KATY INDUSTRIES, INC. 10-Q 3/31/06
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
the
quarterly period ended: March 31, 2006
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
|
|
75-1277589
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
2461
South Clark Street, Suite 630, Arlington, Virginia 22202
(Address
of Principal Executive Offices) (Zip Code)
Registrant's
telephone number, including area code: (703) 236-4300
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (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
|
|
Outstanding
at April 30, 2006
|
Common
Stock, $1 Par Value
|
|
7,985,677
Shares
|
KATY
INDUSTRIES, INC.
FORM
10-Q
March
31,
2006
INDEX
Page
PART
I FINANCIAL
INFORMATION
Item
1.
Financial
Statements:
Condensed
Consolidated Balance Sheets
March
31,
2006 and December 31, 2005 (unaudited) 2,3
Condensed
Consolidated Statements of Operations
Three
Months Ended March 31, 2006 and 2005 (unaudited)
4
Condensed
Consolidated Statements of Cash Flows
Three
Months Ended March 31, 2006 and 2005 (unaudited)
5
Notes
to Condensed
Consolidated Financial Statements (unaudited)
6
Item
2.
Management's
Discussion and Analysis of Financial
Condition
and Results of Operations
27
Item
3.
Quantitative
and Qualitative Disclosures about Market
Risk 39
Item
4. Controls
and
Procedures 40
PART
II OTHER
INFORMATION
Item
1.
Legal
Proceedings 43
Item
1A.
Risk
Factors
43
Item
2.
Unregistered
Sales of Equity Securities and Use of
Proceeds 43
Item
3.
Defaults
Upon Senior
Securities 43
Item
4. Submission
of Matters to a Vote of Security
Holders 43
Item
5.
Other
Information 43
Item
6. Exhibits 43
Signatures 44
Certifications
PART
I
FINANCIAL INFORMATION
Item
1.
FINANCIAL
STATEMENTS
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands)
(Unaudited)
ASSETS
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,001
|
|
$
|
8,421
|
|
Accounts
receivable, net
|
|
|
46,503
|
|
|
63,612
|
|
Inventories,
net
|
|
|
67,960
|
|
|
62,799
|
|
Other
current assets
|
|
|
3,822
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
121,286
|
|
|
138,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
665
|
|
|
665
|
|
Intangibles,
net
|
|
|
6,827
|
|
|
6,946
|
|
Other
|
|
|
8,605
|
|
|
8,643
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
16,097
|
|
|
16,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
|
|
|
|
|
Land
and improvements
|
|
|
1,747
|
|
|
1,732
|
|
Buildings
and improvements
|
|
|
14,051
|
|
|
14,011
|
|
Machinery
and equipment
|
|
|
139,303
|
|
|
140,514
|
|
|
|
|
|
|
|
|
|
|
|
|
155,101
|
|
|
156,257
|
|
Less
- Accumulated depreciation
|
|
|
(98,944
|
)
|
|
(98,260
|
)
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
56,157
|
|
|
57,997
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
193,540
|
|
$
|
212,683
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in Thousands, Except Share Data)
(Unaudited)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
27,379
|
|
$
|
47,449
|
|
Accrued
compensation
|
|
|
3,714
|
|
|
4,071
|
|
Accrued
expenses
|
|
|
36,482
|
|
|
37,713
|
|
Current
maturities of long-term debt
|
|
|
2,857
|
|
|
2,857
|
|
Revolving
credit agreement
|
|
|
50,477
|
|
|
41,946
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
120,909
|
|
|
134,036
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
12,143
|
|
|
12,857
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
10,642
|
|
|
10,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
143,694
|
|
|
157,390
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 9)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
15%
Convertible preferred stock, $100 par value,
authorized
|
|
|
|
|
|
|
|
1,200,000
shares, issued and outstanding 1,131,551 shares,
|
|
|
|
|
|
|
|
liquidation
value $113,155
|
|
|
108,256
|
|
|
108,256
|
|
Common
stock, $1 par value; authorized 35,000,000 shares;
|
|
|
|
|
|
|
|
issued
9,822,304 shares
|
|
|
9,822
|
|
|
9,822
|
|
Additional
paid-in capital
|
|
|
26,829
|
|
|
27,016
|
|
Accumulated
other comprehensive income
|
|
|
3,167
|
|
|
3,158
|
|
Accumulated
deficit
|
|
|
(76,206
|
)
|
|
(70,415
|
)
|
Treasury
stock, at cost, 1,830,227 shares and 1,874,027 shares,
respectively
|
|
|
(22,022
|
)
|
|
(22,544
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
49,846
|
|
|
55,293
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
193,540
|
|
$
|
212,683
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Amounts
in Thousands, Except Per Share Data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
83,896
|
|
$
|
95,513
|
|
Cost
of goods sold
|
|
|
72,781
|
|
|
85,832
|
|
Gross
profit
|
|
|
11,115
|
|
|
9,681
|
|
Selling,
general and administrative expenses
|
|
|
13,580
|
|
|
12,527
|
|
Severance,
restructuring and related charges
|
|
|
782
|
|
|
172
|
|
Loss
on sale of assets
|
|
|
102
|
|
|
186
|
|
Operating
loss
|
|
|
(3,349
|
)
|
|
(3,204
|
)
|
Interest
expense
|
|
|
(1,771
|
)
|
|
(1,264
|
)
|
Other,
net
|
|
|
337
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(4,783
|
)
|
|
(4,516
|
)
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
252
|
|
|
132
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
|
(5,035
|
)
|
|
(4,648
|
)
|
|
|
|
|
|
|
|
|
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
(756
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,791
