|
272 |
|
Benefits paid |
|
|
(181 |
) |
|
|
(150 |
) |
|
|
(261 |
) |
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
1,347 |
|
|
$ |
1,297 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status — deficiency |
|
$ |
51 |
|
|
$ |
242 |
|
|
$ |
2,607 |
|
|
$ |
3,831 |
|
Unrecognized net actuarial loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Unrecognized prior service cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost at end of year |
|
$ |
51 |
|
|
$ |
242 |
|
|
$ |
2,607 |
|
|
$ |
3,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in financial statements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets |
|
$ |
(49 |
) |
|
$ |
(42 |
) |
|
$ |
— |
|
|
$ |
— |
|
Accrued expenses |
|
|
— |
|
|
|
— |
|
|
|
237 |
|
|
|
327 |
|
Other liabilities |
|
|
100 |
|
|
|
284 |
|
|
|
2,370 |
|
|
|
3,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51 |
|
|
$ |
242 |
|
|
$ |
2,607 |
|
|
$ |
3,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated OCI consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss |
|
$ |
540 |
|
|
$ |
604 |
|
|
$ |
487 |
|
|
$ |
461 |
|
Unrecognized prior service cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) benefit cost |
|
$ |
540 |
|
|
$ |
604 |
|
|
$ |
487 |
|
|
$ |
1,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The following table presents the assumptions used to determine the Company’s benefit
obligations at December 31, 2007 and 2006 along with sensitivity of the Company’s plans to
potential changes in certain key assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
|
Other Benefits |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Assumptions as of December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
Expected long-term return rate on assets |
|
|
7.00 |
% |
|
|
7.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Assumed rates of compensation increases |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Medical trend rate pre-65 (initial) |
|
|
N/A |
|
|
|
N/A |
|
|
|
7.00 |
% |
|
|
8.50 |
% |
Medical trend rate post-65 (initial) |
|
|
N/A |
|
|
|
N/A |
|
|
|
8.00 |
% |
|
|
8.50 |
% |
Medical trend rate (ultimate) |
|
|
N/A |
|
|
|
N/A |
|
|
|
5.00 |
% |
|
|
5.00 |
% |
Years to ultimate rate pre-65 |
|
|
N/A |
|
|
|
N/A |
|
|
|
5 |
|
|
|
7 |
|
Years to ultimate rate post-65 |
|
|
N/A |
|
|
|
N/A |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of one-percent increase in health care trend rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accumulated postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
$ |
212 |
|
|
$ |
322 |
|
Increase in service cost and interest cost |
|
|
|
|
|
|
|
|
|
$ |
14 |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of one-percent decrease in health care trend rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accumulated postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
$ |
185 |
|
|
$ |
280 |
|
Decrease in service cost and interest cost |
|
|
|
|
|
|
|
|
|
$ |
12 |
|
|
$ |
16 |
|
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 |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Equity Securities |
|
|
30 - 35% |
|
|
|
48% |
|
|
|
45% |
|
| |
Debt Securities |
|
|
60 - 65% |
|
|
|
52% |
|
|
|
55% |
|
| |
Real estate |
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
| |
Other |
|
|
0 - 3% |
|
|
|
0% |
|
|
|
0% |
|
The following table presents components of the net periodic benefit cost for the Company’s
pension and postretirement benefit plans during 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
|
Other Benefits |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
13 |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest cost |
|
|
90 |
|
|
|
90 |
|
|
|
155 |
|
|
|
209 |
|
Expected return on plan assets |
|
|
(93 |
) |
|
|
(90 |
) |
|
|
— |
|
|
|
— |
|
Amortization of prior service cost |
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
126 |
|
Amortization of net loss |
|
|
50 |
|
|
|
59 |
|
|
|
34 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
60 |
|
|
$ |
68 |
|
|
$ |
208 |
|
|
$ |
351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
There are no required contributions to the pension plans for 2008. The following table
presents estimated future benefit payments:
| |
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
176 |
|
|
$ |
245 |
|
2009 |
|
|
61 |
|
|
|
244 |
|
2010 |
|
|
72 |
|
|
|
242 |
|
2011 |
|
|
75 |
|
|
|
238 |
|
2012 |
|
|
75 |
|
|
|
234 |
|
Thereafter |
|
|
455 |
|
|
|
1,065 |
|
|
|
|
|
|
|
|
Total |
|
$ |
914 |
|
|
$ |
2,268 |
|
|
|
|
|
|
|
|
The estimated amounts that will be amortized from accumulated other comprehensive income into
net periodic benefit cost in 2008 are:
| |
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
$ |
37 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
Total |
|
$ |
37 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
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 $1.3 million and $1.6 million recorded in
accrued compensation and other liabilities at December 31, 2007 and 2006, 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. 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 $0.4 million, $0.4 million and $0.4 million in 2007,
2006 and 2005, 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,
2007, 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.
51
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 2007, 2006
and 2005, the Company purchased 1,300, 40,800 and 3,200 shares of common stock, respectively, on
the open market for $3.4 thousand, $0.1 million and $7.5 thousand, respectively.
Note 13. STOCK INCENTIVE PLANS
Director Stock Grant
During 2007 and 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. The total grant to the directors for the year ended December
31, 2005 was 6,000 shares.
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.
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.
52
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.
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.
53
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, 2004 |
|
|
1,725,650 |
|
|
$ |
4.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
936,000 |
|
|
|
2.71 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(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 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(7,600 |
) |
|
|
16.85 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(78,200 |
) |
|
|
3.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
1,632,200 |
|
|
$ |
3.59 |
|
|
5.81 years |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at December 31, 2007 |
|
|
1,322,200 |
|
|
$ |
3.80 |
|
|
5.41 years |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, total unvested compensation expense associated with stock options
amounted to $0.1 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 0.4 years as of December 31, 2007.
