EX-10-1
THIS
DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON NOVEMBER 15, 2005 PURSUANT TO
A
RULE 201 TEMPORARY HARDSHIP EXEMPTION
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
[
x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
Quarterly period ended: September 30, 2005
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from_______________ to________________
Commission
File Number 001-05558
Katy
Industries, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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|
75-1277589
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(State
of Incorporation)
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(I.R.S.
Employer Identification
No.)
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765
Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762
(Address
of Principal Executive Offices) (Zip Code)
Registrant's
telephone number, including area code: (203)598-0397
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock
as of the latest practicable date.
Class
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|
Outstanding
at November 15, 2005
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Common
Stock, $1 Par Value
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|
7,951,377
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KATY
INDUSTRIES, INC.
FORM
10-Q
September
30, 2005
INDEX
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Page
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements:
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PART
II
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OTHER
INFORMATION
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ASSETS
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September
30,
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December
31,
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|
2005
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|
2004
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|
CURRENT
ASSETS:
|
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|
|
|
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Cash
and cash equivalents
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|
$
|
8,627
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$
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8,525
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Accounts
receivable, net
|
|
|
76,084
|
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|
66,689
|
|
Inventories,
net
|
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|
60,536
|
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|
65,674
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Other
current assets
|
|
|
4,534
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|
4,233
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|
|
|
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Total
current assets
|
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149,781
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|
145,121
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OTHER
ASSETS:
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Goodwill
|
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2,239
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2,239
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Intangibles,
net
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7,814
|
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7,428
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Other
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9,036
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9,946
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Total
other assets
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19,089
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19,613
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PROPERTY
AND EQUIPMENT
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|
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Land
and improvements
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1,766
|
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|
1,897
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Buildings
and improvements
|
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|
14,353
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|
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13,537
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Machinery
and equipment
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|
138,056
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132,825
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|
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|
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154,175
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148,259
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Less
- Accumulated depreciation
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(97,009
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)
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(88,529
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)
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Property
and equipment, net
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57,166
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59,730
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Total
assets
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$
|
226,036
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$
|
224,464
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See
Notes to Condensed Consolidated Financial Statements.
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KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands, Except Share Data)
(Unaudited)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
September
30,
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December
31,
|
|
|
|
|
2005
|
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|
2004
|
|
CURRENT
LIABILITIES:
|
|
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|
|
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|
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|
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Accounts
payable
|
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$
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51,284
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$
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39,079
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Accrued
compensation
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4,438
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5,269
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Accrued
expenses
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41,441
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39,939
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Current
maturities of long-term debt
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3,472
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2,857
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Revolving
credit agreement
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41,085
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40,166
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Total
current liabilities
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141,720
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127,310
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LONG-TERM
DEBT, less current maturities
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13,571
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15,714
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OTHER
LIABILITIES
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10,772
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12,855
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Total
liabilities
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166,063
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155,879
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COMMITMENTS
AND CONTINGENCIES (Note 9)
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-
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-
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STOCKHOLDERS’
EQUITY
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15%
Convertible Preferred Stock, $100 par value,
authorized
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1,200,000
shares, issued and outstanding 1,131,551 shares,
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liquidation
value $113,155
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108,256
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108,256
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Common
stock, $1 par value, authorized 35,000,000 shares,
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issued
9,822,204 shares
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9,822
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9,822
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Additional
paid-in capital
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27,016
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25,111
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Accumulated
other comprehensive income
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|
3,338
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4,564
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|
Accumulated
deficit
|
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|
(66,619
|
)
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|
(57,258
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)
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Treasury
stock, at cost, 1,870,827 and 1,876,827 shares,
respectively
|
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|
(21,840
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)
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(21,910
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)
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Total
stockholders' equity
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59,973
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68,585
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Total
liabilities and stockholders' equity
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$
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226,036
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$
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224,464
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See
Notes to Condensed Consolidated Financial Statements.
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Three
Months
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Nine
Months
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Ended
September 30,
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Ended
September 30,
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|
2005
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|
2004
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2005
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2004
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Net
sales
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$
|
140,557
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$
|
135,426
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$
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334,280
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$
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335,843
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Cost
of goods sold
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122,896
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117,569
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295,310
|
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|
288,095
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|
Gross
profit
|
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17,661
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17,857
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|
38,970
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|
47,748
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|
Selling,
general and administrative expenses
|
|
|
13,861
|
|
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14,846
|
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|
40,100
|
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|
43,834
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|
Stock
option expense
|
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|
-
|
|
|
-
|
|
|
1,953
|
|
|
-
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|
Severance,
restructuring and related charges
|
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|
662
|
|
|
167
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1,975
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|
1,956
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|
(Gain)
loss on sale of assets
|
|
|
(187
|
)
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3
|
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|
(353
|
)
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|
(546
|
)
|
Operating
income (loss)
|
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|
3,325
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|
|
2,841
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|
(4,705
|
)
|
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2,504
|
|
Interest
expense
|
|
|
(1,487
|
)
|
|
(1,017
|
)
|
|
(4,143
|
)
|
|
(2,814
|
)
|
Other,
net
|
|
|
219
|
|
|
(30
|
)
|
|
209
|
|
|
(261
|
)
|
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|
|
|
|
|
|
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|
|
|
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Income
(loss) before provision for income taxes
|
|
|
2,057
|
|
|
1,794
|
|
|
(8,639
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)
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|
(571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
724
|
|
|
918
|
|
|
722
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
1,333
|
|
|
876
|
|
|
(9,361
|
)
|
|
(2,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
(3,822
|
)
|
|
-
|
|
|
(10,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
1,333
|
|
$
|
(2,946
|
)
|
$
|
(9,361
|
)
|
$
|
(12,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share of common stock - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.17
|
|
$
|
0.11
|
|
$
|
(1.18
|
)
|
$
|
(0.28
|
)
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
(0.48
|
)
|
|
-
|
|
|
(1.36
|
)
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.17
|
|
$
|
(0.37
|
)
|
$
|
(1.18
|
)
|
$
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share of common stock - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
0.05
|
|
$
|
0.11
|
|
$
|
(1.18
|
)
|
$
|
(0.28
|
)
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
(0.48
|
)
|
|
-
|
|
|
(1.36
|
)
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.05
|
|
$
|
(0.37
|
)
|
$
|
(1.18
|
)
|
$
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,951
|
|
|
7,870
|
|
|
7,948
|
|
|
7,875
|
|
Diluted
|
|
|
26,880
|
|
|
7,870
|
|
|
7,948
|
|
|
7,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9,361
|
)
|
$
|
(2,188
|
)
|
Depreciation
and amortization
|
|
|
8,606
|
|
|
11,102
|
|
Amortization
of debt issuance costs
|
|
|
844
|
|
|
804
|
|
Stock
option expense
|
|
|
1,953
|
|
|
-
|
|
Gain
on sale of assets
|
|
|
(353
|
)
|
|
(546
|
)
|
|
|
|
1,689
|
|
|
9,172
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(9,596
|
)
|
|
(10,637
|
)
|
Inventories
|
|
|
5,019
|
|
|
(19,072
|
)
|
Other
assets
|
|
|
(471
|
)
|
|
(1,136
|
)
|
Accounts
payable
|
|
|
12,456
|
|
|
5,546
|
|
Accrued
expenses
|
|
|
677
|
|
|
(125
|
)
|
Other,
net
|
|
|
(2,090
|
)
|
|
(2,404
|
)
|
|
|
|
5,995
|
|
|
(27,828
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
7,684
|
|
|
(18,656
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(5,785
|
)
|
|
(10,838
|
)
|
Acquisition
of business, net of cash acquired
|
|
|
(1,658
|
)
|
|
-
|
|
Collections
of note receivable from sale of subsidiary
|
|
|
106
|
|
|
14
|
|
Proceeds
from sale of assets
|
|
|
931
|
|
|
5,545
|
|
Net
cash used in investing activities
|
|
|
(6,406
|
)
|
|
(5,279
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
borrowings on revolving loans
|
|
|
1,045
|
|
|
12,536
|
|
Proceeds
of term loans
|
|
|
-
|
|
|
18,152
|
|
Repayments
of term loans
|
|
|
(2,143
|
)
|
|
(3,244
|
)
|
Direct
costs associated with debt facilities
|
|
|
(244
|
)
|
|
(1,439
|
)
|
Repurchases
of common stock
|
|
|
-
|
|
|
(75
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(1,342
|
)
|
|
25,930
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
166
|
|
|
(117
|
)
|
Net
increase in cash and cash equivalents
|
|
|
102
|
|
|
1,878
|
|
Cash
and cash equivalents, beginning of period
|
|
|
8,525
|
|
|
6,748
|
|
Cash
and cash equivalents, end of period
|
|
$
|
8,627
|
|
$
|
8,626
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
(1)
Significant
Accounting Policies
Consolidation
Policy and Basis of Presentation
The
condensed consolidated financial statements include the accounts of Katy
Industries, Inc. and subsidiaries in which it has a greater than 50% interest,
collectively “Katy” or the Company. All significant intercompany accounts,
profits and transactions have been eliminated in consolidation. Investments
in
affiliates that are not majority owned and where the Company exercises
significant influence are reported using the equity method. The condensed
consolidated financial statements at September 30, 2005 and December 31, 2004
and for the three and nine month periods ended September 30, 2005 and 2004
are
unaudited and reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial condition and results of
operations of the Company. Interim results may not be indicative of results
to
be realized for the entire year. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management’s discussion and analysis of financial
condition and results of operations, contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2004.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories
The
components of inventories are as follows (amounts in
thousands):
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
21,045
|
|
$
|
23,220
|
|
|
Work
in process
|
|
|
1,766
|
|
|
1,826
|
|
|
Finished
goods
|
|
|
42,640
|
|
|
45,299
|
|
|
Inventory
reserves
|
|
|
(4,915
|
)
|
|
(4,671
|
)
|
|
|
|
$
|
60,536
|
|
$
|
65,674
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2005 and December 31, 2004, approximately 34% and 39%,
respectively, of Katy’s inventories were accounted for using the last-in,
first-out (“LIFO”) method of costing, while the remaining inventories were
accounted for using the first-in, first-out (“FIFO”) method. Current cost, as
determined using the FIFO method, exceeded LIFO cost by $4.5 million and $4.7
million at September 30, 2005 and December 31, 2004, respectively.
Property,
Plant 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 was $2.6 million and $3.0
million and $8.1 million and $9.8 million for the three and nine month periods
ended September 30, 2005 and 2004, respectively.
Katy
adopted Statement of Financial Accounting Standards (“SFAS”) No. 143,
Accounting
for Asset Retirement Obligations,
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 September 30, 2005 an asset of $0.8
million and related liability of $1.1 million for retirement obligations
associated with returning certain leased properties to the respective lessors
upon the termination of the lease arrangements. A summary of the changes in
asset retirement obligation since December 31, 2004 is included in the table
below (amounts in thousands):
SFAS
No. 143 Obligation at December 31, 2004
|
|
$
|
1,237
|
|
Additions
|
|
|
330
|
|
Accretion
expense
|
|
|
36
|
|
Changes
in estimates, including timing
|
|
|
32
|
|
Payments
|
|
|
(580
|
)
|
SFAS
No. 143 Obligation at September 30, 2005
|
|
$
|
1,055
|
|
|
|
|
|
|
Stock
Options and Other Stock Awards
The
Company follows the provisions of Accounting Principles Board (“APB”) Opinion
No. 25, Accounting
for Stock Issued to Employees,
regarding accounting for stock options and other stock awards. APB Opinion
No.
25 dictates a measurement date concept in the determination of compensation
expense related to stock awards including stock options, restricted stock,
and
stock appreciation rights. The Company’s outstanding stock options historically
have had established measurement dates and therefore, fixed plan accounting
was
applied, generally resulting in no compensation expense for these stock option
awards. In March 2004, the Company’s Board of Directors approved the vesting of
all previously outstanding and 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. In
the
second quarter of 2005, the Company's former President and Chief
Executive Officer retired from the Company. Upon this event, the Company
recognized $2.0 million of 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.
Upon his retirement, our former President and Chief Executive Officer
immediately forfeited 750,000 options while 300,000 options remain unexercised.
150,000 options and zero options were granted during the three months ended
September 30, 2005 and 2004, respectively, while 906,000 options and 6,000
options were granted during the nine months ended September 30, 2005 and 2004,
respectively.
The
Company has also issued stock appreciation rights and restricted stock awards
which are accounted for as variable stock compensation awards and compensation
expense or income has been recorded for these awards. Compensation expense
recorded relative to stock awards was $22.1 thousand and $9.0 thousand for
the
nine month periods ended September 30, 2005 and 2004, respectively. No
compensation expense was recorded relative to stock awards for the three months
ended September 30, 2005 and 2004, respectively. Compensation income (expense)
recorded associated with the vesting of stock appreciation rights was $0.1
million and ($0.1) million for the three month periods ended September 30,
2005
and 2004, respectively. Compensation income recorded associated with the vesting
of stock appreciation rights was $0.9 million and $0.1 million for the nine
month periods ended September 30, 2005 and 2004, respectively. No compensation
expense was recorded relative to restricted stock awards during the three and
nine months ended September 30, 2005 and 2004, respectively. Compensation
expense or income for stock awards and stock appreciation rights is recorded
in
selling, general and administrative expenses in the Condensed Consolidated
Statements of Operations.
SFAS
No.
123, Accounting
for Stock-Based Compensation,
changes
the method for recognition of expense related to option grants to employees.
Under SFAS No. 123, compensation cost would be recorded based upon the fair
value of each option at the date of grant using an option-pricing model that
takes into account as of the grant date the exercise price and expected life
of
the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock and the risk-free interest rate
for
the expected term of the option. The fair value of each option grant is
estimated on the date of grant using a Black-Scholes option-pricing model with
an expected life of five to ten years for all grants. Had compensation cost
been
determined based on the fair value method of SFAS No. 123, the Company’s net
loss and loss per share would have been adjusted to the pro forma amounts
indicated below (amounts in thousands, except per share data).
|
|
Three
Months
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
Ended
September 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Net
income (loss) attributable to common stockholders,
|
|
$
|
1,333
|
|
$
|
(2,946
|
)
|
$
|
(9,361
|
)
|
$
|
(12,934
|
)
|
as
reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in reported net income (loss), with no related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
effects
|
|
|
-
|
|
|
-
|
|
|
1,953
|
|
|
-
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
expense determined under fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value
based method for all awards, with no
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
tax effects
|
|
|
(120
|
)
|
|
-
|
|
|
(134
|
)
|
|
(1,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
$
|
1,213
|
|
$
|
(2,946
|
)
|
$
|
(7,542
|
)
|
$
|
(14,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.17
|
|
$
|
(0.37
|
)
|
$
|
(1.18
|
)
|
$
|
(1.64
|
)
|
Pro
forma
|
|
$
|
0.15
|
|
$
|
(0.37
|
)
|
$
|
(0.95
|
)
|
$
|
(1.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.05
|
|
$
|
(0.37
|
)
|
$
|
(1.18
|
)
|
$
|
(1.64
|
)
|
Pro
forma
|
|
$
|
0.05
|
|
$
|
(0.37
|
)
|
$
|
(0.95
|
)
|
$
|
(1.88
|
)
|
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 123 (revised 2004), Share-Based
Payment
(“SFAS
123R”), which is a revision of SFAS No. 123. SFAS 123R supersedes APB Opinion
No. 25, and amends FASB Statement No. 95, Statement
of Cash Flows.
The
approach to quantifying stock-based compensation expense in SFAS 123R is similar
to SFAS No. 123. However, the revised statement requires all share-based
payments to employees, including grants of employee stock options, to be
recognized as an expense in the Consolidated Statements of Operations based
on
their fair values as they are earned by the employees under the vesting terms.
Pro forma disclosure of stock-based compensation expense, as is the Company's
practice under SFAS No. 123, will not be permitted after 2005, since SFAS 123R
must be adopted no later than the first interim or annual period beginning
after
December 15, 2005. The Company expects to follow the "modified prospective"
method of adoption of SFAS 123R in the first quarter of 2006, whereby earnings
for prior periods will not be restated as though stock based compensation had
been expensed. Although the Company has not yet fully evaluated the effect
of
SFAS 123R on its results of operations, the Company believes that the impact
on
the Consolidated Statements of Operations will be similar to the pro forma
impact shown above for the quarter ended September 30, 2005.
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 Statement of Financial Accounting Standards No. 133 (“FAS
133”), Accounting
for Derivative Financial Instruments and Hedging Activities,
the
Company is required to recognize all derivatives on its balance sheet at fair
value. As the derivative instrument held by the Company is classified as a
hedge
under FAS 133, changes in the fair value of the derivative will be offset
against the change in fair value of the hedged liability through earnings,
or
recognized in other comprehensive income until the hedged item is recognized
in
earnings. Hedge ineffectiveness associated with the swap will be reported by
the
Company in interest expense.
The
Company accounts for its interest rate swap in accordance with FAS 133. The
agreement has an effective date of August 17, 2005 and a termination date of
August 17, 2007 with a notional amount of $25.0 million in the first year
declining to $15.0 million in the second year. The Company is hedging its
variable LIBOR-based interest rate for a fixed interest rate of 4.49% for the
term of the swap agreement to protect the Company from potential interest rate
increases. The Company has designated its benchmark variable LIBOR-based
interest rate on a portion of the Bank of America Credit Agreement as a hedged
item under a cash flow hedge. In accordance with FAS 133, the Company recorded
a
liability of less than $0.1 million on its balance sheet at September 30, 2005,
with changes in fair market value included in other comprehensive
income.
The
Company
reported insignificant losses for the three and nine months ended September
30,
2005, as a result of hedge ineffectiveness. Future changes in this swap
arrangement, including termination of the agreement, may result in a
reclassification of any gain or loss reported in other comprehensive income
into
earnings as an adjustment to interest expense.
Details
regarding the swap as of September 30, 2005 are as follows (amounts in
thousands):
|
Notional
Amount
|
|
Maturity
|
|
Rate
Paid
|
|
Rate
Received
|
|
Fair
Value (2)
|
|
|
$25,000
|
|
August
17, 2007
|
|
4.49%
|
|
LIBOR
(1)
|
|
$
(40)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
LIBOR rate is
determined on the 23rd of each month and continues up to and including the
maturity date.
(2)
The fair value is
the mark-to-market value.
Earnings
Per Share
The
condensed consolidated financial statements include basic and diluted earnings
per share. Diluted per share information is calculated by also considering
the
impact of potential common stock on the weighted average shares outstanding.
Potential common stock consists of (a) stock options “in the money” based on the
average stock price for the respective period and (b) convertible preferred
shares accounted for using the “if converted” basis, which assumes their
conversion to common stock at a ratio of 16.6:1.
The
following table sets forth the computation of diluted earnings per share for
the
three months ended September 30, 2005 (amounts in thousands):
|
|
For
the three months ended
|
|
|
|
September
30, 2005
|
|
Basic
EPS
|
|
Income
|
|
Shares
|
|
Per-share
amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
1,333
|
|
|
7,951
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities [a]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock
|
|
|
|
|
|
18,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
1,333
|
|
|
26,880
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
[a] For
the
nine months ended September 30, 2005 and 2004, respectively, and the three
months ended September 30, 2004, the stock options and convertible preferred
stock were not reflected, as their effect on earnings (loss) per share for
the
periods were anti-dilutive.
Reclassifications
Certain
amounts from prior periods have been reclassified to conform to the current
period presentation.
(2)
New
Accounting Pronouncements
On
December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the “Act”) became law in the U.S. The Act introduces a prescription
drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide retiree benefits in certain
circumstances. FASB Staff Position (FSP) 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (“FSP
106-2”), issued in May 2004, requires measures of the accumulated postretirement
benefit obligation (“APBO”) and net periodic postretirement benefit cost
(“NPPBC”) to reflect the effects of the Act. FSP 106-2 became effective for the
Company in the third quarter of fiscal 2004; however Katy had chosen to defer
adoption until its next measurement date, subject to the final provisions of
the
Act. While the Company expects that it may be entitled to the federal subsidy
for certain of its plans, the effect of the Act on the Company’s accumulated
postretirement benefit obligations is not material. While the Company may be
entitled to the federal subsidy for certain of its plans, we have determined
that the administrative costs of obtaining the subsidy meet or exceed any
potential subsidy benefit.
In
November 2004, the FASB issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4
(SFAS
151). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and spoilage. In addition, SFAS 151 requires
that allocation of fixed production overhead to the costs of conversion be
based
on the normal capacity of the production facilities. The provisions of SFAS
151
are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company expects that the adoption of SFAS 151 will not have
a
material impact on its results of operations and financial
position.
In
December 2004, the FASB issued FSP No. 109-1, Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction
on
Qualified Production Activities Provided by the American Jobs Creation Act
of
2004.
The
American Jobs Creation Act of 2004 includes a tax deduction of up to 9% of
the
lesser of qualified production activities income, as defined, or taxable income,
after the deduction for the utilization of any net operating loss carryforwards.
The FSP clarified that this deduction should be accounted for as a special
tax
deduction in accordance with SFAS No. 109. The Company expects that due to
its
net operating loss carryforwards and its full domestic valuation allowance,
the
new deduction will have no impact on income tax expense for fiscal years 2005
and 2006.
In
December 2004, the FASB issued FSP No. 109-2, Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. The
Company has completed its review of the Repatriation Provision and has concluded
that it will not benefit from the Act due to the Company's current tax position.
As a result, the Repatriation Provision has not had any impact on income tax
expense during fiscal 2004 and through the nine months ended September 30,
2005.
(3)
Intangible
Assets
The
following table sets forth information regarding Katy’s intangible assets
(amounts in thousands):
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Patents
|
|
$
|
1,380
|
|
$
|
(800
|
)
|
$
|
580
|
|
$
|
1,114
|
|
$
|
(727
|
)
|
$
|
387
|
|
Customer
lists
|
|
|
10,647
|
|
|
(7,795
|
)
|
|
2,852
|
|
|
10,666
|
|
|
(7,619
|
)
|
|
3,047
|
|
Tradenames
|
|
|
5,508
|
|
|
(1,794
|
)
|
|
3,714
|
|
|
5,531
|
|
|
(1,537
|
)
|
|
3,994
|
|
Other
|
|
|
679
|
|
|
(11
|
)
|
|
668
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
18,214
|
|
$
|
(10,400
|
)
|
$
|
7,814
|
|
$
|
17,311
|
|
$
|
(9,883
|
)
|
$
|
7,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
of
Katy’s intangible assets are definite long-lived intangibles. Katy recorded
amortization expense on intangible assets of $0.2 million and $0.4 million
for
the three-month periods ended September 30, 2005 and 2004, respectively, and
$0.5 million and $1.3 million for the nine-month periods ended September 30,
2005 and 2004, respectively. Estimated aggregate future amortization expense
related to intangible assets is as follows (amounts in thousands):
2005 $331
2006 756
2007 752
2008 746
2009
732
2010
714
(4)
Acquisition
During
the third quarter of 2005, the Company’s Continental Commercial Products LLC
subsidiary (“CCP”) acquired substantially all of the assets and assumed certain
liabilities of Washington International Non-Wovens, LLC (“WIN”), based in
Washington, GA. The purchase price was approximately $2.1 million and was
allocated to the acquired net tangible 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 Abrasives business unit in the Maintenance Products Group.
(5) Savannah
Energy Systems Company Partnership
On
April
29, 2002, Savannah Energy Systems Company (“SESCO”), an indirect wholly owned
subsidiary of Katy, entered into a partnership agreement with Montenay Power
Corporation and its affiliates (“Montenay”) that turned over the operational
control of SESCO's waste-to-energy facility to the partnership. The Company
caused SESCO to enter into this agreement as a result of evaluations of SESCO's
business. First, Katy concluded that SESCO was not a core component of the
Company's long-term business strategy. Moreover, Katy did not feel it had the
management expertise to deal with certain risks and uncertainties presented
by
the operation of SESCO's business, given that SESCO was the Company's only
waste-to-energy facility. Katy had explored options for divesting SESCO for
a
number of years, and management felt that this transaction offered a reasonable
strategy to exit this business.
The
partnership, with Montenay's leadership, assumed SESCO's position in various
contracts relating to the facility's operation. Under the partnership agreement,
SESCO contributed its assets and liabilities (except for its liability under
the
loan agreement with the Resource Recovery Development Authority (the
“Authority”) of the City of Savannah and the related receivable under the
service agreement with the Authority) to the partnership. While SESCO has a
99%
interest as a limited partner, Montenay has the day to day responsibility for
administration, operations, financing and other matters of the partnership,
and
accordingly, the partnership will not be consolidated. Katy agreed to pay
Montenay $6.6 million over the span of seven years under a note payable as
part
of the partnership and related agreements. Certain amounts may be due to SESCO
upon expiration of the service agreement in 2008; also, Montenay may purchase
SESCO's interest in the partnership at that time. Katy has not recorded any
amounts receivable or other assets relating to amounts that may be received
at
the time the service agreement expires, given their uncertainty. The Company
does not consolidate the partnership and, as such, there is no income statement
activity related to the day-to-day operation of the partnership.
The
Company made a payment of $1.1 million in June 2005 on the remaining portion
of
the $6.6 million note. The table below schedules the remaining payments as
of
September 30, 2005, which are reflected in accrued expenses and other
liabilities in the Condensed Consolidated Balance Sheet (amounts in
thousands):
2006
|
|
$
|
1,100
|
|
2007
|
|
|
1,100
|
|
2008
|
|
|
550
|
|
|
|
$
|
2,750
|
|
In
the first
quarter of 2002, the Company recognized a charge of $6.0 million consisting
of
1) the discounted value of the $6.6 million note, 2) the carrying value of
certain assets contributed to the partnership, consisting primarily of machinery
spare parts, and 3) costs to close the transaction. It should be noted that
all
of SESCO's long-lived assets were reduced to a zero value during the year
ended
December 31, 2001, so no additional impairment was required. The Company
expects
that in the future, the only income statement activity associated with the
partnership is the accretion of the discounted note payable, and Katy's
Condensed Consolidated Balance Sheet will carry the liability mentioned
above.
In
1984,
the Authority issued $55.0 million of Industrial Revenue Bonds and lent the
proceeds to SESCO under the loan agreement for the acquisition and construction
of the waste-to-energy facility that has now been transferred to the
partnership. The funds required to repay the loan agreement come from the
monthly disposal fee paid by the Authority under the service agreement for
certain waste disposal services, a component of which is for debt service.
To
induce the required parties to consent to the SESCO partnership transaction,
SESCO retained its liability under the loan agreement. In connection with that
liability, SESCO also retained its right to receive the debt service component
of the monthly disposal fee.
Management
has determined that SESCO has a legally enforceable right to offset amounts
it
owes to the Authority under the loan agreement against amounts that are owed
from the Authority under the service agreement. At September 30, 2005, this
amount was $23.7 million. Accordingly, the amounts owed to and due from SESCO
have been netted for financial reporting purposes and are not shown on the
Condensed Consolidated Balance Sheets.
In
addition to SESCO retaining its liabilities under the loan agreement, to induce
the required parties to consent to the partnership transaction, Katy also
continues to guarantee the obligations of the partnership under the service
agreement. The partnership is liable for liquidated damages under the service
agreement if it fails to accept the minimum amount of waste or to meet other
performance standards under the service agreement. The liquidated damages,
an
off balance sheet risk for Katy, are equal to the amount of the Industrial
Revenue Bonds outstanding, less $4.0 million maintained in a debt service
reserve trust. Management does not expect non-performance by the other parties.
Additionally, Montenay has agreed to indemnify Katy for any breach of the
service agreement by the partnership.
Following
are scheduled principal repayments on the loan agreement (and the Industrial
Revenue Bonds) as of September 30, 2005 (amounts in thousands):
2005
|
|
$
|
8,370
|
|
2006
|
|
|
15,300
|
|
Total
|
|
$
|
23,670
|
|
(6)
Indebtedness
On
April
20, 2004, the Company completed a refinancing of its outstanding indebtedness
(the “Refinancing”) and entered into a new agreement with Bank of America
Business Capital (formerly Fleet Capital Corporation) (the “Bank of America
Credit Agreement”). Like the previous credit agreement with Fleet Capital
Corporation, the Bank of America Credit Agreement is a $110 million facility
with a $20 million term loan (“Term Loan”) and a $90 million revolving credit
facility (“Revolving Credit Facility”) with essentially the same terms as the
previous credit agreement. The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks, all of
which participated in the syndicate from the previous credit agreement. In
addition, the Bank of America Credit Agreement contains credit sub-facilities
in
Canada and the United Kingdom which allows the Company to borrow funds locally
in these countries and provide a natural hedge against currency fluctuations.
Under
the
Bank of America Credit Agreement, the Term Loan has a final maturity date of
April 20, 2009 with quarterly payments of $0.7 million. The Term Loan is
collateralized by the Company’s property and equipment. The Revolving Credit
Facility also has an expiration date of April 20, 2009 and its borrowing base
is
determined by eligible inventory and accounts receivable. Letters of credit,
which reduce the unused borrowing availability under the Revolving Credit
Facility, were $9.6 million at September 30, 2005. Unused borrowing
availability on the Revolving Credit Facility, after considering letters of
credit, was $35.5 million at September 30, 2005. All extensions of credit
under the Bank of America Credit Agreement are collateralized by a first
priority security interest in and lien upon the capital stock of each material
domestic subsidiary (65% of the capital stock of each material foreign
subsidiary), and all present and future assets and properties of Katy.
The
Bank
of America Credit Agreement contains various financial and operating covenants,
which among other things, require the Company to maintain a fixed charge
coverage ratio and certain other financial ratios (see discussion below). It
also includes customary restrictions and default provisions.
From
September 30, 2004, interest rate margins (i.e. the interest rate spread above
LIBOR) on our Bank of America Credit Agreement borrowings have risen from 175
basis points over applicable LIBOR rates for Revolving Credit Facility
borrowings and 200 basis points over LIBOR for borrowings under the Term Loan
to
275 and 300 basis points, respectively. Current margins reflect the highest
spread under the Bank of America Credit Agreement, as specified by the Third
Amendment (see below). Additionally, margins on the Term Loan will drop 25
basis
points if the balance of the Term Loan is reduced below $10.0
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 at September 30, 2005 and
over the life of the agreement is 4.49%. (See Note 1 for further information
regarding this transaction).
Long-term debt consists of the following (amounts in thousands):
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Term
loan payable under the Bank of America Credit Agreement, interest
|
|
|
|
|
|
|
|
based
on LIBOR and Prime Rates (6.875% - 8%), due through 2009
|
|
$
|
16,428
|
|
$
|
18,571
|
|
Revolving
loans payable under the Bank of America Credit Agreement,
|
|
|
|
|
|
|
|
interest
based on LIBOR and Prime Rates (6.5% - 7.75%)
|
|
|
41,085
|
|
|
40,166
|
|
Other
|
|
|
615
|
|
|
-
|
|
Total
debt
|
|
|
58,128
|
|
|
58,737
|
|
Less
revolving loans, classified as current (see below)
|
|
|
(41,085
|
)
|
|
(40,166
|
)
|
Less
current maturities
|
|
|
(3,472
|
)
|
|
(2,857
|
)
|
Long-term
debt
|
|
$
|
13,571
|
|
$
|
15,714
|
|
|
|
|
|
|
|
|
|
Aggregate remaining scheduled maturities of the Term Loan as of September 30,
2005 are as follows (amounts in thousands):
2005
|
$
|
714
|
2006
|
|
2,857
|
2007
|
|
2,857
|
2008
|
|
2,857
|
2009
|
|
7,143
|
The
Revolving Credit Facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence of a
material adverse effect (“MAE”) clause in the Bank of America Credit Agreement,
cause the Revolving Credit Facility to be classified as a current liability
per
guidance in Emerging Issues Task Force Issue No. 95--22, Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement.
The
Company does not expect to repay, or be required to repay, within one year,
the
balance of the Revolving Credit Facility classified as a current liability.
The
MAE clause, which is a typical requirement in commercial credit agreements,
allows the lenders to require the loan to become due if they determine there
has
been a material adverse effect on the Company’s operations, business,
properties, assets, liabilities, condition or prospects. The classification
of
the Revolving Credit Facility as a current liability was a result only of the
combination of the lockbox agreements and the MAE clause. The Revolving Credit
Facility does not expire or have a maturity date within one year, but rather
has
a final expiration date of April 20, 2009. The lender has not notified Katy
of
any indication of a MAE at September 30, 2005, and to management’s knowledge,
the Company was not in violation of any provision of the Bank of America Credit
Agreement, as amended, at September 30, 2005.