Stock Appreciation Rights
During 2002, a non-employee consultant was awarded 200,000 SARs under the 1997 Incentive
Plan. As of December 31, 2007, 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. No SARs were granted in 2005. In 2006, 20,000 SARs were granted to one
individual with an exercise price of $3.16. In 2007 and 2006, 2,000 SARs each were granted to
three directors with a Stand-Alone Stock Appreciation Rights Agreement. These SARs vest
immediately and have an exercise price of $1.10 and $2.08, respectively. At December 31, 2007,
Katy had 469,215 SARs outstanding at a weighted average exercise price of $4.34.
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.
54
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 |
|
|
|
|
|
|
Granted |
|
|
6,000 |
|
Vested |
|
|
(42,768 |
) |
Cancelled |
|
|
(3,333 |
) |
|
|
|
|
|
|
|
|
|
Non-Vested at December 31, 2007 |
|
|
13,333 |
|
|
|
|
|
|
|
|
|
|
Total Outstanding at December 31, 2007 |
|
|
669,215 |
|
|
|
|
|
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 benefit from income taxes from continuing operations is based on the following pre-tax
loss:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Amounts in Thousands) |
|
| |
Domestic |
|
$ |
(15,114 |
) |
|
$ |
(10,345 |
) |
|
$ |
(27,894 |
) |
Foreign |
|
|
514 |
|
|
|
1,155 |
|
|
|
1,052 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(14,600 |
) |
|
$ |
(9,190 |
) |
|
$ |
(26,842 |
) |
|
|
|
|
|
|
|
|
|
|
The benefit from income taxes from continuing operations consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Amounts in Thousands) |
|
Current tax (benefit) provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(800 |
) |
|
$ |
(559 |
) |
|
$ |
(4,452 |
) |
State |
|
|
35 |
|
|
|
30 |
|
|
|
76 |
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(765 |
) |
|
$ |
(529 |
) |
|
$ |
(4,376 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreign |
|
|
46 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
Total benefit from continuing operations |
|
$ |
(719 |
) |
|
$ |
(529 |
) |
|
$ |
(4,376 |
) |
|
|
|
|
|
|
|
|
|
|
The tax expense or benefit recorded in continuing operations is generally determined without
regard to other categories of earnings, such as a loss from discontinued operations or OCI. An
exception is provided if there is aggregate pre-tax income from other categories and a pre-tax loss
from continuing operations, even if a valuation allowance has been established against deferred tax
assets as of the beginning of the year. This exception results in a tax benefit being reflected in
continuing operations to the extent that earnings from the other categories have been offset by
losses generated by continuing operations during the year. The Company’s total tax benefit
recorded in continuing operations as a result of the exception and
application of the “with” computation was $0.8 million, $0.8 million and $4.5 million for the
years ended December 31, 2007, 2006 and 2005, respectively.
55
Actual income tax benefit reported from continuing operations are different than would have been
computed by applying the federal statutory tax rate to loss from continuing operations before
income taxes. The reasons for this difference are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Amounts in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes at statutory rate |
|
$ |
(5,110 |
) |
|
$ |
(3,217 |
) |
|
$ |
(9,395 |
) |
State income taxes, net of federal benefit |
|
|
23 |
|
|
|
20 |
|
|
|
49 |
|
Foreign tax rate differential |
|
|
325 |
|
|
|
404 |
|
|
|
368 |
|
Net operating losses adjustments |
|
|
(4 |
) |
|
|
2,518 |
|
|
|
(166 |
) |
Stock option expense |
|
|
— |
|
|
|
— |
|
|
|
529 |
|
Valuation allowance adjustments |
|
|
3,843 |
|
|
|
(277 |
) |
|
|
3,552 |
|
Foreign NOL utilization |
|
|
65 |
|
|
|
113 |
|
|
|
718 |
|
Permanent items |
|
|
18 |
|
|
|
(124 |
) |
|
|
(10 |
) |
Other, net |
|
|
121 |
|
|
|
34 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
Net benefit from income taxes |
|
$ |
(719 |
) |
|
$ |
(529 |
) |
|
$ |
(4,376 |
) |
|
|
|
|
|
|
|
|
|
|
The significant components of the Company’s deferred income tax liabilities and assets are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Amounts in Thousands) |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Waste-to-energy facility |
|
$ |
— |
|
|
$ |
160 |
|
Inventory costs |
|
|
(1,074 |
) |
|
|
(1,072 |
) |
Unremitted foreign earnings |
|
|
— |
|
|
|
(4,153 |
) |
|
|
|
|
|
|
|
|
|
$ |
(1,074 |
) |
|
$ |
(5,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance for doubtful receivables |
|
$ |
104 |
|
|
$ |
1,862 |
|
Accrued expenses and other items |
|
|
9,872 |
|
|
|
12,069 |
|
Difference between book and tax basis of property |
|
|
10,383 |
|
|
|
12,859 |
|
Operating loss carry-forwards — domestic |
|
|
34,521 |
|
|
|
35,326 |
|
Operating loss carry-forwards — foreign |
|
|
48 |
|
|
|
94 |
|
Tax credit carry forwards |
|
|
12,500 |
|
|
|
6,647 |
|
Estimated foreign tax credit related to unremitted earnings |
|
|
— |
|
|
|
4,153 |
|
|
|
|
|
|
|
|
|
|
|
67,428 |
|
|
|
73,010 |
|
Less valuation allowance |
|
|
(66,306 |
) |
|
|
(66,971 |
) |
|
|
|
|
|
|
|
|
|
|
1,122 |
|
|
|
6,039 |
|
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
48 |
|
|
$ |
974 |
|
|
|
|
|
|
|
|
At December 31, 2007, the Company had approximately $90.9 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 $17.9 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, 2007, the Company’s Canadian
subsidiary has 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 $11.1 million that expire in the
years 2009 through 2016.