The
Company determined that due to declining profitability in the fourth quarter
of
2004, potentially lower profitability in the first half of 2005 and the timing
of certain restructuring payments, it would not meet its Fixed Charge Coverage
Ratio (as defined in the Bank of America Credit Agreement) and could potentially
exceed its maximum Consolidated Leverage Ratio (also as defined in the Bank
of
America Credit Agreement) as of the end of the first, second and third quarters
of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage
Ratio or exceeding the maximum Consolidated Leverage Ratio, the Company obtained
an amendment to the Bank of America Credit Agreement (the “Second Amendment”).
The Second Amendment applied only to the first three quarters of 2005 and the
covenants would have returned to their original levels for the fourth quarter
of
2005. Specifically, the Second Amendment eliminated the Fixed Charge Coverage
Ratio, increased the maximum Consolidated Leverage Ratio, established a Minimum
Consolidated EBITDA (on a latest twelve months basis) for each of the periods
and also established a Minimum Availability (the eligible collateral base less
outstanding borrowings and letters of credit) on each day within the nine-month
period.
Subsequent
to the Second Amendment’s effective date, the Company determined that it would
likely not meet its amended financial covenants. On April 13, 2005, the Company
obtained a further amendment to the Bank of America Credit Agreement (the “Third
Amendment”). The Third Amendment eliminates the maximum Consolidated Leverage
Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment
and adjusts the Minimum Availability such that our eligible collateral must
exceed the sum of the Company’s outstanding borrowings and letters of credit
under the Revolving Credit Facility by at least $5 million from the effective
date of the Third Amendment through September 29, 2005 and by at least $7.5
million from September 30, 2005 until the date the Company delivers its
financial statements for the first quarter of 2006 to its lenders. Subsequent
to
the delivery of the financial statements for the first quarter of 2006 the
Third
Amendment reestablishes the minimum Fixed Charge Coverage Ratio as originally
set forth in the Bank of America Credit Agreement. The Third Amendment also
reduces the maximum allowable capital expenditures for 2005 from $15 million
to
$10 million, and increases the interest rate margins on all of the Company’s
outstanding borrowings and letters of credit to the largest margins set forth
in
the Bank of America Credit Agreement. Effective April 13, 2005, interest accrues
on the Revolving Credit Facility and Term Loan borrowings at 275 and 300 basis
points over LIBOR, respectively. Interest rate margins will return to levels
set
forth in the Bank of America Credit Agreement subsequent to the delivery of
the
Company’s financial statements for the first quarter of 2006 to its lenders.
As
a
result of the Third Amendment, the Company’s current debt covenants under the
Bank of America Credit Agreement are as follows (see further discussion
below):
Minimum
Availability
- At
September 30, 2005, the Company was required to have a borrowing base
(collateral) in excess of borrowings and outstanding letters of credit by at
least $7.5 million. Pursuant to the Third Amendment, this covenant is in effect
through the first quarter of 2006.
Fixed
Charge Coverage Ratio
- The
Company is required to maintain a Fixed Charge Coverage Ratio (as defined in
the
Bank of America Credit Agreement) of 1.1:1. Pursuant to the Third Amendment,
this covenant was suspended and will be reinstated following the first quarter
of 2006.
Capital
Expenditures
- For
the year ended December 31, 2005, the Company is not to exceed $10.0 million
in
capital expenditures. Subsequent to 2005, the Company is not to exceed $15.0
million during a single fiscal year.
Leverage
Ratio
- The
Third Amendment to the Bank of America Credit Agreement eliminated the Leverage
Ratio (as defined in the Bank of America Credit Agreement) as a financial
covenant. Following the first quarter of 2006, the Leverage Ratio will be
utilized to determine the interest rate margin over the applicable LIBOR
rate.
The
Company has recently indicated to the syndicate of banks in the Bank of America
Credit Agreement, that it may be unable to attain the required Fixed Charge
Coverage Ratio as of the end of the first quarter of 2006. If the Company is
unable to comply with the terms of the Fixed Charge Coverage Ratio or any of
the
other amended covenants, it may be required to obtain further amendments and
pursue increased liquidity through additional debt financing and/or the sale
of
assets. The Company believes that given its strong working capital base,
additional liquidity could be obtained through additional debt financing, if
necessary. However, there is no guarantee that such amendments or financing
could be obtained. In addition, the Company is continually evaluating
alternatives relating to the sale of excess assets and divestitures of certain
of its business units. Asset sales and business divestitures present
opportunities to provide additional liquidity by de-leveraging our financial
position.
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 September 30, 2005.
During
the nine months ended September 30, 2005, the company incurred debt issuance
costs of $0.2 million, primarily related to the Second Amendment to the Bank
of
America Credit Agreement.
Katy
incurred additional debt issuance costs in 2004 associated with the Bank of
America Credit Agreement. Additionally, at the time of the inception of the
Bank
of America Credit Agreement, Katy had approximately $4.0 million of unamortized
debt issuance costs associated with the previous credit agreement. The remainder
of the previously capitalized costs, along with the capitalized costs incurred
in connection with the Bank of America Credit Agreement, will be amortized
over
the life of the Bank of America Credit Agreement through April 2009. Future
quarterly amortization expense is expected to be approximately $0.3 million.
During the nine months ended September 30, 2004, Katy incurred fees and expenses
of $0.4 million
(reported in Other, net on the Condensed Consolidated Statements of Operations)
associated with a financing which the Company chose not to pursue.
(7)
Retirement
Benefit Plans
Several
of the Company’s subsidiaries have pension plans covering substantially all of
their employees. These plans are noncontributory, defined benefit pension plans.
The benefits to be paid under these plans are generally based on employees’
retirement age and years of service. The companies’ funding policies, subject to
the minimum funding requirement of employee benefit and tax laws, are to
contribute such amounts as determined on an actuarial basis to provide the
plans
with assets sufficient to meet the benefit obligations. Plan assets consist
primarily of fixed income investments, corporate equities and government
securities. The Company also provides certain health care and life insurance
benefits for some of its retired employees. The post-retirement health plans
are
unfunded. Katy uses an annual measurement date of December 31 for the majority
of its pension and other postretirement benefit plans for all years presented.
Information regarding the Company’s net periodic benefit cost for pension and
other postretirement benefit plans for the three and nine months ended September
30, 2005 and 2004, is as follows (amounts in thousands):
|
|
Pension
Benefits
|
|
|
|
Three
Months
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
Ended
September 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2
|
|
$
|
1
|
|
$
|
6
|
|
$
|
3
|
|
Interest
cost
|
|
|
23
|
|
|
33
|
|
|
70
|
|
|
97
|
|
Expected
return on plan assets
|
|
|
(25
|
)
|
|
(33
|
)
|
|
(77
|
)
|
|
(98
|
)
|
Amortization
of net gain
|
|
|
20
|
|
|
18
|
|
|
59
|
|
|
52
|
|
Net
periodic benefit cost
|
|
$
|
20
|
|
$
|
19
|
|
$
|
58
|
|
$
|
54
|
|
|
|
Other
Benefits
|
|
|
|
Three
Months
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
Ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
$
|
7
|
|
$
|
-
|
|
$
|
21
|
|
Interest
cost
|
|
|
47
|
|
|
40
|
|
|
142
|
|
|
120
|
|
Amortization
of prior service cost
|
|
|
15
|
|
|
15
|
|
|
45
|
|
|
45
|
|
Amortization
of net gain
|
|
|
15
|
|
|
-
|
|
|
45
|
|
|
-
|
|
Net
periodic benefit cost
|
|
$
|
77
|
|
$
|
62
|
|
$
|
232
|
|
$
|
186
|
|
There
are
no required contributions to the pension plans for 2005 and Katy did not make
any contributions during the first three quarters of 2005.
(8)
Income
Taxes
As
of
September 30, 2005 and December 31, 2004, the Company had deferred tax assets,
net of deferred tax liabilities, of approximately $61.3 million. Domestic net
operating loss (NOL) carry forwards comprised $28.9 million of the deferred
tax
assets. Katy’s history of operating losses in many of its taxing jurisdictions
provides significant negative evidence with respect to the Company’s ability to
generate future taxable income, a requirement in order to recognize deferred
tax
assets on the Condensed Consolidated Balance Sheets. For this reason, the
Company was unable to conclude at September 30, 2005 and December 31, 2004
that
NOLs and other deferred tax assets in the United States and certain unprofitable
foreign jurisdictions would be utilized in the future. As a result, valuation
allowances for these entities were recorded as of such dates for the full amount
of deferred tax assets, net of the amount of deferred tax liabilities.
The
provision for income taxes for the three and nine months ended September 30,
2005 reflects a current expense for foreign and state income taxes. The
provision for income taxes for the three and nine months ended September 30,
2004 reflects a foreign income tax provision offset by a current benefit for
state income taxes. In both 2005 and 2004, tax benefits were not recorded in
the
U.S. (for federal and most state income taxes) and for certain foreign
jurisdictions on pre-tax net losses. As a result of accumulated operating losses
and inability to conclude that it will generate sufficient taxable income in
the
future in those jurisdictions, the Company has concluded that it was more likely
than not that such benefits would not be realized.
(9)
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 EPA agreed to resolve
the proceeding through an Administrative Order on Consent under Section 7003
of
RCRA. While the Company has completed the cleanup activities required by the
Administrative Order on Consent under Section 7003 of RCRA, the Company still
has further obligations with respect to this matter in the areas of groundwater
and land treatment unit monitoring 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. The Company has recorded
and accrued amounts that it deems reasonable for prospective liabilities with
respect to this matter and believes that any additional liability with respect
to this matter in excess of the accrual will not be material.
Asbestos
Claims
A. The
Company has recently been named as a defendant in seven lawsuits filed in state
court in Alabama by a total of approximately 62 individual plaintiffs. There
are
over 100 defendants named in each case. In all seven 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
five of the cases, Plaintiffs also assert wrongful death claims. The Company
will vigorously defend the claims against it in these matters. The liability
of
the Company cannot be determined at this time.
B. Sterling
Fluid Systems (USA) has tendered over 1,900 cases pending in Michigan, New
Jersey, Illinois, Nevada, Mississippi, Wyoming, Louisiana, Georgia,
Massachusetts and California to the Company for defense and indemnification.
With respect to one case, Sterling has demanded that Katy indemnify it for
a
$200,000 settlement. Sterling bases its tender of the complaints on the
provisions contained in a 1993 Purchase Agreement between the parties whereby
Sterling purchased the LaBour Pump business and other assets from the Company.
Sterling has not filed a lawsuit against Katy in connection with these
matters.
The
tendered complaints all purport to state claims against Sterling and its
subsidiaries. The Company and its current subsidiaries are not named as
defendants. The plaintiffs in the cases also allege that they were exposed
to
asbestos and products containing asbestos in the course of their employment.
Each complaint names as defendants many manufacturers of products containing
asbestos, apparently because plaintiffs came into contact with a variety of
different products in the course of their employment. Plaintiffs’ claim that
LaBour Pump and/or Sterling may have manufactured some of those
products.
With
respect to many of the tendered complaints, including the one settled by
Sterling for $200,000, the Company has taken the position that Sterling has
waived its right to indemnity by failing to timely request it as required under
the 1993 Purchase Agreement. With respect to the balance of the tendered
complaints, the Company has elected not to assume the defense of Sterling in
these matters.
C. LaBour
Pump Company, a former subsidiary of the Company, has been named as a defendant
in over 300 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
(U.S. District Court, Southern District of Indiana).
In
December 1996, Banco del Atlantico (“plaintiff”), a bank located in Mexico,
filed a lawsuit in Texas against Woods Industries, Inc., a subsidiary of Katy,
and against certain past and/or then present officers, directors and owners
of
Woods (collectively, “defendants”). The plaintiff alleges that it was defrauded
into making loans to a Mexican corporation controlled by certain past officers
and directors of Woods based upon fraudulent representations and purported
guarantees. Based on these allegations, and others, the plaintiff originally
asserted claims for alleged violations of the federal Racketeer Influenced
and
Corrupt Organizations Act (“RICO”); “money laundering” of the proceeds of the
illegal enterprise; the Indiana RICO and Crime Victims Act; common law fraud
and
conspiracy; and fraudulent transfer. As discussed below, certain of the
plaintiff’s claims were recently dismissed with prejudice by the Court. The
plaintiff also seeks recovery upon certain alleged guarantees purportedly
executed by Woods Wire Products, Inc., a predecessor company from which Woods
purchased certain assets in 1993 (prior to Woods’s ownership by Katy, which
began in December 1996). The primary legal theories under which the plaintiff
seeks to hold Woods liable for its alleged damages are respondeat superior,
conspiracy, successor liability, or a combination of the three.
The
case
was transferred from Texas to the Southern District of Indiana in 2003. In
September 2004, the plaintiff and HSBC Mexico, S.A. (collectively,
“plaintiffs”), who intervened in the litigation as an additional alleged owner
of the claims against the defendants, filed a Second Amended Complaint. The
defendants filed motions to dismiss the Second Amended Complaint on November
8,
2004. These motions sought dismissal of plaintiffs’ Second Amended Complaint on
grounds of, among other things, failure to state a claim and forum non
conveniens.
On
August
11, 2005, the court granted significant aspects of Defendants’ motions to
dismiss for failure to state a claim. Specifically, the Court dismissed
with
prejudice all
of
the federal and Indiana RICO claims asserted in the Second Amended Complaint
against Woods. This ruling removes the treble damages exposure associated with
the federal and Indiana RICO claims. Recently, the Court also denied the
defendants’ renewed motion to dismiss for forum non conveniens. The sole claims
now remaining against Woods are certain common law claims and claims under
the
Indiana Crime Victims Act. Discovery on the Plaintiffs’ claims is continuing,
and fact discovery currently closes on April 11, 2006.
The
plaintiffs seek damages in excess of $24 million, request that the Court void
certain asset sales as purported “fraudulent transfers” (including the 1993
Woods Wire Products, Inc./Woods asset sale), and continue to claim that the
Indiana Crime Victims Act entitles them to treble damages for some or all of
their claims. Katy may have recourse against the former owners of Woods and
others for, among other things, violations of covenants, representations and
warranties under the purchase agreement through which Katy acquired Woods,
and
under state, federal and common law. Woods may also have indemnity claims
against the former officers and directors. In addition, there is a dispute
with
the former owners of Woods regarding the final disposition of amounts withheld
from the purchase price, which may be subject to further adjustment as a result
of the claims by the plaintiff. The extent or limit of any such adjustment
cannot be predicted at this time.
While
the
ultimate liability of the Company related to this matter cannot be determined
at
this time, the Company has recorded and accrued amounts that it deems reasonable
for prospective liabilities with respect to this matter.
Other
Claims
Katy
also
has a number of product liability and workers’ compensation claims pending
against it and its subsidiaries. Many of these claims are proceeding through
the
litigation process and the final outcome will not be known until a settlement
is
reached with the claimant or the case is adjudicated. The Company estimates
that
it can take up to 10 years from the date of the injury to reach a final outcome
on certain claims. With respect to the product liability and workers’
compensation claims, Katy has provided for its share of expected losses beyond
the applicable insurance coverage, including those incurred but not reported
to
the Company or its insurance providers, which are developed using actuarial
techniques. Such accruals are developed using currently available claim
information, and represent management’s best estimates. The ultimate cost of any
individual claim can vary based upon, among other factors, the nature of the
injury, the duration of the disability period, the length of the claim period,
the jurisdiction of the claim and the nature of the final outcome.
Although
management believes that the actions specified above in this section
individually and in the aggregate are not likely to have outcomes that will
have
a material adverse effect on the Company’s financial position, results of
operations or cash flow, further costs could be significant and will be recorded
as a charge to operations when, and if, current information dictates a change
in
management’s estimates.
(10)
Industry
Segment Information
The
Company is organized into two operating segments: Maintenance Products and
Electrical Products. The activities of the Maintenance Products Group include
the manufacture and distribution of a variety of commercial cleaning supplies
and consumer home and automotive storage products. The Electrical Products
Group
is a distributor of consumer electrical corded products. The following table
sets forth information by segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Maintenance
Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
|
|
$
|
64,013
|
|
$
|
72,218
|
|
$
|
189,355
|
|
$
|
212,444
|
|
Operating
(loss) income
|
|
|
|
|
|
|
|
|
591
|
|
|
74
|
|
|
(3,937
|
)
|
$
|
1,121
|
|
Operating
(deficit) margin
|
|
|
|
|
|
|
|
|
0.9
|
%
|
|
0.1
|
%
|
|
(2.1
|
%)
|
|
0.5
|
%
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
2,466
|
|
|
2,975
|
|
|
7,592
|
|
|
9,976
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
2,731
|
|
|
4,834
|
|
|
5,534
|
|
|
10,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
|
|
$
|
76,544
|
|
$
|
63,208
|
|
$
|
144,925
|
|
$
|
123,399
|
|
Operating
income
|
|
|
|
|
|
|
|
|
6,100
|
|
|
6,329
|
|
|
10,163
|
|
|
10,879
|
|
Operating
margin
|
|
|
|
|
|
|
|
|
8.0
|
%
|
|
10.0
|
%
|
|
7.0
|
%
|
|
8.8
|
%
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
245
|
|
|
364
|
|
|
948
|
|
|
948
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
100
|
|
|
300
|
|
|
251
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
- |
Operating
segments
|
|
$
|
140,557
|
|
$
|
135,426
|
|
$
|
334,280
|
|
$
|
335,843
|
|
|
|
|
Total
|
|
$
|
140,557
|
|
$
|
135,426
|
|
$
|
334,280
|
|
$
|
335,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
- |
Operating
segments
|
|
$
|
6,691
|
|
$
|
6,403
|
|
$
|
6,226
|
|
$
|
12,000
|
|
|
|
- |
Unallocated
corporate
|
|
|
(2,704
|
)
|
|
(3,395
|
)
|
|
(7,003
|
)
|
|
(8,089
|
)
|
|
|
- |
Stock
option expense
|
|
|
-
|
|
|
-
|
|
|
(1,953
|
)
|
|
-
|
|
|
|
- |
Severance,
restructuring,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
related charges
|
|
$
|
(662
|
)
|
|
(167
|
)
|
|
(1,975
|
)
|
|
(1,956
|
)
|
|
|
- |
Gain
on sale of real estate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
549
|
|
|
|
|
|
|
$
|
3,325
|
|
$
|
2,841
|
|
$
|
(4,705
|
)
|
$
|
2,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
- |
Operating
segments
|
|
$
|
2,711
|
|
$
|
3,339
|
|
$
|
8,540
|
|
$
|
10,924
|
|
|
|
- |
Unallocated
corporate
|
|
|
26
|
|
|
54
|
|
|
66
|
|
|
178
|
|
|
|
|
Total
|
|
|
$
|
2,737
|
|
$
|
3,393
|
|
$
|
8,606
|
|
$
|
11,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
- |
Operating
segments
|
|
$
|
2,831
|
|
$
|
5,134
|
|
$
|
5,785
|
|
$
|
10,836
|
|
|
|
- |
Unallocated
corporate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
|
|
Total
|
|
|
|
|
$
|
2,831
|
|
$
|
5,134
|
|
$
|
5,785
|
|
$
|
10,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
Total
assets
|
|
- |
Maintenance
Products Group
|
|
$
|
136,950
|
|
$
|
154,635
|
|
|
|
|
|
|
|
|
|
- |
Electrical
Products Group
|
|
|
77,768
|
|
|
57,698
|
|
|
|
|
|
|
|
|
|
- |
Other
[a]
|
|
|
1,617
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
Unallocated
corporate
|
|
|
9,701
|
|
|
10,507
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
226,036
|
|
$
|
224,464
|
|
|
|
|
|
|
|
[a]
The
amount shown as “Other” represents an equity investment in a shrimp harvesting
and farming operation.
(11)
Severance,
Restructuring and Related Charges
The
Company has initiated several cost reduction and facility consolidation
initiatives since its recapitalization in mid-2001, resulting in severance,
restructuring and related charges over the past four years. A summary of
severance, restructuring and related charges (income) (by major initiative)
for
the three and nine months ended September 30, 2005 and 2004, respectively,
is as
follows (amounts in thousands):
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Consolidation
of abrasives facilities
|
|
$
|
371
|
|
$
|
170
|
|
$
|
1,295
|
|
$
|
833
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
|
150
|
|
|
(84
|
)
|
|
198
|
|
|
(186
|
)
|
Consolidation
of administrative functions for CCP
|
|
|
-
|
|
|
55
|
|
|
21
|
|
|
227
|
|
Shutdown
of Woods Canada manufacturing
|
|
|
131
|
|
|
3
|
|
|
112
|
|
|
1,045
|
|
Other
|
|
|
10
|
|
|
23
|
|
|
349
|
|
|
37
|
|
Total
severance, restructuring and related costs
|
|
$
|
662
|
|
$
|
167
|
|
$
|
1,975
|
|
$
|
1,956
|
|
Consolidation
of abrasives facilities
- In
2002, the Company approved a plan to consolidate the manufacturing facilities
of
its abrasives business
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 has
been delayed. The Lawrence, Massachusetts facility was closed in the second
quarter of 2005 and it is expected that the Pineville, North Carolina facility
will be closed in 2006. Both operations will be consolidated into the recently
expanded Wrens, Georgia facility. Expenses incurred in the nine months ended
September 30, 2005 consist of costs for demolition and repair of the Lawrence
facility and various other consolidation related costs ($0.6 million), severance
associated with the Lawrence facility ($0.4 million), and idle facility costs
($0.3 million). Costs incurred in the nine months ended September 30, 2004
consisted of severance for terminations at the Lawrence facility ($0.4
million), the closure of the Pineville facility ($0.3 million) and expenses
for
the preparation of the Wrens facility ($0.1 million). With respect to the
severance costs, the employees covered by these termination benefits were
required to provide service beyond the minimum retention period. Accordingly,
the liability for these termination costs initially was being recognized ratably
from September 2003 until approximately June 2004 (the periods that the
employees were required to provide service until the Lawrence and Pineville
facilities were expected to be closed). As a result of the delay in the closing
of these facilities, the liability for these employee termination costs was
recognized ratably through the second quarter of 2005, the closing date of
the
Lawrence facility, and will be recognized through 2006, the expected closing
date of the Pineville facility. Other than closure costs and severance for
the
Pineville facility, management does not anticipate any material costs beyond
2005.
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Termination
|
|
Termination |
|
|
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Other
[c]
|
|
Restructuring
liabilities at December 31, 2004
|
|
$
|
983
|
|
$
|
733
|
|
$
|
250
|
|
$
|
-
|
|
Additions
|
|
|
1,295
|
|
|
334
|
|
|
263
|
|
|
698
|
|
Payments
|
|
|
(1,821
|
)
|
|
(860
|
)
|
|
(263
|
)
|
|
(698
|
)
|
Restructuring
liabilities at September 30, 2005
|
|
$
|
457
|
|
$
|
207
|
|
$
|
250
|
|
$
|
-
|
|
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 area. Management
believed that in order to implement a more competitive cost structure and combat
competitive pricing pressure, the excess capacity at our four plastic molding
facilities in this area would need to be eliminated. This plan was expected
to
be completed by the end of 2003; however charges have been incurred past 2003
due to changes in assumptions in non-cancelable lease accruals, including the
buyout of the Warson Road lease and changes in sublet assumptions. In addition,
further charges have been incurred for the movement of inventory and equipment.
Charges in 2005 were for miscellaneous costs for the termination of the Warson
Road facility lease and the movement of equipment from Hazelwood to Bridgeton
($0.1 million), and an adjustment to the non-cancelable lease accrual at the
Hazelwood facility due to change in assumptions in usage ($0.1 million). In
the
first nine months of 2004, a credit of $0.6 million was recorded to reverse
a
non-cancelable lease accrual based on a change in usage of leased facility
(Hazelwood, Missouri) that was previously impaired and was offset by costs
of
$0.4 million related primarily to the movement of equipment between facilities.
Management believes that no further costs will be incurred for this activity,
except for potential adjustments to non-cancelable lease
liabilities.
|
|
|
|
Contract
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
Total
|
|
Costs
[b]
|
|
Other
[c]
|
|
Restructuring
liabilities at December 31, 2004
|
|
$
|
2,402
|
|
$
|
2,402
|
|
$
|
-
|
|
Additions
|
|
|
198
|
|
|
100
|
|
|
98
|
|
Payments
|
|
|
(479
|
)
|
|
(381
|
)
|
|
(98
|
)
|
Restructuring
liabilities at September 30, 2005
|
|
$
|
2,121
|
|
$
|
2,121
|
|
$
|
-
|
|
Consolidation
of
administrative functions for CCP
- In
2002, in order to streamline processes and eliminate duplicate functions, the
Company initiated a plan to centralize certain administrative and back office
functions into Bridgeton, Missouri from certain businesses within the
Maintenance Products Group. This plan was anticipated to be completed in 2004
upon the transfer of functions from the Lawrence, Massachusetts facility (see
Consolidation of abrasives facilities above); however the closure was delayed
and subsequently contributed to the delay in this plan. Katy has incurred
various costs (mostly system conversions and the consolidation of administrative
personnel) over the past three years for this integration of back office and
administrative functions. The most significant project is the centralization
of
the customer service functions for the JanSan Plastics, Abrasives, Textiles
and
Filters and Grillbricks business units. For the nine months ended September
30,
2005, all costs related to an accrual for idle space at our Textiles facility
in
Atlanta. For the nine months ended September 30, 2004, costs were incurred
for
system conversions and the consolidation of administrative
personnel. Management
believes that no more costs will be incurred for this activity.
|
|
Contract
|
|
|
|
Termination
|
|
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2004
|
|
$
|
-
|
|
Additions
|
|
|
21
|
|
Payments
|
|
|
(21
|
)
|
Restructuring
liabilities at September 30, 2005
|
|
$
|
-
|
|
Shutdown
of Woods Canada manufacturing
- In
2003, the Company approved a plan to shut down the manufacturing operation
in
Toronto, Ontario and source substantially all of its products from Asia.
Management believed that this action was necessary in order to implement a
more
competitive cost structure to combat pricing pressure by producers in Asia.
In
connection with this shutdown, the Company also anticipated the sale and
leaseback of this facility, which would provide additional liquidity. It was
anticipated that the shutdown and sale/leaseback would be completed by the
end
of 2003. In December 2003, Woods Canada closed this manufacturing facility
in
Toronto, Ontario, but was unable to complete the sale/leaseback transaction
at
that time. Accordingly, the charge for the non-cancelable lease accrual was
recoded in the first quarter of 2004, upon the completion of the sale/leaseback
transaction. The idle capacity was a direct result of the elimination of the
manufacturing function from this facility. A portion of the facility was
available for sublease at the time the accrual was established. In the first
nine months of 2005, a charge of $0.1 million was recorded for an adjustment
to
the non-cancelable lease accrual based on a change in estimates, offset by
a
credit of less than $0.1 million for an adjustment to a severance reserve.
In
the first nine months of 2004, Woods Canada incurred a charge of $1.0 million
for a non-cancelable lease accrual associated with a sale/leaseback transaction
and idle capacity as a result of the shutdown of manufacturing. Also in the
first nine months of 2004, Woods Canada recorded less than $0.1 million for
additional severance. Management believes that no more costs will be incurred
for this activity, except for potential adjustments to non-cancelable lease
liabilities.
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2004
|
|
$
|
808
|
|
$
|
54
|
|
$
|
754
|
|
Additions
|
|
|
131
|
|
|
-
|
|
|
131
|
|
Reductions
|
|
|
(19
|
)
|
|
(19
|
)
|
|
-
|
|
Payments
|
|
|
(185
|
)
|
|
(33
|
)
|
|
(152
|
)
|
Currency
translation and other
|
|
|
14
|
|
|
(1
|
)
|
|
15
|
|
Restructuring
liabilities at September 30, 2005
|
|
$
|
749
|
|
$
|
1
|
|
$
|
748
|
|
Other -
Charges
in the first nine months of 2005 related to severance associated with the
reduction in workforce principally due to the exit of certain product lines
in
the Consumer Plastics business units in the U.S. ($0.2 million) and the U.K.
($0.1 million). Costs in the first nine months of 2004 relate primarily to
the
closure of CCP’s facility in Canada and the subsequent consolidation into the
Woods Canada facility ($0.1 million), the closure of CCP’s metals facility in
Santa Fe Springs, California ($0.1 million), and the shutdown and relocation
of
a procurement office in Asia for Woods U.S. ($0.1 million) offset by a credit
of
$0.2 million for an adjustment to a non-cancelable lease accrual related to
the
shutdown of the Woods U.S. manufacturing.
The
following table details activity in all restructuring reserves since December
31, 2004 (amounts in thousands):
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Other
[c]
|
|
Restructuring
liabilities at December 31, 2004
|
|
$
|
4,454
|
|
$
|
807
|
|
$
|
3,647
|
|
$
|
-
|
|
Additions
|
|
|
1,994
|
|
|
683
|
|
|
515
|
|
|
796
|
|
Reductions
|
|
|
(19
|
)
|
|
(19
|
)
|
|
-
|
|
|
-
|
|
Payments
|
|
|
(2,941
|
)
|
|
(1,223
|
)
|
|
(922
|
)
|
|
(796
|
)
|
Currency
translation and other
|
|
|
124
|
|
|
(1
|
)
|
|
125
|
|
|
-
|
|
Restructuring
liabilities at September 30, 2005
|
|
$
|
3,612
|
|
$
|
247
|
|
$
|
3,365
|
|
$
|
-
|
|
[a]
Includes severance, benefits, and other employee-related costs associated with
the employee terminations.
[b]
Includes charges related to non-cancelable lease liabilities for abandoned
facilities, net of potential sub-lease revenue.
[c]
Includes charges associated with moving inventory, machinery and equipment,
and
the consolidation of administrative and operational functions.
Katy
expects to substantially complete its restructuring program in 2005. The
remaining severance, restructuring and related charges for these initiatives
are
expected to be less than $0.5 million. Payments associated with non-cancelable
lease liabilities for abandoned facilities are scheduled to end in
2011.
The
following table details activity in restructuring and related reserves by
operating segment since December 31, 2004 (amounts in thousands):
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
2005
|
|
$
|
909
|
|
$
|
724
|
|
$
|
185
|
|
2006
|
|
|
912
|
|
|
592
|
|
|
320
|
|
2007
|
|
|
501
|
|
|
281
|
|
|
220
|
|
2008
|
|
|
460
|
|
|
234
|
|
|
226
|
|
2009
|
|
|
307
|
|
|
243
|
|
|
64
|
|
2010
|
|
|
255
|
|
|
255
|
|
|
-
|
|
Thereafter
|
|
|
268
|
|
|
268
|
|
|
-
|
|
Total
Payments
|
|
$
|
3,612
|
|
$
|
2,597
|
|
$
|
1,015
|
|
The
following table summarizes the future obligations for severance, restructuring
and other related charges by operating segment detailed above (amounts in
thousands):
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
Restructuring
liabilities at December 31, 2004
|
|
$
|
4,454
|
|
$
|
3,385
|
|
$
|
1,069
|
|
Additions
|
|
|
1,994
|
|
|
1,863
|
|
|
131
|
|
Reductions
|
|
|
(19
|
)
|
|
-
|
|
|
(19
|
)
|
Payments
|
|
|
(2,941
|
)
|
|
(2,651
|
)
|
|
(290
|
)
|
Currency
translation and other
|
|
|
124
|
|
|
-
|
|
|
124
|
|
Restructuring
liabilities at September 30, 2005
|
|
$
|
3,612
|
|
$
|
2,597
|
|
$
|
1,015
|
|
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2005 versus Three Months Ended September 30,
2004
|
|
2005
|
|
2004
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
to Sales
|
|
$
|
|
%
to Sales
|
|
Net
sales
|
|
$
|
140.6
|
|
|
100.0
|
|
$
|
135.4
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
122.9
|
|
|
87.4
|
|
|
117.6
|
|
|
86.8
|
|
Gross
profit
|
|
|
17.7
|
|
|
12.6
|
|
|
17.9
|
|
|
13.2
|
|
Selling,
general and administrative expenses
|
|
|
13.9
|
|
|
9.9
|
|
|
14.8
|
|
|
11.0
|
|
Severance,
restructuring and related charges
|
|
|
0.7
|
|
|
0.5
|
|
|
0.2
|
|
|
0.1
|
|
Gain
on sale of assets
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
-
|
|
|
-
|
|
Operating
income
|
|
|
3.3
|
|
|
2.4
|
|
|
2.8
|
|
|
2.1
|
|
Interest
expense
|
|
|
(1.5
|
)
|
|
|
|
|
(1.0
|
)
|
|
|
|
Other,
net
|
|
|
0.2
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
2.1
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
0.7
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1.3
|
|
|
|
|
|
0.9
|
|
|
|
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
1.3
|
|
|
|
|
$
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share of common stock - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.17
|
|
|
|
|
$
|
0.11
|
|
|
|
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
|
|
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.17
|
|
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share of common stock - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.05
|
|
|
|
|
$
|
0.11
|
|
|
|
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
|
|
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.05
|
|
|
|
|
$
|
(0.37
|
)
|
|
|
|
Overview
Our
consolidated net sales for the three month period ended September 30, 2005
increased $5.2 million compared to the three month period ended September 30,
2004. The improvement in net sales of 4% was comprised of higher pricing [4%],
favorable currency translation [1%] and lower volumes [(1%)]. Gross margins
were
12.6% for the three month period ended September 30, 2005; a decrease of 0.6
percentage points compared to the three month period ended September 30, 2004.