56
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.
The Company adopted FIN No. 48 on January 1, 2007. As a result of the implementation of FIN
No. 48, the Company recognized approximately a $1.1 million increase in the liability for
unrecognized tax benefits, which was accounted for as an increase of $0.1 million to the January 1,
2007 balance of deferred tax assets and a reduction of $1.0 million to the January 1, 2007 balance
of retained earnings. A reconciliation of the beginning and ending balance for liabilities
associated with unrecognized tax benefits is as follows (in thousands):
| |
|
|
|
|
Balances at January 1, 2007 |
|
$ |
2,043 |
|
Tax positions related to prior years |
|
|
61 |
|
Tax positions related to the current year |
|
|
819 |
|
Reductions for tax positions related to prior years |
|
|
(329 |
) |
Settlements and payments |
|
|
(339 |
) |
Lapse of applicable statute of limitations |
|
|
(201 |
) |
|
|
|
|
Balances at December 31, 2007 |
|
$ |
2,054 |
|
|
|
|
|
At December 31, 2007, the Company had reserves totaling $2.1 million, primarily for various
foreign income tax issues all of which, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties accrued related to the unrecognized tax benefits
in the provision for income taxes. During 2007, 2006 and 2005, the Company recognized an
insignificant amount in interest and penalties. The Company had approximately $0.5 million and
$0.3 million for the payment of interest and penalties accrued at December 31, 2007 and 2006,
respectively.
The Company believes that it is reasonably possible that the total amount of unrecognized tax
benefits will change within twelve months of the date of adoption. The Company has certain tax
return years subject to statutes of limitation which will close within twelve months of the date
of adoption. Unless challenged by tax authorities, the closure of those statutes of limitation is
expected to result in the recognition of uncertain tax positions in the amount of $0.6 million.
The Company has uncertain tax positions relating to various tax matters and filings in certain
jurisdictions, none of which are currently under examination.
The Company and all of its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states. The Company’s foreign subsidiaries file income tax returns in
certain foreign jurisdictions since they have operations outside the U.S. The Company and its
subsidiaries are generally no longer subject to U.S. federal, state and local examinations by tax
authorities for years before 2003.
Repatriation of Foreign Earnings
During 2006, the Company made provision for U.S. federal and foreign withholding tax on
approximately $8.3 million of its Canadian subsidiary earnings which we intended to repatriate.
The Company provided no federal and foreign withholding tax on the undistributed earnings of its
remaining Canadian 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 operating leases for real property
with lease terms of up to eight years. In addition, the Company leases manufacturing and data
processing equipment under operating leases expiring during the next four years.
57
In most cases, management expects that in the normal course of business, leases will be
renewed or replaced by other leases. Future minimum lease payments as of December 31, 2007 are as
follows:
| |
|
|
|
|
2008 |
|
$ |
6,324 |
|
2009 |
|
|
2,625 |
|
2010 |
|
|
2,026 |
|
2011 |
|
|
896 |
|
2012 |
|
|
314 |
|
Thereafter |
|
|
310 |
|
|
|
|
|
Total minimum payments |
|
$ |
12,495 |
|
|
|
|
|
Liabilities totaling $1.5 and $1.0 million were recorded on the Consolidated Balance Sheets
at December 31, 2007 and 2006, respectively, 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 2007, 2006 and 2005 for operating leases from continuing operations was
$6.1 million, $6.3 million, and $7.1 million, respectively. Also, $0.3 million and $0.4 million
of rent was paid and charged against liabilities in 2007 and 2006, respectively, for
non-cancelable leases at facilities abandoned as a result of restructuring initiatives.
Note 16. RELATED PARTY TRANSACTIONS
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 2007, 2006 and 2005, 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 one reporting segment: Maintenance Products Group. The
activities of the Maintenance Products Group include the manufacture and distribution of a variety
of commercial cleaning supplies and storage 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.