Higher raw material costs and higher operating costs in our Abrasives business
unit were partially offset by selling price increases. Selling, general and
administrative expense (SG&A) as a percentage of sales decreased from 11.0%
for the third quarter of 2004 to 9.9% in the third quarter of 2005, primarily
due to cost containment in the Electrical Products Group and lower corporate
expenses. Operating income increased by $0.5 million to $3.3 million, as lower
SG&A was partially offset by higher severance and restructuring costs.
Overall,
we reported net income attributable to common shareholders of $1.3 million
[$0.17 per share basic and $0.05 per share diluted] for the three month period
ended September 30, 2005, versus a net loss attributable to common shareholders
of ($2.9) million [($0.37) per share basic and diluted] in the same period
of
2004. During the third quarter of 2004, we recorded the impact of
payment-in-kind dividends earned on our convertible preferred stock of ($3.8)
million [($0.48) per share basic and diluted]. The payment-in-kind dividends
ended in December 2004.
Net
Sales
Maintenance
Products Group
Net
sales
from the Maintenance Products Group decreased from $72.2 million during the
three month period ended September 30, 2004 to $64.0 million during the three
month period ended September 30, 2005. Overall, this decline of 11% was
primarily due to lower volumes [(15%)] partially offset by higher pricing [4%].
Sales volume for the Consumer Plastics business units in the U.S. and the U.K.,
which sell primarily to mass merchant customers, was significantly lower due
to
our decision to exit certain unprofitable product lines. In addition, volumes
at
our U.K. Consumer Plastics business unit were negatively impacted by softening
demand due to a continued weak retail sector in the U.K. We also experienced
volume declines in our Abrasives business unit in the U.S. due to certain
operational disruptions including inefficiencies caused by the consolidation
of
two additional abrasives facilities into the Wrens, Georgia facility as well
as
a fire in Wrens early in the fourth quarter of 2004. These disruptions to our
Abrasives operations have resulted in the loss of certain customers. Volumes
for
our Metal Truck Box business unit are lower due to weakened demand from a major
customer (a large mass merchant retailer). Sales volumes for our Container
business unit improved over last year principally due to available production
capacity at our Norwalk, California facility, which resulted from the exit
of
certain product lines by the Consumer Plastics business.
Higher
pricing resulted from the implementation of selling price increases across
the
Maintenance Products Group, which took effect throughout the first half of
2005,
with the most significant increases in the domestic business units which sell
plastics products. The implementation of price increases was in response to
the
accelerating cost of our primary raw materials, packaging materials, utilities
and freight starting in 2004 and continuing into 2005.
Electrical
Products Group
The
Electrical Products Group’s sales improved from $63.2 million for the three
month period ended September 30, 2004 to $76.5 million for the three month
period ended September 30, 2005. The sales improvement of 21% was primarily
the
result of increased volume [14%], higher pricing [5%] and favorable currency
translation [2%]. Volume at Woods U.S. benefited principally from increases
in
store growth at some of our large mass merchant retailers, hurricane related
orders, and the timing of purchases by customers switching to direct import
(direct import sales represent merchandise shipped directly from our suppliers
to our customers). Woods Canada experienced volume increases with most of its
major customers (primarily mass merchant retailers) and volumes are higher
across all of its product categories, especially garden lighting.
Multiple
selling price increases have been implemented since the beginning of 2004 at
Woods U.S. (and to a lesser extent at Woods Canada) to offset the rising cost
of
copper and PVC. We continue to implement price increases; however there can
be
no assurance that such increases will be accepted. In addition, sales at Woods
Canada were favorably impacted by a stronger Canadian dollar versus the U.S.
dollar in the third quarter of 2005 as compared to the same period in
2004.
Operating
Income
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
Operating
income
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
$
|
|
%
of Sales
|
|
$
|
|
%
of Sales
|
|
$
|
|
%
of Sales
|
|
Maintenance
Products Group
|
|
$
|
0.6
|
|
|
0.9
|
|
$
|
0.1
|
|
|
0.1
|
|
$
|
0.5
|
|
|
0.8
|
|
Electrical
Products Group
|
|
|
6.1
|
|
|
8.0
|
|
|
6.3
|
|
|
10.0
|
|
|
(0.2
|
)
|
|
(2.0
|
)
|
Unallocated
corporate expense
|
|
|
(2.7
|
)
|
|
|
|
|
(3.4
|
)
|
|
|
|
|
0.7
|
|
|
|
|
Severance,
restructuring and related charges
|
|
|
(0.7
|
)
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
(0.5
|
)
|
|
|
|
Operating
income
|
|
$
|
3.3
|
|
|
|
|
$
|
2.8
|
|
|
|
|
$
|
0.5
|
|
|
|
|
Maintenance
Products Group
The
Maintenance Products Group’s operating income improved from $0.1 million (0.1%
of net sales) during the three month period ended September 30, 2004 to $0.6
million (0.9% of net sales) for the three month period ended September 30,
2005.
The improvement was primarily attributable to improved gross margins as the
impact of higher selling prices (principally in the U.S.) implemented in 2005
which outpaced the impact of higher raw material costs and to improved
manufacturing efficiency at our domestic plastic molding facilities. Partially
offsetting these items was a decline in the gross profit of our domestic
Abrasives business resulting from lower volumes and increased costs resulting
from certain operational disruptions at our Wrens, Georgia facility. Gross
profit also declined at our Consumer Plastics business in the U.K. due to lower
volumes and the inability to recover higher raw material costs through selling
price increases. SG&A expenses for the Maintenance Products Group were
slightly lower in the third quarter of 2005 versus the third quarter of 2004,
but overall were slightly higher as a percentage of sales.
Electrical
Products Group
The
Electrical Products Group’s operating income decreased from $6.3 million (10.0%
of net sales) for the three month period ended September 30, 2004 to $6.1
million (8.0% of net sales) for the three month period ended September 30,
2005.
The decrease in profitability was principally the result of selling price
increases not quite keeping pace with the increasing costs of copper and PVC.
SG&A expenses for the Electrical Products Group were slightly higher in the
third quarter of 2005 versus the third quarter of 2004, but overall were
slightly lower as a percentage of sales primarily due to cost containment.
Corporate
Corporate
operating expenses decreased from $3.4 million in the three month period ended
September 30, 2004 to $2.7
million in three month period ended September 30, 2005 principally due to lower
bonus expense resulting from a decline in operating performance, decreased
expense for stock appreciation rights due to a lower stock price and lower
insurance costs.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the three months ended September 30, 2005 and
2004 were impacted by severance, restructuring and related charges of $0.7
million and $0.2 million, respectively. Charges in 2005 related to severance,
facility closure costs and inventory and equipment moves associated with the
closure of one of our abrasives facilities ($0.4 million); and adjustments
to
non-cancelable lease accruals at our Hazelwood, Missouri facility and at our
Woods Canada facility ($0.3 million).
Charges
in the third quarter of 2004 related primarily to the restructuring of the
abrasives business (principally severance) ($0.2 million), the movement of
inventory and equipment in connection with the consolidation of St. Louis
manufacturing and distribution facilities ($0.2 million), and the shutdown
and
relocation of a procurement office for our Electrical Products Group in Asia
($0.1 million) which were offset by credits to adjust non-cancelable lease
accruals based on changes in usage of the previously impaired leased facilities
in Hazelwood ($0.3 million) and Woods ($0.1 million).
Other
Items
Interest
expense increased by $0.5 million in the third quarter of 2005 compared to
the
same period of 2004, primarily as a result of higher interest rates in 2005
and
increased margins over LIBOR pursuant to the Third Amendment of our Bank of
America Credit Agreement (see Note 6 of the Notes to Condensed Consolidated
Financial Statements), partially offset by lower average borrowings in the
third
quarter of 2005 versus the third quarter of 2004. Other, net for the three
months ended September 30, 2005 is primarily comprised of foreign currency
transaction gains and interest income.
The provision for income taxes for both the three months ended September 30,
2005 and 2004 reflect a current expense for state and foreign income taxes.
In
both 2005 and 2004, tax benefits were not recorded in the U.S. (for federal
and
state income taxes) and for certain foreign subsidiaries on pre-tax net losses
as a result of accumulated operating losses in the those jurisdictions, as
we
concluded that it was more likely than not that such benefits would not be
realized.
Nine
Months Ended September 30, 2005 versus Nine Months Ended September 30,
2004
|
|
2005
|
|
2004
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
to Sales
|
|
$
|
|
%
to Sales
|
|
Net
sales
|
|
$
|
334.3
|
|
|
100.0
|
|
$
|
335.8
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
295.3
|
|
|
88.3
|
|
|
288.1
|
|
|
85.8
|
|
Gross
profit
|
|
|
39.0
|
|
|
11.7
|
|
|
47.7
|
|
|
14.2
|
|
Selling,
general and administrative expenses
|
|
|
40.1
|
|
|
12.0
|
|
|
43.8
|
|
|
13.1
|
|
Stock
option expense
|
|
|
2.0
|
|
|
0.6
|
|
|
-
|
|
|
-
|
|
Severance,
restructuring and related charges
|
|
|
2.0
|
|
|
0.6
|
|
|
2.0
|
|
|
0.6
|
|
Gain
on sale of assets
|
|
|
(0.4
|
)
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(0.2
|
)
|
Operating
income (loss)
|
|
|
(4.7
|
)
|
|
(1.4
|
)
|
|
2.5
|
|
|
0.7
|
|
Interest
expense
|
|
|
(4.1
|
)
|
|
|
|
|
(2.8
|
)
|
|
|
|
Other,
net
|
|
|
0.2
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(8.6
|
)
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
0.7
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(9.4
|
)
|
|
|
|
|
(2.2
|
)
|
|
|
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
|
|
|
(10.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(9.4
|
)
|
|
|
|
$
|
(12.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1.18
|
)
|
|
|
|
$
|
(0.28
|
)
|
|
|
|
Payment-in-kind
dividends on convertible preferred stock
|
|
|
-
|
|
|
|
|
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(1.18
|
)
|
|
|
|
$
|
(1.64
|
)
|
|
|
|
Overview
Our
consolidated net sales for the nine month period ended September 30, 2005
decreased $1.5 million compared to the nine month period ended September 30,
2004. The decline in net sales of less than 1% was comprised of lower volumes
[(6%)], offset by higher pricing [5%] and favorable currency translation [1%].
Gross margins were 11.7% for the nine month period ended September 30, 2005;
a
decrease of 2.5 percentage points compared to the nine month period ended
September 30, 2004. Higher raw material costs and incremental operating costs
incurred due to certain production disruptions at our abrasives facilities
were
partially offset by selling price increases and the favorable impact of
restructuring and cost containment. Selling, general and administrative expense
(SG&A) as a percentage of sales declined from 13.1% for the first nine
months of 2004 to 12.0% in the first nine months of 2005, primarily due to
cost
containment (mostly in the Electrical Products Group). The operating loss
increased by $7.2 million to ($4.7) million, mostly due to lower gross margins
and higher non-cash stock option expense.
Overall,
we reported a net loss attributable to common shareholders of ($9.4) million
[($1.18) per share basic and diluted] for the nine month period ended September
30, 2005, versus a net loss attributable to common shareholders of ($12.9)
million [($1.64) per share basic and diluted] in the same period of 2004. During
the first nine months of 2004, we recorded the impact of payment-in-kind
dividends earned on our convertible preferred stock of ($10.7) million [($1.36)
per share basic and diluted]. The payment-in-kind dividends ended in December
2004.
Net
Sales
Maintenance
Products Group
Net
sales
from the Maintenance Products Group decreased from $212.4 million during the
nine month period ended September 30, 2004 to $189.4 million during the nine
month period ended September 30, 2005. Overall, this decline of 11% was
primarily due to lower volumes [(15%)] net of higher pricing [4%]. Sales volume
for the Consumer Plastics business units in the U.S. and the U.K., which sell
primarily to mass merchant customers, was significantly lower due to our
decision to exit certain unprofitable product lines. In addition, volumes at
our
U.K Consumer Plastics business unit were negatively impacted by softening demand
due to a weak retail sector in the U.K. We also experienced volume declines
in
our Abrasives business unit in the U.S. due to certain operational disruptions
including inefficiencies caused by the consolidation of two additional abrasives
facilities into the Wrens, Georgia facility as well as a fire in Wrens early
in
the fourth quarter of 2004. These disruptions to our Abrasives operations have
resulted in the loss of certain customers. These decreases in Abrasives sales
were partially offset by stronger sales of roofing products to the construction
industry. Sales of Metal Truck Box products declined in first nine months of
2005 versus the first nine months of 2004 primarily due to lower demand from
a
major retail outlet customer, while sales of Textiles were down slightly due
to
the loss of a customer. Lower volumes at our UK Jan-San Plastics business unit
reflected increased foreign competition for sprayers. Sales volumes for our
Container business unit improved over last year principally due to available
production capacity at our Norwalk, California facility, which resulted from
the
exit of certain product lines by the U.S. Consumer Plastics business.
Higher
pricing resulted from the implementation of selling price increases across
the
Maintenance Products Group, which took effect throughout the first nine months
of 2005. The implementation of price increases was in response to the
accelerating cost of our primary raw materials, packaging materials, utilities
and freight starting in 2004 and continuing into 2005. We have continued to
implement price increases; however, there can be no assurance that such
increases will be accepted.
Electrical
Products Group
The
Electrical Products Group’s sales improved from $123.4 million for the nine
month period ended September 30, 2004 to $144.9 million for the nine month
period ended September 30, 2005. The sales improvement of 17% was primarily
the
result of increased volume [9%], higher pricing [6%], and favorable currency
translation [2%]. Woods Canada’s net pricing was negatively impacted by
incremental program costs necessary to retain business with a significant
customer. Volume at Woods U.S. benefited principally from increased promotional
activity at one of its largest mass merchant retailers in the first quarter
of
2005,increases in store growth at some of our large mass merchant retailers,
hurricane related orders, and the timing of purchases by customers switching
to
direct import (direct import sales represent merchandise shipped directly from
our suppliers to our customers). Volumes at Woods Canada were favorably impacted
by increased demand at its largest customer (a national mass merchant retailer
in Canada). Sales at Woods Canada also benefited from a stronger Canadian dollar
versus the U.S. dollar in the first nine months of 2005 as compared to the
same
period in 2004.
Multiple
selling price increases were implemented since the beginning of 2004 at Woods
U.S. (and to a lesser extent at Woods Canada) to offset the rising cost of
copper and PVC. We have continued to implement price increases; however, there
can be no assurance that such increases will be accepted.