58
For all periods presented, information for the Maintenance Products Group excludes amounts
related to the CML, 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, |
|
| |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
(Amounts in thousands) |
|
Maintenance Products Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net external sales |
|
|
|
$ |
187,771 |
|
|
$ |
192,416 |
|
|
$ |
200,085 |
|
Operating income (loss) |
|
|
|
|
571 |
|
|
|
4,825 |
|
|
|
(7,819 |
) |
Operating margin (deficit) |
|
|
|
|
0.3 |
% |
|
|
2.5 |
% |
|
|
(3.9 |
%) |
Depreciation and amortization |
|
|
|
|
7,175 |
|
|
|
7,516 |
|
|
|
7,600 |
|
Capital expenditures |
|
|
|
|
4,373 |
|
|
|
3,713 |
|
|
|
8,210 |
|
Total assets |
|
|
|
|
85,124 |
|
|
|
86,147 |
|
|
|
100,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
- Segment |
|
$ |
187,771 |
|
|
$ |
192,416 |
|
|
$ |
200,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
187,771 |
|
|
$ |
192,416 |
|
|
$ |
200,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
- Segment |
|
$ |
571 |
|
|
$ |
4,825 |
|
|
$ |
(7,819 |
) |
|
|
- Unallocated corporate |
|
|
(6,302 |
) |
|
|
(10,206 |
) |
|
|
(13,198 |
) |
|
|
- Impairments of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
(2,112 |
) |
|
|
- Severance, restructuring and related charges |
|
|
(2,581 |
) |
|
|
(17 |
) |
|
|
(956 |
) |
|
|
- (Loss) gain on sale of assets |
|
|
(2,434 |
) |
|
|
(412 |
) |
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(10,746 |
) |
|
$ |
(5,810 |
) |
|
$ |
(23,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
- Segment |
|
$ |
7,175 |
|
|
$ |
7,516 |
|
|
$ |
7,600 |
|
|
|
- Unallocated corporate |
|
|
119 |
|
|
|
112 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,294 |
|
|
$ |
7,628 |
|
|
$ |
7,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
- Segment |
|
$ |
4,373 |
|
|
$ |
3,713 |
|
|
$ |
8,210 |
|
|
|
- Unallocated corporate |
|
|
30 |
|
|
|
20 |
|
|
|
— |
|
|
|
- Discontinued operations |
|
|
261 |
|
|
|
1,009 |
|
|
|
1,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,664 |
|
|
$ |
4,742 |
|
|
$ |
9,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
- Segment |
|
$ |
85,124 |
|
|
$ |
86,147 |
|
|
$ |
100,401 |
|
|
|
- Other [a] |
|
|
8,634 |
|
|
|
89,645 |
|
|
|
101,497 |
|
|
|
- Unallocated corporate |
|
|
4,806 |
|
|
|
6,902 |
|
|
|
10,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
98,564 |
|
|
$ |
182,694 |
|
|
$ |
212,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| [a] |
|
Amounts shown as “Other” represent items associated with Sahlman Holding Company, Inc.,
the Company’s equity method investment, and the assets of the Woods US, Woods Canada, CML, United
Kingdom consumer plastics and the Metal Truck Box business units. |
The Company operates businesses in the United States and foreign countries. The operations
for 2007, 2006 and 2005 of businesses within major geographic areas are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
United |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Thousands of Dollars) |
|
States |
|
|
Canada |
|
|
Europe |
|
|
Other |
|
|
Consolidated |
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers |
|
$ |
179,581 |
|
|
$ |
3,296 |
|
|
$ |
2,571 |
|
|
$ |
2,323 |
|
|
$ |
187,771 |
|
Total assets |
|
$ |
89,816 |
|
|
$ |
8,748 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
98,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers |
|
$ |
177,776 |
|
|
$ |
9,128 |
|
|
$ |
2,320 |
|
|
$ |
3,192 |
|
|
$ |
192,416 |
|
Total assets |
|
$ |
145,512 |
|
|
$ |
24,678 |
|
|
$ |
12,264 |
|
|
$ |
240 |
|
|
$ |
182,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers |
|
$ |
185,556 |
|
|
$ |
8,699 |
|
|
$ |
2,351 |
|
|
$ |
3,479 |
|
|
$ |
200,085 |
|
Total assets |
|
$ |
161,044 |
|
|
$ |
25,950 |
|
|
$ |
24,881 |
|
|
$ |
219 |
|
|
$ |
212,094 |
|
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.
59
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 post-closure obligations in
the areas of groundwater monitoring, as well as ongoing site operation and maintenance costs.
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) (“Sterling”) has tendered over 2,367 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 Company, a former division of an
inactive subsidiary of Katy, and/or Sterling may have manufactured some of those products.
60
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 division of an inactive subsidiary of Katy, has been named as a
defendant in over 383 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, appeal docketed,
United States Court of Appeals for the Seventh Circuit, Appeal No. 07-2238).
In December 1996, Banco del Atlantico (“Plaintiff”), a bank located in Mexico, filed a
lawsuit in federal court in Texas against Woods Industries, Inc. (“Woods”), a subsidiary of the
Company, and against certain past and/or then present officers, directors and owners of Woods
(collectively, “Defendants”). 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,
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. 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 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, Plaintiff and HSBC Mexico, S.A. (collectively, “Plaintiffs”), who intervened in
the litigation as an additional alleged owner of the claims against Defendants, filed a Second
Amended Complaint.
On August 11, 2005, the Court dismissed with prejudice all of the federal and Indiana RICO
claims asserted in the Second Amended Complaint against Woods. During subsequent discovery,
Defendants moved for sanctions for Plaintiffs’ asserted failures to abide by the rules of discovery
and produce certain documents and witnesses, including the sanction of dismissal of the case with
prejudice. Defendants also moved for summary judgment on the remaining claims on January 16, 2007.
Plaintiffs also cross-moved for summary judgment in their favor on their claims under the alleged
guarantees purportedly executed by old Woods Wire Products, Inc.
On April 9, 2007, while the parties’ summary judgment motions were still being briefed, the
Court granted Defendants’ motion for sanctions and dismissed all of Plaintiffs’ claims with
prejudice. The Court’s dismissal orders dismiss all claims against Woods.
Plaintiffs have appealed to the Seventh Circuit Court of Appeals both the District Court’s
dismissal of their RICO claims in its August 11, 2005 order and the District Court’s dismissal of
all their claims in its April 9, 2007 order. Plaintiffs filed their opening brief on appeal on
July 13, 2007. Defendants filed their opposition brief on September 14, 2007 and Plaintiffs filed
their reply brief on October 11, 2007. The Seventh Circuit heard oral argument on Plaintiffs’
appeal on February 13, 2008. The Seventh Circuit has not yet issued a decision.
Plaintiffs’ claims as originally pled sought damages in excess of $24.0 million, requested
that the court void certain asset sales as purported “fraudulent transfers” (including the 1993
Woods Wire Products, Inc./Woods asset sale), and 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 Plaintiffs. The extent or limit of any
such adjustment cannot be predicted at this time.