Operating
Income
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
Operating
income (loss)
|
|
2005
|
|
2004
|
|
Change
|
|
|
|
$
|
|
%
of Sales
|
|
$
|
|
%
of Sales
|
|
$
|
|
%
of Sales
|
|
Maintenance
Products Group
|
|
$
|
(3.9
|
)
|
|
(2.1
|
)
|
$
|
1.1
|
|
|
0.5
|
|
$
|
(5.0
|
)
|
|
(2.6
|
)
|
Electrical
Products Group
|
|
|
10.2
|
|
|
7.0
|
|
|
10.9
|
|
|
8.8
|
|
|
(0.7
|
)
|
|
(1.8
|
)
|
Unallocated
corporate expense
|
|
|
(7.0
|
)
|
|
|
|
|
(8.1
|
)
|
|
|
|
|
1.1
|
|
|
|
|
Stock
option expense
|
|
|
(2.0
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(2.0
|
)
|
|
|
|
Severance,
restructuring and related charges
|
|
|
(2.0
|
)
|
|
|
|
|
(2.0
|
)
|
|
|
|
|
-
|
|
|
|
|
Gain
on sale of real estate
|
|
|
-
|
|
|
|
|
|
0.5
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
Operating
income (loss)
|
|
$
|
(4.7
|
)
|
|
|
|
$
|
2.5
|
|
|
|
|
|
(7.2
|
)
|
|
|
|
Maintenance
Products Group
The
Maintenance Products Group’s operating income decreased from $1.1 million (0.5%
of net sales) during the nine month period ended September 30, 2004 to an
operating loss of $3.9 million (-2.1% of net sales) for the nine month period
ended September 30, 2005. The decrease was primarily attributable to lower
volumes in the U.S. and U.K. Consumer Plastics and domestic Abrasives business
units. In addition, higher raw material costs in the first nine months of 2005
versus the first nine months of 2004 were substantially recovered through higher
selling prices, except in our U.K Consumer Plastics business unit. Raw material
costs stabilized somewhat in the second quarter of 2005 and we were able to
implement price increases across most business units starting in the first
quarter of 2005. However, we have recently observed a rise in raw material
costs
(See OUTLOOK FOR 2005). In addition, manufacturing throughput was low at our
plastics molding facilities in the U.S. and U.K., especially in the first
quarter as we reduced inventory and adjusted our production levels in connection
with our decision to exit certain unprofitable lines of Consumer Plastics
business. However, manufacturing throughput improved in the second and third
quarters of 2005. We continue to experience declines in the profitability of
our
domestic Abrasives business resulting from increased costs which were
principally due to certain operational disruptions at our Wrens, Georgia
facility. SG&A expenses were lower in the first nine months of 2005 versus
the first nine months of 2004, but as a percentage of net sales, SG&A has
remained essentially unchanged.
Electrical
Products Group
The
Electrical Products Group’s operating income decreased from $10.9 million (8.8%
of net sales) for the nine month period ended September 30, 2004 to $10.2
million (7.0% of net sales) for the nine month period ended September 30, 2005,
a decline of 7%. The lower profitability was principally the result of selling
price increases not quite keeping pace with the increasing costs of copper
and
PVC, most notably in the second and third quarters. Lower gross margins were
partially offset by stronger volumes. In addition, SG&A expenses were
essentially unchanged versus the same period last year, but were significantly
lower as a percentage of sales primarily due to cost containment
initiatives.
Corporate
Corporate
operating
expenses decreased from $8.1 million in the nine month period ended September
30, 2004 to $7.0 million in the nine month period ended September 30, 2005
principally due to lower bonus expense resulting from a decline in operating
performance, decreased expense for stock appreciation rights due to a lower
stock price and lower insurance costs offset by non-recurring severance costs
and search fees associated with the CEO transition in the second quarter of
2005.
Stock
Option Expense
The
non-cash stock option expense of $2.0 million during the nine months ended
September 30, 2005 related to the March 2004 acceleration of vesting of options
that were held by our former CEO at that time. A substantial portion of these
options were forfeited by the former CEO upon his retirement, however. See
Note
1 of the Notes to Condensed Consolidated Financial Statements.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the nine months ended September 30, 2005 and
2004
were negatively impacted by severance, restructuring and related charges of
$2.0
million and $2.0 million, respectively. Charges in 2005 related to severance,
facility closure costs and inventory and equipment moves associated with the
consolidation of our Abrasives facilities ($1.3 million); severance associated
with the reduction in workforce principally due to the exit of certain product
lines in the U.S. and U.K. Consumer Plastics business units ($0.3 million);
adjustments to non-cancelable lease accruals at our Hazelwood, Missouri facility
and at our Woods Canada facility ($0.2 million); and charges aggregating to
$0.1
million for miscellaneous costs for the termination of the Warson Road facility
lease and the movement of inventory and equipment from Hazelwood to
Bridgeton.
Charges
in the first nine months of 2004 related to a non-cancelable lease accrual
associated with a sale/leaseback transaction and idle capacity as a result
of
the shutdown of manufacturing at Woods Canada ($1.0 million); the restructuring
of the abrasives business ($0.9 million); costs for the movement of inventory
and equipment in connection with the consolidation of St. Louis manufacturing
and distribution facilities ($0.4 million); costs incurred for the consolidation
of administrative functions for CCP ($0.2 million); expenses for the closure
of
CCP’s facility in Canada and the subsequent consolidation into the Woods Canada
facility ($0.1 million); and costs for the shutdown and relocation of a
procurement office in Asia ($0.1 million); partially offset by credits for
adjustments to non-cancelable leases based on changes in the usage of these
leased facilities ($0.8 million).
Other
Items
Interest
expense increased by $1.3 million in the first nine months of 2005 versus the
same period of 2004, primarily as a result of higher interest rates and
increased margins over LIBOR pursuant to the Third Amendment of our Bank of
America Credit Agreement (see Note 6 of the Notes to Condensed Consolidated
Financial Statements). In addition, slightly higher average borrowings in 2005
(principally due to increased working capital levels and poor financial
performance in 2004), contributed to the increase. Other, net for the nine
months ended September 30, 2004 included the write-off of fees and expenses
of
$0.4 million associated with a financing which the Company chose not to pursue.
The
provision for income taxes for the nine month periods ended September 30, 2005
and 2004 reflect a current expense for state and foreign income taxes. In both
2005 and 2004, tax benefits were not recorded in the U.S. (for federal and
state
income taxes) and for certain foreign subsidiaries on pre-tax net losses as
a
result of accumulated operating losses in the those jurisdictions, as we
concluded that it was more likely than not that such benefits would not be
realized. We recorded tax benefits for other foreign subsidiaries as we
concluded that it was more likely than not that such benefits would be
realized.
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 for the foreseeable future. As of September 30, 2005, we
had
cash and cash equivalents of $8.6 million versus cash and cash equivalents
of
$8.5 million at December 31, 2004. Also as of September 30, 2005, we had
outstanding borrowings of $58.1 million [49% of total capitalization]. As of
December 31, 2004, we had outstanding borrowings of $58.7 million [46% of total
capitalization]. We generated $7.7 million of cash flow from operations during
the nine months ended September 30, 2005 versus the utilization of $18.7 million
of cash flow from operations during the nine months ended September 30, 2004.
The improvement in cash flow from operations was primarily attributable to
a
reduction of inventory in the
first
nine months of 2005
versus an inventory build in the
first
nine months of 2004.
We
expect
liquidity to generally stabilize for the remainder of 2005, as increased
receivable collections will be offset by increased accounts payable settlements
in (both primarily related to the Electrical Products Group). Other elements
of
working capital will continue to be closely managed. Capital expenditures in
the
fourth quarter are expected to continue at approximately at the same pace as
the
first three quarters of 2005, but overall are expected to be lower than 2004.
We
have a
number of obligations and commitments, which are listed on the schedule later
in
this section entitled “Contractual and Commercial Obligations.” We have
considered all of these obligations and commitments in structuring our capital
resources to ensure that they can be met. See the notes accompanying the table
in that section for further discussions of those items. We believe that given
our strong working capital base, additional liquidity could be obtained through
additional debt financing, if necessary. However, there is no guarantee that
such financing could be obtained. In addition, we are continually evaluating
alternatives relating to the sale of excess assets and divestitures of certain
of our business units. Asset sales and business divestitures present
opportunities to provide additional liquidity by de-leveraging our financial
position.
Bank
of America Credit Agreement
On
April
20, 2004, we completed a refinancing of our outstanding indebtedness (the
“Refinancing”) and entered into a new agreement with Bank of America Business
Capital (formerly Fleet Capital Corporation) (the “Bank of America Credit
Agreement”). Like the previous credit agreement with Fleet Capital Corporation,
the Bank of America Credit Agreement is a $110 million facility with a $20
million term loan (“Term Loan”) and a $90 million revolving credit facility
(“Revolving Credit Facility”) with essentially the same terms as the previous
credit agreement. The Bank of America Credit Agreement is an asset-based lending
agreement and involves a syndicate of four banks, all of which participated
in
the syndicate from the previous credit agreement. The Bank of America Credit
Agreement, and the additional borrowing ability under the Revolving Credit
Facility obtained by incurring new term debt, results in three important
benefits related to our long-term strategy: (1) additional borrowing capacity
to
invest in capital expenditures and/or acquisitions key to our strategic
direction, (2) increased working capital flexibility to build inventory when
necessary to accommodate lower cost outsourced finished goods inventory and
(3)
the ability to borrow locally in Canada and the United Kingdom and provide
a
natural hedge against currency fluctuations.
The
Revolving Credit Facility has an expiration date of April 20, 2009 and its
borrowing base is determined by eligible inventory and accounts receivable.
The
Term Loan also has a final maturity date of April 20, 2009 with quarterly
payments of $0.7 million. A final payment of $6.4 million is scheduled to be
paid in April 2009. The term loan is collateralized by our property, plant
and
equipment. All extensions of credit under the Bank of America Credit Agreement
are collateralized by a first priority security interest in and lien upon the
capital stock of each material domestic subsidiary (65% of the capital stock
of
each material foreign subsidiary), and all of our present and future assets
and
properties. The
Bank
of America Credit Agreement contains various financial and operating covenants,
which among other things, require us to maintain a fixed charge coverage ratio
and certain other financial ratios (see discussion below). It also includes
customary restrictions and default provisions.
Our
borrowing base under the Bank of America Credit Agreement is reduced by the
outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom we conduct business may
require letters of credit in the future that either (1) do not exist today
or
(2) would be at higher amounts than those that exist today. Currently, our
largest letters of credit relate to our casualty insurance programs. At
September 30, 2005, total outstanding letters of credit were $9.6 million.
Unused
borrowing availability on the Revolving Credit Facility, after considering
letters of credit, was $35.5 million at September 30, 2005.
From
September 30, 2004, interest rate margins (i.e. the interest rate spread above
LIBOR) on our Bank of America Credit Agreement borrowings have risen from 175
basis points over applicable LIBOR rates for Revolving Credit Facility
borrowings and 200 basis points over LIBOR for borrowings under the Term Loan
to
275 and 300 basis points, respectively. Current margins reflect the highest
spread under the Bank of America Credit Agreement, as specified by the Third
Amendment (see below). Additionally, margins on the Term Loan will drop 25
basis
points if the balance of the Term Loan is reduced below $10.0
million.
Effective August
17, 2005, we entered into a two-year interest rate swap agreement (the “Interest
Rate Swap”) with a counterparty to limit our exposure to rising interest rates
on our Bank of America Credit Agreement. The Interest Rate Swap has a notional
amount of $25.0 million in the first year and $15.0 million in the second year.
We will pay the counterparty a fixed rate of 4.49% in exchange for receiving
one-month LIBOR.
In
the
2005, we paid fees of $0.2 million to our lenders primarily related to the
Second Amendment to our credit agreement. We incurred additional debt issuance
costs in 2004 associated with the Bank of America Credit Agreement.
Additionally, at the time of the inception of the Bank of America Credit
Agreement, we had approximately $4.0 million of unamortized debt issuance costs
associated with the previous credit agreement. The remainder of the previously
capitalized costs, along with the capitalized costs from the Bank of America
Credit Agreement, will be amortized over the life of the Bank of America Credit
Agreement through April 2009. Also, during the first nine months of 2004, we
incurred fees and expenses of $0.4 million associated with a financing which
we
chose not to pursue.
The
revolving credit facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence of a
material adverse effect (“MAE”) clause in the Bank of America Credit Agreement,
caused the revolving credit facility to be classified as a current liability
(except as noted below), per guidance in the Emerging Issues Task Force Issue
No. 95-22, Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement.
We do
not expect to repay, or be required to repay, within one year, the balance
of
the revolving credit facility classified as a current liability. The MAE clause,
which we believe is a common requirement in commercial credit agreements, allows
the lenders to require the loan to become due if they determine there has been
a
material adverse effect on our operations, business, properties, assets,
liabilities, condition or prospects. The classification of the revolving credit
facility as a current liability (except as noted above) is a result only of
the
combination of the lockbox agreements and the MAE clause. The Bank of America
Credit Agreement does not expire or have a maturity date within one year, but
rather has a final expiration date of April 20, 2009. The lender had not
notified us of any indication of a MAE at September 30, 2005, and, to
management’s knowledge, we were not in default of any provision of the Bank of
America Credit Agreement, as amended at September 30, 2005.
We
determined that due to declining profitability in the fourth quarter of 2004,
potentially lower profitability in the first nine months of 2005 and the timing
of certain restructuring payments, we would not meet our Fixed Charge Coverage
Ratio (as defined in the Bank of America Credit Agreement) and could potentially
exceed our maximum Consolidated Leverage Ratio (also as defined in the Bank
of
America Credit Agreement) as of the end of the first, second and third quarters
of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage
Ratio or exceeding the maximum Consolidated Leverage Ratio, we obtained an
amendment to the Bank of America Credit Agreement (the “Second Amendment”). The
Second Amendment applied only to the first three quarters of 2005 and the
covenants would have returned to their original levels for the fourth quarter
of
2005. Specifically, the Second Amendment eliminated the Fixed Charge Coverage
Ratio, increased the maximum Consolidated Leverage Ratio, established a Minimum
Consolidated EBITDA (on a latest twelve months basis) for each of the periods
and also established a Minimum Availability (the eligible collateral base less
outstanding borrowings and letters of credit) on each day within the nine-month
period.
Subsequent
to the Second Amendment’s effective date, we determined that we would likely not
meet our amended financial covenants. On April 13, 2005, we obtained a further
amendment to the Bank of America Credit Agreement (the “Third Amendment”). The
Third Amendment eliminated the maximum Consolidated Leverage Ratio and the
Minimum Consolidated EBITDA as established by the Second Amendment and adjusted
the Minimum Availability such that our eligible collateral must exceed the
sum
of our outstanding borrowings and letters of credit under the Revolving Credit
Facility by at least $5 million from the effective date of the Third Amendment
through September 29, 2005 and by at least $7.5 million from September 30,
2005
until the date we deliver our financial statements for the first quarter of
2006
to our lenders. Subsequent to the delivery of the financial statements for
the
first quarter of 2006, the Third Amendment reestablished the minimum Fixed
Charge Coverage Ratio as originally set forth in the Bank of America Credit
Agreement. The Third Amendment also reduced the maximum allowable capital
expenditures for 2005 from $15 million to $10 million, and increased the
interest rate margins on all of the Company’s outstanding borrowings and letters
of credit to the largest margins set forth in the Bank of America Credit
Agreement. Effective April 13, 2005, interest accrues on the Revolving Credit
Facility and Term Loan borrowings at 275 and 300 basis points over LIBOR,
respectively. Interest rate margins will return to levels set forth in the
Bank
of America Credit Agreement subsequent to the delivery of our financial
statements for the first quarter of 2006 to our lenders.
As
a
result of the Third Amendment, the Company’s current debt covenants under the
Bank of America Credit Agreement are as follows (see further discussion
below):
Minimum
Availability
- At
September 30, 2005, the Company was required to have a borrowing base
(collateral) in excess of borrowings and outstanding letters of credit by at
least $7.5 million. Pursuant to the Third Amendment, this covenant is in effect
through the first quarter of 2006.
Fixed
Charge Coverage Ratio
- The
Company is required to maintain a Fixed Charge Coverage Ratio (as defined in
the
Bank of America Credit Agreement) of 1.1:1. Pursuant to the Third Amendment,
this covenant was suspended and will be reinstated following the first quarter
of 2006.
Capital
Expenditures
- For
the year ended December 31, 2005, the Company is not to exceed $10.0 million
in
capital expenditures. Subsequent to 2005, the Company is not to exceed $15.0
million during a single fiscal year.
Leverage
Ratio
- The
Third Amendment to the Bank of America Credit Agreement eliminated the Leverage
Ratio (as defined in the Bank of America Credit Agreement) as a financial
covenant. Following the first quarter of 2006, the Leverage Ratio will be
utilized to determine the interest rate margin over the applicable LIBOR
rate.
We
have
recently indicated to the syndicate of banks in the Bank of America Credit
Agreement, that we may be unable to attain the required Fixed Charge Coverage
Ratio as of the end of the first quarter of 2006. If we are unable to comply
with the terms of the Fixed Charge Coverage Ratio or any of the amended
covenants, we may be required to obtain further amendments and pursue increased
liquidity through additional debt financing and/or the sale of assets (see
discussion above). However, there is no guarantee that such amendments or
financing could be obtained.