61
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. The status of this claim is not affected by the Company’s
sale of its Electrical Products Group to Coleman Cable, Inc.
Other Claims
There are a number of product liability and workers’ compensation claims pending against Katy
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 ten 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
The Company has started 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 and the consolidation of the Glit
facilities. These initiatives resulted from the on-going strategic reassessment of the Company’s
various businesses as well as the markets in which they operate.
A summary of charges (reductions) by major initiative is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Amounts in Thousands) |
|
Consolidation of Glit facilities |
|
$ |
1,699 |
|
|
$ |
299 |
|
|
$ |
724 |
|
Consolidation of St. Louis manufacturing/distribution facilities |
|
|
882 |
|
|
|
(499 |
) |
|
|
39 |
|
Corporate office relocation |
|
|
— |
|
|
|
217 |
|
|
|
172 |
|
Consolidation of administrative functions for CCP |
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
Total severance, restructuring and related costs |
|
$ |
2,581 |
|
|
$ |
17 |
|
|
$ |
956 |
|
|
|
|
|
|
|
|
|
|
|
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 2007, the Company closed the Washington, Georgia facility and integrated its
operations into Wrens, Georgia. Charges were incurred in 2007 associated with severance for
terminations at the Washington, Georgia facility ($0.1 million), costs for the removal of equipment
and cleanup of the Washington, Georgia facility ($0.2 million), the establishment of non-cancelable
lease liabilities for the abandoned Washington, Georgia facility ($0.7 million), and other
lease-related costs ($0.7 million). The other lease-related costs represent write-offs of
leasehold improvements ($0.4 million) and a favorable lease intangible asset ($0.3 million) related
to the Washington, Georgia facility. 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).
62
Management believes that no further charges will be incurred for this activity,
except for the potential adjustments to non-cancelable lease liabilities as actual activity
compares to assumptions made. Following is a rollforward of restructuring liabilities by type for
the consolidation of Glit facilities (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
One-time |
|
|
Contract |
|
|
|
|
|
| |
|
|
|
|
|
Termination |
|
|
Termination |
|
|
|
|
|
| |
|
Total |
|
|
Benefits [a] |
|
|
Costs [b] |
|
|
Other [c] |
|
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 |
|
|
$ |
— |
|
Additions |
|
|
1,774 |
|
|
|
151 |
|
|
|
1,450 |
|
|
|
173 |
|
Reductions |
|
|
(75 |
) |
|
|
— |
|
|
|
(75 |
) |
|
|
— |
|
Payments |
|
|
(389 |
) |
|
|
(151 |
) |
|
|
(65 |
) |
|
|
(173 |
) |
Other |
|
|
(689 |
) |
|
|
— |
|
|
|
(689 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities
at December 31, 2007 |
|
$ |
626 |
|
|
$ |
— |
|
|
$ |
626 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 completed by
the end of 2003. Charges were incurred in 2007, 2006 and 2005 associated with adjustments to the
non-cancelable lease accrual at the Hazelwood, Missouri facility due to changes in the subleasing
assumptions. Management believes that no further charges will be incurred for this activity,
except for potential adjustments to non-cancelable lease liabilities as actual activity compares to
assumptions made. 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, 2005 |
|
$ |
1,845 |
|
Reductions |
|
|
(499 |
) |
Payments |
|
|
(881 |
) |
|
|
|
|
Restructuring liabilities
at December 31, 2006 |
|
$ |
465 |
|
Additions |
|
|
882 |
|
Payments |
|
|
(520 |
) |
|
|
|
|
Restructuring liabilities
at December 31, 2007 |
|
$ |
827 |
|
|
|
|
|
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. There was no activity
for this initiative during 2007. 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, 2005 |
|
$ |
157 |
|
Additions |
|
|
217 |
|
Payments |
|
|
(374 |
) |
|
|
|
|
Restructuring liabilities
at December 31, 2006 |
|
$ |
— |
|
Additions |
|
|
— |
|
Payments |
|
|
— |
|
|
|
|
|
Restructuring liabilities
at December 31, 2007 |
|
$ |
— |
|
|
|
|
|
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. The most significant project was the centralization of the
customer service functions for the Continental, Glit, Wilen, and Disco business units. 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
incurred primarily severance costs in 2005 for this integration of back office and administrative
functions. There was no activity for this initiative during 2007 and 2006.
63
A rollforward of all restructuring and related reserves since December 31, 2005 is as follows
(amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
One-time |
|
|
Contract |
|
|
|
|
|
| |
|
|
|
|
|
Termination |
|
|
Termination |
|
|
|
|
|
| |
|
Total |
|
|
Benefits [a] |
|
|
Costs [b] |
|
|
Other [c] |
|
Restructuring liabilities at December 31, 2005 |
|
$ |
2,507 |
|
|
$ |
412 |
|
|
$ |
2,095 |
|
|
$ |
— |
|
Additions |
|
|
516 |
|
|
|
326 |
|
|
|
— |
|
|
|
190 |
|
Reductions |
|
|
(499 |
) |
|
|
— |
|
|
|
(499 |
) |
|
|
— |
|
Payments |
|
|
(2,054 |
) |
|
|
(738 |
) |
|
|
(1,126 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2006 |
|
$ |
470 |
|
|
$ |
— |
|
|
$ |
470 |
|
|
$ |
— |
|
Additions |
|
|
2,656 |
|
|
|
151 |
|
|
|
2,332 |
|
|
|
173 |
|
Reductions |
|
|
(75 |
) |
|
|
— |
|
|
|
(75 |
) |
|
|
— |
|
Payments |
|
|
(909 |
) |
|
|
(151 |
) |
|
|
(585 |
) |
|
|
(173 |
) |
Other |
|
|
(689 |
) |
|
|
— |
|
|
|
(689 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2007 |
|
$ |
1,453 |
|
|
$ |
— |
|
|
$ |
1,453 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| [a] |
|
Includes severance, benefits, and other employee-related costs associated with the
employee terminations. No obligations remain at December 31, 2007. |
| |
| [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 $3.1 million as of December 31, 2007. The Company has included $1.6 million as an
offset for sublease rentals. |
| |
| [c] |
|
Includes charges associated with equipment removal and cleanup of abandoned facilities. No
obligations remain at December 31, 2007. |
The remaining severance, restructuring and other related charges for these initiatives are
expected to be approximately $0.3 million, primarily related to the consolidation of the Glit
facilities program. With leases expiring on December 31, 2008 for our largest facility in
Bridgeton, Missouri, the Company anticipates entering into a new lease agreement which will utilize
significantly less square footage in order to improve the overhead cost structure. As a result,
the Company anticipates incurring approximately $1.2 million in the non-cash write off of fixed
assets for assets expected to be sold or abandoned in 2008.