Contractual
Obligations and Commercial Obligations
Katy’s
obligations as of September 30, 2005 are summarized below (amounts in
thousands):
Contractual
Obligations
|
|
Total
|
|
Due
in less than 1 year
|
|
Due
in 1-3 years
|
|
Due
in 3-5 years
|
|
Due
after 5 years
|
|
Revolving
credit facility [a]
|
|
$
|
41,085
|
|
$
|
41,085
|
|
$
|
-
|
|
$
|
-
|
|
$ |
-
|
|
Term
loans
|
|
|
17,043
|
|
|
3,472
|
|
|
5,714
|
|
|
7,857
|
|
|
-
|
|
Interest
on debt [b]
|
|
|
14,047
|
|
|
4,356
|
|
|
7,707
|
|
|
1,984
|
|
|
-
|
|
Operating
leases [c]
|
|
|
25,279
|
|
|
6,861
|
|
|
11,235
|
|
|
4,280
|
|
|
2,903
|
|
Severance
and restructuring [c]
|
|
|
2,414
|
|
|
1,105
|
|
|
716
|
|
|
384
|
|
|
209
|
|
SESCO
payable to Montenay [d]
|
|
|
2,750
|
|
|
1,100
|
|
|
1,100
|
|
|
550
|
|
|
-
|
|
Postretirement
benefits [e]
|
|
|
5,930
|
|
|
877
|
|
|
1,494
|
|
|
1,314
|
|
|
2,245
|
|
Interest
rate swap [f]
|
|
|
39
|
|
|
39
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Contractual Obligations
|
|
$
|
108,587
|
|
$
|
58,895
|
|
$
|
27,966
|
|
$
|
16,369
|
|
$
|
5,357
|
|
Other
Commercial Commitments
|
|
Total
|
|
Due
in less than 1 year
|
|
Due
in 1-3 years
|
|
Due
in 4-5 years
|
|
Due
after 5 years
|
|
Commercial
letters of credit
|
|
$
|
892
|
|
$
|
892
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Stand-by
letters of credit
|
|
|
8,678
|
|
|
8,678
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Guarantees
[g]
|
|
|
23,670
|
|
|
8,370
|
|
|
15,300
|
|
|
-
|
|
|
-
|
|
Total
Commercial Commitments
|
|
$
|
33,240
|
|
$
|
17,940
|
|
$
|
15,300
|
|
$
|
-
|
|
$
|
-
|
|
[a]
As
discussed in the Liquidity and Capital Resources section above and in Note
6 to
the Condensed Consolidated Financial Statements in Part I, Item 1, the entire
revolving credit facility under the Bank of America Revolving Credit Agreement
is classified as a current liability on the Consolidated Statements of Financial
Position as a result of the combination in the Bank of America Credit Agreement
of (i) lockbox agreements on Katy’s depository bank accounts, and (ii) a
subjective Material Adverse Effect (MAE) clause. The Revolving Credit Facility
expires in April of 2009.
[b] Represents
interest on the Revolving Credit Facility and Term Loan of the Bank of America
Credit Agreement. Amounts assume interest accrues at the current rate in effect,
including the effect the impact of the increased margins through the end of
the
first quarter of 2006 pursuant to the Third Amendment. Amount also assumes
the
principal balance of the Revolving Credit Facility remains constant through
its
expiration date of April 20, 2009 and the principal balance of the Term Loan
amortizes in accordance with the terms of the Bank of America Credit Agreement.
Due to the variable nature of the Bank of America Credit Agreement, actual
interest rates could differ from the assumptions above. In addition, actual
borrowing levels could differ from the assumptions above due to liquidity needs.
[c]
Future non-cancelable lease rentals are included in the line entitled “Operating
leases,” which also includes obligations associated with restructuring
activities. The Condensed Consolidated Balance Sheet at September 30, 2005
and
December 31, 2004, includes $3.4 million and $3.6 million, respectively, in
discounted liabilities associated with non-cancelable operating lease rentals,
net of estimated sub-lease revenues, related to facilities that have been
abandoned as a result of restructuring and consolidation activities.
[d]
Amount owed to Montenay as a result of the SESCO partnership, discussed in
Note
5 to the Condensed Consolidated Financial Statements. $1.1 million of this
obligation is classified in the Condensed Consolidated Balance Sheets as an
Accrued Expense in Current Liabilities, while the remainder is included in
Other
Liabilities, recorded on a discounted basis.
[e]
Benefits consisting of post-retirement medical obligations to retirees of former
subsidiaries of Katy, as well as deferred compensation plan liabilities to
former officers of the Company.
[f]
As
discussed in Note 1 to the Condensed Consolidated Financial Statements, the
amount consists of the liability for the interest rate swap entered into by
the
company in August 2005.
[g]
As
discussed in Note 5 to the Condensed Consolidated Financial Statements in Part
I, Item 1, SESCO, an indirect wholly-owned subsidiary of Katy, is party to
a
partnership that operates a waste-to-energy facility, and has certain
contractual obligations, for which Katy provides certain guarantees. If the
partnership is not able to perform its obligations under the contracts, under
certain circumstances SESCO and Katy could be subject to damages equal to the
amount of Industrial Revenue Bonds outstanding (which financed construction
of
the facility) less amounts held by the partnership in debt service reserve
funds. As of September 30, 2005, $23.7 million of the Industrial Revenue Bonds
remained outstanding. Katy and SESCO do not anticipate non-performance by
parties to the contracts.
Off-balance
Sheet Arrangements
See
Note
5 to the Condensed Consolidated Financial Statements in Part II, Item 8 for
a
discussion of SESCO.
Cash
Flow
Operating
Activities
Cash
flow
provided by operating activities before changes in operating assets and
liabilities was $1.7 million in the first nine months of 2005 versus cash flow
provided by operating activities before changes in operating assets and
liabilities of $9.2 million in the first nine months of 2004. While we had
net
losses in both periods, these amounts included non-cash items such as
depreciation, amortization and amortization of debt issuance costs. We generated
$6.0 million of cash related to operating assets and liabilities during the
nine
months ended September 30, 2005 versus cash used related to operating assets
and
liabilities of $27.8 million during the nine months ended September 30, 2004.
Our operating cash flow was favorably impacted in the first nine months of
2005
by a decrease in inventory of $5.0 million, as a liquidation of inventory in
the
business units of the Maintenance Products Group was partially offset by a
seasonal increase in inventory in the Electrical Products Group. In addition
seasonally higher accounts payable of $12.5 million was offset by seasonally
higher accounts receivable, principally resulting from a increase in net sales
in the third quarter of 2005 versus the fourth quarter of 2004. Operating cash
flow during the first nine months of 2005 was negatively impacted by lower
accruals due to the settlement of previously recorded restructuring charges.
Operating cash flow in the first nine months of 2004 was negatively impacted
by
higher inventory and receivables and lower accruals. The inventory build was
due
to the early purchase of certain materials in advance of scheduled supplier
price increases, increased material prices and planned builds in connection
with
facility closures. Accounts payable were higher also as a result of the
seasonally stronger Electrical Products Group. During the first nine months
of
2005, we were turning our inventory at 5.0 times per year versus 4.3 times
per
year during the first nine months of 2004. Cash of $2.9 million and $4.3 million
was used in the nine months ended September 30, 2005 and 2004, respectively,
to
satisfy severance, restructuring and related obligations. Severance,
restructuring and related charges are expected to substantially end in 2005,
however, cash payments will continue through 2011 to satisfy non-cancelable
lease obligations. See Note 11 of the Notes to Condensed Consolidated Financial
Statements.
Investing
Activities
Capital
expenditures totaled $5.8 million during the nine months ended September 30,
2005 as compared to $10.8 million during the nine months ended September 30,
2004. Capital expenditures in the fourth quarter are expected to continue at
approximately at the same pace as the first three quarters of 2005, but overall
are expected to be lower than 2004. On August 5, 2005, we purchased
substantially all of the assets of Washington International Non-wovens (“WIN”).
Through September 30, 2005, we have expended $1.5 million to purchase the assets
and satisfy certain of the obligations of WIN. During the fourth quarter of
2005, we expect to expend approximately $0.6 million to satisfy the remaining
obligations of WIN. During the nine months ended September 30, 2005, we have
received $0.9 million in proceeds primarily relating to the sales of excess
equipment of our Maintenance Products Group. On March 31, 2004, Woods Canada
sold its manufacturing facility for net proceeds of $3.2 million and immediately
entered into a sale/leaseback arrangement to allow that business unit to occupy
this property as a distribution facility. On June 28, 2004, CCP sold its vacant
metals facility in Santa Fe Springs, California for net proceeds of $1.9
million.
Financing
Activities
Overall,
debt decreased $1.0 million during the nine months ended September 30, 2005
versus an increase of $27.4 million during the nine months ended September
30,
2004, primarily relating to the changes in working capital during those periods.
Direct debt costs totaling $0.2 million in the first nine months of 2005
primarily represents a fee paid to our lenders in connection with the Second
Amendment and $1.4 million in the first nine months of 2004 principally relates
to the April 20, 2004 refinancing of the Bank of America Credit Agreement.
On
May 10, 2004, we suspended our $5.0 million share repurchase program after
announcing the resumption of the plan on April 20, 2004. We had previously
suspended the program in November 2003. There currently are no plans to resume
the share repurchase program.
SEVERANCE,
RESTRUCTURING AND RELATED CHARGES
We
expect
to substantially complete our restructuring program in 2005. The remaining
severance, restructuring and related charges for these initiatives are expected
to be less than $0.5 million. The remaining cash obligations of $3.6 million
primarily relate to payments associated with non-cancelable lease liabilities
for abandoned facilities which are scheduled to end in 2011.
See
Note
11 to the Condensed Consolidated Financial Statements in Part I, Item 1,
“RESULTS OF OPERATIONS - Three Months Ended September 30, 2005 versus Three
Months Ended September 30, 2004 - Severance,
Restructuring and Related Charges”
and
“RESULTS OF OPERATIONS - Nine Months Ended September 30, 2005 versus Nine Months
Ended September 30, 2004 - Severance,
Restructuring and Related Charges”
for
further discussion of severance, restructuring and related charges. .
OUTLOOK
FOR 2005
We continue to experience a strong sales performance during the first nine
months of 2005 from the Woods U.S. business unit, offset by lower volumes in
our
U.S. and U.K. Consumer Plastics and domestic Abrasives business units. Price
increases were passed along to our Woods U.S. customers during 2004 and 2005
as
a result of the rise in copper prices since late 2003; and we continue to
implement price increases; however there can be no assurance that such increases
will be accepted. Also at our Woods U.S. business unit, we continue to be at
risk from foreign competitors and our customers who desire to source their
materials directly from foreign markets (particularly Asia). Our volumes in
our
U.S. Consumer Plastics business appear to have stabilized following our exit
from certain unprofitable lines of business in the first half of 2005. We expect
continued softness in the U.K., especially in the consumer /retail sector.
In
2005, we have implemented price increases for all of our business units in
our
Maintenance Products Group in response to the increase in raw material costs
over the past few years. However, in the U.S. and U.K. Consumer Plastics
business, we face the continuing challenge of passing through price increases
to
offset these higher costs, and sales volumes have been and could continue to
be
negatively impacted as a result of raising prices. The disruptions to our
Abrasives operations have resulted in the loss of certain customers, commencing
in the second half of 2004. While we expect to recover some of these lost sales
in the current year, we may experience additional lost sales in 2005. We believe
that sales for the Abrasives business unit in the fourth quarter of 2005 will
be
continue at approximately the same pace as the first nine months of
2005.
Cost
of
goods sold is subject to variability in the prices for certain raw materials,
most significantly thermoplastic resins used in the manufacture of plastic
products for the JanSan Plastics, Consumer Plastics and Container businesses
and
copper which is used in the Woods’ business units. 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 of these resins, such as polyethylene and
polypropylene have increased steadily from the latter half of 2002 through
the
early months of 2005. Prices for resin decreased in the second quarter of
2005, but have recently returned to historically high levels. We currently
believe that these higher prices will remain in effect until at least the early
part of 2006. Prices for copper generally increased from late 2003 and have
continued through the present time. Prices for copper appeared to have
stabilized in a historically high range in the second quarter of 2005, but
more
recently have sharply increased again. We have not employed an active hedging
program related to our commodity price risk, but are employing other strategies
for managing this risk, including contracting for a certain percentage of resin
needs through supply agreements and opportunistic spot purchases. In more
recent months, we have experienced sharp rises in energy costs which have
impacted our plant operating costs and the cost of distributing our products.
We
believe that in the short run, these energy costs will continue to rise. We
announced price increases in the first nine months of 2005 across almost all
of
our business units. We continue to implement price increases; however, there
can
be no assurance that such increases will be accepted. In a climate of rising
raw
material and energy costs, we have generally experienced difficulty in raising
prices sufficiently to our customers (most notably in the major home improvement
and mass market retail outlets) to cover these higher costs. Our future
earnings may be negatively impacted to the extent further increases in costs
for
raw materials and energy cannot be recovered or offset through higher selling
prices. We ultimately cannot predict the direction our raw material and energy
prices will take during late 2005 and beyond.
Certain
operational disruptions including inefficiencies caused by the consolidation
of
two additional abrasives facilities into the Wrens, Georgia facility as well
as
a fire in Wrens early in the fourth quarter of 2004, have resulted in higher
operating costs despite lower sales volumes. The fire damaged certain production
equipment and affected the operations of certain of our production lines.
However, we have been able to continue to operate the remainder of our
production lines at this facility and have obtained equipment allowing us to
operate all product lines at this facility. Various cost reduction initiatives,
including the elimination of headcount, manufacturing process improvements,
and
overhead cost control have been implemented or will be implemented in the near
term. In addition, cost reduction initiatives are being undertaken at our U.K.
Consumer Plastics business unit to offset the lower sales volumes.
Since
our
Recapitalization in 2001, our management has been focused on a number of
restructuring and cost reduction initiatives, including the consolidation of
facilities; divestiture of non-core operations; SG&A cost rationalization
and organizational changes. We are now substantially complete with our
restructuring plans. In the future, we expect to benefit from sales
growth opportunities across our various business units. We believe we can
accomplish this without having to add significant capital because our
facilities are currently under utilized.
As
a
percentage of sales, we expect SG&A expenses in the fourth quarter of 2005
will remain in line with the same period in 2004. Overall, SG&A expense has
continually declined since 2001as a percentage of sales. We expect to maintain
modest headcount and rental costs for our corporate office. We have completed
the process of transferring back-office functions of our Textiles (Wilen),
Abrasives (Glit-Microtron and Loren) and Filters and Grillbricks (Disco)
business units from Georgia to Bridgeton, Missouri, the headquarters of CCP.
We
will continue to evaluate the possibility of further consolidation of
administrative processes.
Our
cost
reduction efforts, integration of back office functions and simplifications
of
our business transactions are all dependent on executing a system integration
plan. This plan involves the migration of data across information technology
platforms and implementation of new software and hardware. The domestic systems
integration plan was substantially completed in October 2003, while our
international systems integration plan is substantially complete.
Interest rates rose in the second half of 2004 and we expect rates to continue
to rise in the fourth quarter of 2005. Effective August 17, 2005, in response
to
the rising interest rates, we entered into an interest rate swap agreement
with
a counterparty to effectively convert $25 million of our debt from a variable
rate to a fixed rate (see Note 6 of the Notes to Condensed Consolidated
Financial Statements). From September 30, 2004, interest rate margins (i.e.
the
interest rate spread above LIBOR) on our Bank of America Credit Agreement
borrowings have risen from 175 basis points over applicable LIBOR rates
for
Revolving Credit Facility borrowings and 200 basis points over LIBOR for
borrowings under the Term Loan to 275 and 300 basis points, respectively.
Current margins reflect the highest spread under the Bank of America Credit
Agreement, as specified by the Third Amendment (see below). Additionally,
margins on the Term Loan will drop 25 basis points if the balance of the
Term
Loan is reduced below $10.0 million.
Given
our
history of operating losses, along with guidance provided by the accounting
literature covering accounting for income taxes, we are unable to conclude
it is
more likely than not that we will be able to generate future taxable income
sufficient to realize the benefits of domestic deferred tax assets and deferred
tax assets of unprofitable foreign subsidiaries. Therefore, except for certain
of our profitable foreign subsidiaries, a full valuation allowance on the net
deferred tax asset position was recorded at September 30, 2005 and December
31,
2004, and we do not expect to record the benefit of any deferred tax assets
that
may be generated in 2005 from domestic and certain unprofitable foreign
jurisdictions. We will continue to record current expense associated with
foreign and state income taxes.