The table below details activity in restructuring reserves by operating segment since December
31, 2005 (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Maintenance |
|
|
|
|
| |
|
|
|
|
|
Products |
|
|
|
|
| |
|
Total |
|
|
Group |
|
|
Corporate |
|
Restructuring liabilities at December 31, 2005 |
|
$ |
2,507 |
|
|
$ |
2,350 |
|
|
$ |
157 |
|
Additions |
|
|
516 |
|
|
|
299 |
|
|
|
217 |
|
Reductions |
|
|
(499 |
) |
|
|
(499 |
) |
|
|
— |
|
Payments |
|
|
(2,054 |
) |
|
|
(1,680 |
) |
|
|
(374 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2006 |
|
$ |
470 |
|
|
$ |
470 |
|
|
$ |
— |
|
Additions |
|
|
2,656 |
|
|
|
2,656 |
|
|
|
— |
|
Reductions |
|
|
(75 |
) |
|
|
(75 |
) |
|
|
— |
|
Payments |
|
|
(909 |
) |
|
|
(909 |
) |
|
|
— |
|
Other |
|
|
(689 |
) |
|
|
(689 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Restructuring liabilities at December 31, 2007 |
|
$ |
1,453 |
|
|
$ |
1,453 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
64
The table below summarizes the future obligations for severance, restructuring and other
related charges by operating segment detailed above (amounts in thousands):
| |
|
|
|
|
| |
|
Maintenance |
|
| |
|
Products |
|
| |
|
Group |
|
2008 |
|
$ |
322 |
|
2009 |
|
|
259 |
|
2010 |
|
|
283 |
|
2011 |
|
|
263 |
|
2012 |
|
|
83 |
|
Thereafter |
|
|
243 |
|
|
|
|
|
Total Payments |
|
$ |
1,453 |
|
|
|
|
|
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.
Note 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
For all periods presented, net sales and gross profit excludes amounts related to the Metal
Truck Box, United Kingdom consumer plastics, CML, Woods US, and Woods Canada business units as
these units are classified as discontinued operations as discussed further in Note 7:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2007 |
|
1st Qtr |
|
|
2nd Qtr |
|
|
3rd Qtr |
|
|
4th Qtr |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
45,552 |
|
|
$ |
49,972 |
|
|
$ |
49,208 |
|
|
$ |
43,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
5,596 |
|
|
$ |
6,640 |
|
|
$ |
5,539 |
|
|
$ |
2,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,779 |
) |
|
$ |
1,808 |
|
|
$ |
(810 |
) |
|
$ |
1,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share of common stock — Basic and diluted |
|
$ |
(0.48 |
) |
|
$ |
0.23 |
|
|
$ |
(0.10 |
) |
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2006 |
|
1stQtr |
|
|
2ndQtr |
|
|
3rdQtr |
|
|
4thQtr |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
45,971 |
|
|
$ |
50,932 |
|
|
$ |
51,920 |
|
|
$ |
43,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
5,778 |
|
|
$ |
5,885 |
|
|
$ |
7,566 |
|
|
$ |
5,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in accounting principle |
|
$ |
(4,989 |
) |
|
$ |
(1,934 |
) |
|
$ |
(2,020 |
) |
|
$ |
(2,680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,745 |
) |
|
$ |
(1,934 |
) |
|
$ |
(2,020 |
) |
|
$ |
(2,680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share of common stock — Basic and diluted [a]: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in accounting principle |
|
$ |
(0.62 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.72 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The sum of basic and diluted loss per share of common stock before cumulative effect of a
change in accounting principle does not total to the basic and diluted loss per share reported in
the Consolidated Statements of Operations or Note 10 due to the fluctuation of shares outstanding
throughout the years ending December 31, 2006.
65
Note 22. SUPPLEMENTAL BALANCE SHEET INFORMATION
The following table provides detail regarding other current assets shown on the Consolidated
Balance Sheets:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Prepaids |
|
$ |
1,018 |
|
|
$ |
1,615 |
|
Miscellaneous receivables (sale of businesses) |
|
|
635 |
|
|
|
— |
|
Notes receivable - Metal Truck Box |
|
|
600 |
|
|
|
— |
|
Deferred tax asset |
|
|
— |
|
|
|
907 |
|
Other |
|
|
267 |
|
|
|
469 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,520 |
|
|
$ |
2,991 |
|
|
|
|
|
|
|
|
The following table provides detail regarding other assets shown on the Consolidated Balance
Sheets:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Rabbi trust assets |
|
$ |
1,263 |
|
|
$ |
1,455 |
|
Debt issuance costs, net |
|
|
1,114 |
|
|
|
2,885 |
|
Notes receivable - Metal Truck Box |
|
|
600 |
|
|
|
1,200 |
|
Equity method investment in unconsolidated affiliate |
|
|
— |
|
|
|
2,217 |
|
Other |
|
|
493 |
|
|
|
1,233 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,470 |
|
|
$ |
8,990 |
|
|
|
|
|
|
|
|
The following table provides detail regarding accrued expenses shown on the Consolidated
Balance Sheets:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Contingent liabilities |
|
$ |
14,174 |
|
|
$ |
15,705 |
|
Advertising and rebates |
|
|
3,377 |
|
|
|
11,594 |
|
Professional services |
|
|
843 |
|
|
|
847 |
|
Accrued SARs |
|
|
575 |
|
|
|
567 |
|
Commissions |
|
|
449 |
|
|
|
1,215 |
|
Non-cancelable lease liabilities - restructuring |
|
|
421 |
|
|
|
428 |
|
Accrued income taxes |
|
|
— |
|
|
|
1,649 |
|
SESCO note payable to Montenay |
|
|
— |
|
|
|
400 |
|
Other |
|
|
2,486 |
|
|
|
5,782 |
|
|
|
|
|
|
|
|
Total |
|
$ |
22,325 |
|
|
$ |
38,187 |
|
|
|
|
|
|
|
|
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. Changes in the
detail of accrued expenses primarily result from the sale of the Electrical Products business.
The following table provides detail regarding other liabilities shown on the Consolidated
Balance Sheets:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Pension and postretirement benefits |
|
$ |
2,462 |
|
|
$ |
3,763 |
|
Deferred compensation |
|
|
2,211 |
|
|
|
2,983 |
|
Accrued income taxes - long-term |
|
|
2,052 |
|
|
|
— |
|
Non-cancelable lease liabilities - restructuring |
|
|
1,019 |
|
|
|
703 |
|
Other |
|
|
962 |
|
|
|
953 |
|
|
|
|
|
|
|
|
Total |
|
$ |
8,706 |
|
|
$ |
8,402 |
|
|
|
|
|
|
|
|
66
Note 23. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest and income taxes is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Interest |
|
$ |
4,916 |
|
|
$ |
5,486 |
|
|
$ |
3,953 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
2,176 |
|
|
$ |
1,067 |
|
|
$ |
1,789 |
|
|
|
|
|
|
|
|
|
|
|
A significant non-cash transaction for 2007 includes a $6.8 million receivable associated
with the sale of the Woods US and Woods Canada businesses. In addition, 2006 includes a $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.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
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 Exchange Act, 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 Exchange Act) 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.
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.
67
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 above, 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 have resulted in
further misstatements to inventory and cost of goods sold, which would 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.
Remediation of Material Weaknesses
The Company completed the following steps during the second quarter and remainder 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 of the Company were committed to the remediation and
continued improvement of our internal control over financial reporting. We dedicated, and will
continue to dedicate, significant resources to this effort and, as such, believe we reestablished
effective internal control over financial reporting associated with the above raw material
inventory counting process. As a result of these procedures in the last half of 2007, we have
concluded that we have re-established effective internal controls over financial reporting
associated with the above raw materials inventory counting process.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate control over financial
reporting, as defined in Exchange Act Rule 13a-15(f). Management has assessed the effectiveness of
our internal control over financial reporting as of December 31, 2007 based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. As a result of this assessment, management concluded that, as of December 31,
2007, our internal control over financial reporting was effective in providing reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by our independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
68
Changes in Internal Control over Financial Reporting
There have been no changes in Katy’s internal control over financial reporting during the
year ended December 31, 2007, except for the items noted under the above section Remediation of
Material Weaknesses, that have materially affected, or are reasonably likely to materially affect
Katy’s internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
69
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 2008 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 2008 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 2008 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 2008 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 2008 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 2008 Annual Meeting.
Equity Compensation Plan Information
The following table represents information as of December 31, 2007 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 |
|
|
667,373 |
|
|
$ |
4.93 |
|
|
|
799,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation
Plans Not Approved
by
Stockholders |
|
|
1,634,042 |
|
|
$ |
3.56 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,301,415 |
|
|
|
|
|
|
|
799,948 |
|
|
|
|
|
|
|
|
|
|
|
|
70
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 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. No SARs were granted in
2005. In 2006, 20,000 SARs were granted to one individual with an exercise price of $3.16. In
2007 and 2006, 2,000 SARs each were granted to three directors with a Stand-Alone Stock
Appreciation Rights Agreement. These SARs vest immediately and have an exercise price of $1.10
and $2.08, respectively. At December 31, 2007, Katy had 469,215 SARs outstanding at a weighted
average exercise price of $4.34. Compensation income associated with the vesting of stock
appreciation rights was $0.9 million in 2005. 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.
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 2008 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 2008
Annual Meeting.
71
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:
• Consolidated Balance Sheets as of December 31, 2007 and 2006
• Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005
• Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005
• Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
• 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 74 of this Form 10-K.
3. Exhibits
The exhibits filed with this report are listed on the “Exhibit Index.”
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| |
|
|
|
|
| Dated: March 14, 2008 |
KATY INDUSTRIES, INC.