In
2004,
our financial performance benefited from favorable currency translation as
the
British Pound Sterling and the Canadian dollar strengthened throughout the
year
against the U.S. dollar. In the first nine months of 2005, the Canadian dollar
appears to have stabilized against the U.S. dollar and the British Pound
Sterling has somewhat weakened against the U.S. dollar in the same period.
While
we cannot predict the ultimate direction of exchange rates, we do not anticipate
any material impact on our financial performance in 2005.
We
expect
our debt levels to generally stabilize for the fourth quarter of 2005. Elements
of working capital continue to be closely managed. Capital expenditures in
the
fourth quarter are expected to continue at approximately the same pace as the
first three quarters of 2005, but overall are expected to be lower than 2004.
We
expect our current working capital levels to remain constant as increased
receivable collections in the fourth quarter of 2005 will be offset by the
increased settlement of accounts payable (both primarily in the Electrical
Products Group). We intend to use cash flow in the fourth quarter of 2005 for
additional costs related to the consolidation of the Abrasives facilities
(primarily severance and related benefits). Additionally, funds required in
2006
for the closure of the Pineville, North Carolina are not expected to be
material. We also intend to use cash flow over the next several years for 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.
We
determined that due to declining profitability in the fourth quarter of 2004,
potentially lower profitability in the first half of 2005 and the timing of
certain restructuring payments, we would not meet our Fixed Charge Coverage
Ratio (as defined in the Bank of America Credit Agreement) and could potentially
exceed our maximum Consolidated Leverage Ratio (also as defined in the Bank
of
America Credit Agreement) as of the end of the first, second and third quarters
of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage
Ratio or exceeding the maximum Consolidated Leverage Ratio, we obtained the
Second Amendment to the Bank of America Credit Agreement. The Second Amendment
applied only to the first three quarters of 2005 and the covenants would have
returned to their original levels for the fourth quarter of 2005. Specifically,
the Second Amendment eliminated the Fixed Charge Coverage Ratio, increased
the
maximum Consolidated Leverage Ratio, established a Minimum Consolidated EBITDA
(on a latest twelve months basis) for each of the periods and also established
a
Minimum Availability (the eligible collateral base less outstanding borrowings
and letters of credit) on each day within the nine-month period.
Subsequent
to the Second Amendment’s effective date, we determined that we would likely not
meet our amended financial covenants. On April 13, 2005, we obtained the Third
Amendment to the Bank of America Credit Agreement. The Third Amendment
eliminated the maximum Consolidated Leverage Ratio and the Minimum Consolidated
EBITDA as established by the Second Amendment and adjusted the Minimum
Availability such that our eligible collateral must exceed the sum of our
outstanding borrowings and letters of credit under the Revolving Credit Facility
by at least $5 million from the effective date of the Third Amendment through
September 29, 2005 and by at least $7.5 million from September 30, 2005 until
the date we deliver our financial statements for the first quarter of 2006
to
our lenders. Subsequent to the delivery of the financial statements for the
first quarter of 2006, the Third Amendment reestablished the minimum Fixed
Charge Coverage Ratio as originally set forth in the Bank of America Credit
Agreement. The Third Amendment also reduced the maximum allowable capital
expenditures for 2005 from $15 million to $10 million, and increased the
interest rate margins on all of the Company’s outstanding borrowings and letters
of credit to the largest margins set forth in the Bank of America Credit
Agreement. Effective April 13, 2005, interest accrues on the Revolving Credit
Facility and Term Loan borrowings at 275 and 300 basis points over LIBOR,
respectively. Interest rate margins will return to levels set forth in the
Bank
of America Credit Agreement subsequent to the delivery of our financial
statements for the first quarter of 2006 to our lenders. We expect to be in
compliance with the amended covenants in the Bank of America Credit Agreement
for the remainder of 2005.
We
have
recently indicated to the syndicate of banks in the Bank of America Credit
Agreement, that we may be unable to attain the required Fixed Charge Coverage
Ratio as of the end of the first quarter of 2006. If we are unable to comply
with the terms of the Fixed Charge Coverage Ratio or any of the amended
covenants, we may be required to obtain further amendments and pursue increased
liquidity through additional debt financing and/or the sale of assets. We
believe that given our strong working capital base, additional liquidity could
be obtained through additional debt financing, if necessary. However, there
is
no guarantee that such amendments or financing could be obtained. We are
continually evaluating alternatives relating to the sale of excess assets and
divestitures of certain of our business units. Asset sales and business
divestitures present opportunities to provide additional liquidity by
de-leveraging our financial position.
Cautionary
Statement Pursuant to Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
This
report
and the information incorporated by reference in this report contain various
“forward-looking statements” as defined in Section 27A of the Securities Act of
1933 and Section 21E of the Exchange Act of 1934, as amended. The
forward-looking statements are based on the beliefs of our management, as well
as assumptions made by, and information currently available to, our management.
We have based these forward-looking statements on current expectations and
projections about future events and trends affecting the financial condition
of
our business. These forward-looking statements are subject to risks and
uncertainties that may lead to results that differ materially from those
expressed in any forward-looking statement made by us or on our behalf,
including, among other things:
-Our
inability to achieve product price increases, especially as they relate to
potentially higher raw material costs.
-The
potential impact of losing lines of business at large mass merchant retailers
in
the discount and do-it-yourself markets.
-Competition
from foreign competitors.
-Increases
in the cost of, or in some cases continuation of, the current price levels
of
plastic resins, copper, paper board packaging, and other raw
materials.
-Our
inability to reduce product costs, including manufacturing, sourcing, freight,
and other product costs.
-Greater
reliance on third parties for our finished goods as we increase the portion
of
our manufacturing that is outsourced.
-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.
-Our
inability to execute our systems integration plan.
-Our
inability to successfully integrate our operations as a result of the facility
consolidations.
-Our
inability to sub-lease rented facilities which have been abandoned as a result
of consolidation and restructuring initiatives.
-The
potential impact of rising costs for insurance for properties and various forms
of liabilities.
-The
potential impact of rising interest rates on our LIBOR-based Bank of America
Credit Agreement.
-Our
inability to meet covenants associated with the Bank of America Credit
Agreement.
-The
potential impact of changes in foreign currency exchange rates related to our
foreign operations.
-The
potential impact of our inability to satisfy NYSE listing
standards;
-Changes
in significant laws and government regulations affecting environmental
compliance and income taxes.
Words
and
phrases such as
“expects,”“may,”“estimates,”“will,”“would,”“intends,”“plans,”“seeks,”“believes,”“anticipates”
or the negative of these words and phrases or similar words and phrases 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. These factors are not intended to represent a complete list of all
risks and uncertainties inherent in our business and should be read in
conjunction with the cautionary statements and risks included in our other
filings with the SEC, including, but not limited to, our Annual Report on Form
10-K for the fiscal year ended December 31, 2004.
ENVIRONMENTAL
AND OTHER CONTINGENCIES
See
Note
9 to the Condensed Consolidated Financial Statements in Part I, Item 1 for
a
discussion of environmental and other contingencies.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
See
Note
2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for
a
discussion of recently issued accounting pronouncements.
CRITICAL
ACCOUNTING POLICIES
We
disclosed details regarding certain of our critical accounting policies in
the
Management’s Discussion and Analysis section of our 2004 Annual Report on Form
10-K (Part II, Item 7). There have been no changes to policies as of September
30, 2005.
Interest
Rate Risk
Our
exposure to market risk associated with changes in interest rates relates
primarily to our debt obligations. Accordingly, effective August 17, 2005,
we entered into a two-year interest rate swap agreement on a notional amount
of
$25.0 million in the first year and $15.0 million in the second year. The fixed
interest rate under the swap at September 30, 2005 and over the life of the
agreement is 4.49%.Our interest obligations on outstanding debt at September
30,
2005 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 Third Amendment to the Bank of America Credit
Agreement, our exposures to interest rate risks could be material to our
financial position or results of operations.
Foreign
Exchange Risk
We
are
exposed to fluctuations in the Euro, British pound, Canadian dollar and Chinese
Yuan Renminbi. Some of our subsidiaries make significant U.S. dollar purchases
from Asian suppliers, particularly in China. An adverse change in foreign
currency exchange rates of Asian countries could result in an increase in the
cost of purchases. We do not currently hedge foreign currency transaction or
translation exposures. In July, the Chinese Central Bank revalued the Yuan
Renminbi, breaking the link to the U.S. Dollar. We are currently unable to
determine the long-term effects of China’s revaluation on the foreign currency
exchange rate with the U.S.
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 Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - OUTLOOK FOR 2005, for further discussion
of our exposure to increasing raw material costs.
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our SEC filings is reported within
the
time periods specified in the SEC's rules, and that such information is
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. We also have investments in certain
unconsolidated entities. The oversight of these entities includes an assessment
of controls over the recording of related amounts in the consolidated financial
statements, including controls over the selection of accounting methods, the
recognition of equity method income and losses, and the determination,
valuation, and recording of assets in our investment account
balances.
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934, Katy carried out
an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended) as of the end of the period of our report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and primary financial officer, as appropriate,
to
allow timely decisions regarding required disclosure.
(b)
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Change
in Internal Controls
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There
have been no changes in Katy’s internal control over financial reporting during
the quarter ended September 30, 2005 that has materially affected, or is
reasonably likely to materially affect Katy’s internal control over financial
reporting.
As
noted
in our 2004 Annual Report on Form 10-K, our Abrasives facility in Wrens, Georgia
lacks a perpetual inventory system and relies on quarterly physicals to value
inventory. Throughout 2004, we adjusted our material cost of sales estimate
(for
preparation of non-quarter-end interim financial statements) to reflect rising
material cost of sales.
Also
during 2004, the Wrens facility experienced significant personnel turnover,
consolidation of other operations (consistent with our strategy of consolidating
our abrasives operations into the Wrens facility), and manufacturing disruption
events such as the production interruption caused by the air handling system
fire in October 2004. Management determined that key inventory processes such
as
receiving, production reporting, scrap, and shipping required improvement.
In
light
of the above developments, our management requested that our independent
auditor, PricewaterhouseCoopers LLP (PwC), perform a comprehensive analysis
of
the Wrens inventory process controls. As part of the analysis, PwC conducted
an
on-site review of the operations and inventory-related process controls of
the
Wrens facility as well as related certain back-office processes conducted in
St.
Louis, Missouri.
The
PwC
review concluded that inventory process controls were inadequate. Among the
inadequacies identified were those relating to shipping and receiving controls,
bills of material and routings, security measures, and systems implementation
(we are in the process of re-implementing a new ERP system). As a result of
its
review, PwC recommended that we take certain corrective actions, including
the
establishment of a perpetual inventory system. In response to each of PwC’s
detailed recommendations, management developed an itemized corrective action
plan which was discussed with our Audit Committee, Board of Directors and PwC.
We believe that the action plan developed by our management will correct the
inadequacies in our internal control over financial reporting as they relate
to
our inventory process at our Wrens facility. We also believe that despite these
inadequacies, the quarterly physical inventory process at this facility has
provided us with an accurate inventory valuation.
The
following is a summary of the specific actions that have been taken to correct
the internal control deficiencies:
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·
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Implementation
of short term corrective actions in shipping and receiving - Revised
shipping, receiving, physical inventory, period end cut-off and returned
goods procedures have been issued. Training to reinforce the importance
of
the physical verification will be provided to all appropriate material
handlers by the end of September. Products loaded for shipment are
now
verified against system generated bill of ladings. A receiving log
was
implemented in the first quarter of 2005 and is reviewed at least
weekly
by the distribution manager.
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·
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Establish
improved interim recording of raw material usage - The shop floor
module in PRMS (the facility’s ERP system) was activated on July 1, 2005.
Large raw material variances can now be reviewed and/or isolated
by work
order to allow bill of material (“BOM”) corrections as required.
Miscellaneous inventory transactions are being downloaded and reviewed
at
least weekly by cost accounting. A supplemental system was also
re-implemented to allow the daily review of costed non-woven production
runs to identify process or material variances. The output of this
system
yields a daily cost per yard of non-woven material produced, as well
as an
average cost per yard over multiple batches/runs. This information
was
used as a reference point and allowed material cost verifications
with
PRMS formula BOM’s.
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·
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Reestablish
a monthly physical inventory until the PRMS perpetual inventory process
is
re-implemented - This location’s monthly physical inventory was
reinstituted for the February 2005 accounting
close.
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·
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Establish
security measures to mitigate the risk of theft - All employees were
issued parking permits to help identify on-site traffic of non-employees.
A security camera system was installed and became operational in
June
2005. Cameras provide monitoring of key plant areas by both security
personnel and key managers.
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·
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Improve
bill of material and routing accuracy - In the second quarter of 2005,
a BOM accuracy project was started which encompassed the review of
the
most significant BOM’s across all product lines. This project was
completed in late July. Efforts are now ongoing to review remaining
BOM’s,
prioritizing based on sales volumes and comparative analysis with
other
BOM’s of like material/sizes.
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·
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Properly
staff and plan PRMS re-implementation - The PRMS re-implementation was
completed at the end of July 2005. The Material Planning and Scheduling
module of PRMS will be completed in the fourth quarter of 2005. The
total
re-implementation is being facilitated by a consultant with expertise
with
both PRMS and ERP system implementation across varied
industries.
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·
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Establish
procedures for production reporting and inventory transactions -
Detailed procedures for reporting of production in PRMS have been
issued.
The implementation of scanning for inventory transactions was completed
in
August and documented procedures are currently under development.
Additional procedures are being finalized and will be documented
when they
are validated.
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The
implementation of our action plan is an ongoing process. Although we
believe that we have made significant progress in the items noted above,
we have
not yet fully implemented certain of the PwC recommendations, including the
establishment of a perpetual inventory system. Accordingly, we are unable
to conclude as of September 30, 2005 that our inventory process controls
at our
Wrens facility are adequate.
PART
II - OTHER INFORMATION
Except
as
otherwise noted in Note 9 to the Condensed Consolidated Financial Statements,
during the quarter for which this report is filed there have been no material
developments in previously reported legal proceedings, and no other cases
or legal proceedings, other than ordinary routine litigation incidental to
the
Company’s business and other nonmaterial proceedings were brought against the
company.
On
April
20, 2003, the Company announced a plan to spend up to $5.0 million to repurchase
shares of its common stock. In 2004, 12,000 shares of common stock were
repurchased on the open market for approximately $75 thousand under this plan,
while in 2003, 482,800 shares of its common stock were repurchased on the open
market for approximately $2.6 million. The Company suspended further purchases
under the plan on May 10, 2004.
Other
On
October 11, 2005, the Company received notification from the New York Stock
Exchange ("NYSE") that the Company was not in compliance with the NYSE’s
continued listing standards. Katy is considered "below criteria" by the NYSE
because the Company’s total market capitalization was less than $75 million over
a consecutive 30 trading-day period and its shareholders’ equity was less than
$75 million as of June 30, 2005. While Katy was in compliance with previous
continued listing standards set forth by the NYSE, the NYSE adopted new
continued listing standards, effective June 9, 2005, which increased the
former standards significantly.
In
accordance with the continued listing criteria set forth by the NYSE, the
Company intends to present a plan to the NYSE within 45 days of its receipt
of
the notice, demonstrating how it intends to comply with the continued listing
standards within 18 months of its receipt of the notice. The NYSE may take
up to
45 days to review and evaluate the plan after it is submitted. If the plan
is
accepted, the Company will be subject to quarterly monitoring for compliance
by
the NYSE. If the NYSE does not accept the plan or if the Company is unable
to
achieve compliance with the NYSE’s continued listing criteria through its
implementation of the plan, the Company will be subject to NYSE trading
suspension and delisting, at which time the Company would intend to apply to
have its shares listed on another stock exchange or quotation system.
Entry
into Material Definitive Agreement
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 is to limit the Company’s exposure to interest rate
increases on a portion of the Bank of America Credit Agreement over the two-year
term of the swap. The fixed interest rate under the swap at September 30, 2005
and over the life of the agreement is 4.49%.
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
KATY
INDUSTRIES, INC.
Registrant
DATE: November 15, 2005 |
By: |
/s/ Anthony T. Castor
III
Anthony
T. Castor III
President
and Chief Executive Officer
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By: |
/s/ Amir Rosenthal
Amir
Rosenthal
Vice
President, Chief Financial Officer,
General
Counsel and Secretary
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