Registrant
|
|
| |
/s/ Anthony T. Castor III
|
|
| |
Anthony T. Castor III |
|
| |
President and Chief Executive Officer |
|
| |
|
|
| |
/s/ Amir Rosenthal
|
|
| |
Amir Rosenthal |
|
| |
Vice President, Chief Financial Officer,
General Counsel and Secretary |
|
| |
72
POWER OF ATTORNEY
Each person signing below appoints Anthony T. Castor III and Amir Rosenthal, or either of
them, his attorneys-in-fact for him in any and all capacities, with power of substitution, to sign
any amendments to this report, and to file the same with any exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
as of this 14th day of March, 2008.
| |
|
|
| Signature |
|
Title |
|
|
|
/s/ William F. Andrews
William F. Andrews
|
|
Chairman of the Board and Director |
| |
|
|
/s/ Anthony T. Castor III
Anthony T. Castor III
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
| |
|
|
/s/ Amir Rosenthal
Amir Rosenthal
|
|
Vice President, Chief Financial Officer, General
Counsel and Secretary
(Principal Financial and Accounting Officer) |
| |
|
|
/s/ Christopher Anderson
Christopher Anderson
|
|
Director |
| |
|
|
/s/ Robert M. Baratta
Robert M. Baratta
|
|
Director |
| |
|
|
/s/ Daniel B. Carroll
Daniel B. Carroll
|
|
Director |
| |
|
|
/s/ Wallace E. Carroll, Jr.
Wallace E. Carroll, Jr.
|
|
Director |
| |
|
|
/s/ Samuel P. Frieder
Samuel P. Frieder
|
|
Director |
| |
|
|
/s/ Christopher Lacovara
Christopher Lacovara
|
|
Director |
| |
|
|
/s/ Shant Mardirossian
Shant Mardirossian
|
|
Director |
73
INDEX TO FINANCIAL STATEMENT SCHEDULES
| |
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
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.
74
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM ON
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 14, 2008
appearing in the 2007 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)
also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. 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 14, 2008
75
KATY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(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, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
$ |
2,213 |
|
|
$ |
(140 |
) |
|
$ |
(85 |
) |
|
$ |
(1,727 |
) |
|
$ |
261 |
|
Sales allowances |
|
|
17,893 |
|
|
|
13,967 |
|
|
|
(15,585 |
) |
|
|
(11,986 |
) |
|
|
4,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,106 |
|
|
$ |
13,827 |
|
|
$ |
(15,670 |
) |
|
$ |
(13,713 |
) |
|
$ |
4,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
$ |
2,445 |
|
|
$ |
(147 |
) |
|
$ |
(155 |
) |
|
$ |
70 |
|
|
$ |
2,213 |
|
Sales allowances |
|
|
14,071 |
|
|
|
14,201 |
|
|
|
(14,409 |
) |
|
|
4,030 |
|
|
|
17,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,516 |
|
|
$ |
14,054 |
|
|
$ |
(14,564 |
) |
|
$ |
4,100 |
|
|
$ |
20,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
$ |
2,827 |
|
|
$ |
42 |
|
|
$ |
(156 |
) |
|
$ |
(268 |
) |
|
$ |
2,445 |
|
Sales allowances |
|
|
14,571 |
|
|
|
14,281 |
|
|
|
(12,709 |
) |
|
|
(2,072 |
) |
|
|
14,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,398 |
|
|
$ |
14,323 |
|
|
$ |
(12,865 |
) |
|
$ |
(2,340 |
) |
|
$ |
16,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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, 2007 |
|
$ |
3,905 |
|
|
$ |
(183 |
) |
|
$ |
(50 |
) |
|
$ |
(2,296 |
) |
|
$ |
1,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
$ |
4,548 |
|
|
$ |
460 |
|
|
$ |
(486 |
) |
|
$ |
(617 |
) |
|
$ |
3,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
$ |
4,671 |
|
|
$ |
279 |
|
|
$ |
(263 |
) |
|
$ |
(139 |
) |
|
$ |
4,548 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
| |
|
Beginning |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
End |
|
| Income Tax Valuation Allowances |
|
of Year |
|
|
Provision |
|
|
Reversals |
|
|
Adjustments |
|
|
of Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
$ |
66,971 |
|
|
$ |
— |
|
|
$ |
(665 |
) |
|
$ |
— |
|
|
$ |
66,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
$ |
64,794 |
|
|
$ |
2,177 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
66,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
$ |
60,028 |
|
|
$ |
4,766 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
64,794 |
|
| |
|
|
| * |
|
Other adjustments for all periods presented includes net activity associated with our
businesses disposed in 2007 and 2006. |
76
KATY INDUSTRIES, INC.
EXHIBIT INDEX
DECEMBER 31, 2007
| |
|
|
|
|
|
|
|
|
| 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).
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* |
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4.1a |
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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).
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* |
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4.1b |
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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).
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* |
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4.1c |
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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).
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* |
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4.1d |
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Fourth 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).
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* |
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10.1 |
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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).
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* |
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10.2 |
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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).
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* |
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10.3 |
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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).
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* |
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10.4 |
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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).
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* |
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10.5 |
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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).
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* |
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10.6 |
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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).
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* |
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10.7 |
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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).
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* |
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10.8 |
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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).
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* |
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10.9 |
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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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* |
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10.10 |
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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).
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* |
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77
| |
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| Exhibit |
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| Number |
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Exhibit Title |
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Page |
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10.11 |
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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).
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* |
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10.12 |
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Second Amended and Restated Loan Agreement dated as of
November 30, 2007 with Bank of America, (incorporated
by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed December 5, 2007).
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* |
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10.13 |
|
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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).
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* |
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| |
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10.14 |
|
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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).
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* |
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| |
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21 |
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Subsidiaries of registrant
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** |
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23 |
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Consent of Independent Registered Public Accounting Firm
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** |
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| |
31.1 |
|
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CEO Certification pursuant to Securities Exchange Act
Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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** |
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| |
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| |
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
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** |
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| |
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| |
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.
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**# |
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| |
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| |
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.
|
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|
**# |
|
| |
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| * |
|
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. |
78