|
)
|
$
|
(4,648
|
)
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - Basic and diluted
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
$
|
(0.63
|
)
|
$
|
(0.59
|
)
|
Cumulative
effect of a change in accounting principle
|
|
|
(0.10
|
)
|
|
-
|
|
Net
loss
|
|
$
|
(0.73
|
)
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (thousands):
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,971
|
|
|
7,945
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
KATY
INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE
THREE MONTHS ENDED MARCH 31, 2006 and 2005
(Amounts
in Thousands)
(Unaudited)
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,791
|
)
|
$
|
(4,648
|
)
|
Cumulative
effect of a change in accounting principle
|
|
|
756
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
2,672
|
|
|
2,847
|
|
Amortization
of debt issuance costs
|
|
|
287
|
|
|
276
|
|
Stock
option expense
|
|
|
191
|
|
|
-
|
|
Loss
on sale of assets
|
|
|
102
|
|
|
186
|
|
|
|
|
(1,783
|
)
|
|
(1,339
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
17,221
|
|
|
16,164
|
|
Inventories
|
|
|
(5,136
|
)
|
|
3,627
|
|
Other
assets
|
|
|
(170
|
)
|
|
(942
|
)
|
Accounts
payable
|
|
|
(14,790
|
)
|
|
(11,839
|
)
|
Accrued
expenses
|
|
|
(1,600
|
)
|
|
(2,964
|
)
|
Other,
net
|
|
|
(684
|
)
|
|
(738
|
)
|
|
|
|
(5,159
|
)
|
|
3,308
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(6,942
|
)
|
|
1,969
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(816
|
)
|
|
(1,403
|
)
|
Collections
of note receivable from sale of subsidiary
|
|
|
-
|
|
|
71
|
|
Proceeds
from sale of assets, net
|
|
|
163
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(653
|
)
|
|
(1,332
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
borrowings (repayments) on revolving loans
|
|
|
8,578
|
|
|
(466
|
)
|
Decrease
in book overdraft
|
|
|
(5,360
|
)
|
|
-
|
|
Repayments
of term loans
|
|
|
(714
|
)
|
|
(1,429
|
)
|
Direct
costs associated with debt facilities
|
|
|
(165
|
)
|
|
(138
|
)
|
Repurchases
of common stock
|
|
|
(4
|
)
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
147
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
2,482
|
|
|
(2,033
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(307
|
)
|
|
(30
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(5,420
|
)
|
|
(1,426
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
8,421
|
|
|
8,525
|
|
Cash
and cash equivalents, end of period
|
|
$
|
3,001
|
|
$
|
7,099
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2006
(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 March 31, 2006 and December 31, 2005 and
for the three month periods ended March 31, 2006 and March 31, 2005 are
unaudited and reflect all adjustments (consisting only of normal recurring
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, 2005.
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):
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
19,570
|
|
$
|
23,314
|
|
Work
in process
|
|
|
1,748
|
|
|
1,766
|
|
Finished
goods
|
|
|
57,933
|
|
|
48,949
|
|
Excess
and obsolete inventory reserve
|
|
|
(4,996
|
)
|
|
(4,548
|
)
|
LIFO
reserve
|
|
|
(6,295
|
)
|
|
(6,682
|
)
|
|
|
$
|
67,960
|
|
$
|
62,799
|
|
|
|
|
|
|
|
|
|
At
March
31, 2006 and December 31, 2005, 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 $6.3 million and $6.7 million at March 31, 2006
and December 31, 2005, respectively.
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4
(“SFAS
No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and spoilage. In addition, SFAS No.
151 requires that allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of SFAS No. 151 are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Effective January 1, 2006, the
Company adopted SFAS No. 151 which did not have a material impact on the results
of operations and financial position.
Property
and Equipment
Property
and equipment are stated at cost and depreciated over their estimated useful
lives: buildings (10-40 years) generally using the straight-line method;
machinery and equipment (3-20 years) using straight-line or composite methods;
tooling (5 years) using the straight-line method; and leasehold improvements
using the straight-line method over the remaining lease period or useful life,
if shorter. Costs for repair and maintenance of machinery and equipment are
expensed as incurred, unless the result significantly increases the useful
life
or functionality of the asset, in which case capitalization is considered.
Depreciation expense was $2.5 million and $2.7 million in the three month
periods ending March 31, 2006 and 2005, respectively.
Katy
adopted SFAS No. 143, Accounting
for Asset Retirement Obligations (“SFAS
No. 143”), on January 1, 2003. SFAS No. 143 requires that an asset retirement
obligation associated with the retirement of a tangible long-lived asset be
recognized as a liability in the period in which it is incurred or becomes
determinable, with an associated increase in the carrying amount of the related
long-term asset. The cost of the tangible asset, including the initially
recognized asset retirement cost, is depreciated over the useful life of the
asset. In accordance with SFAS No. 143, the Company has recorded as of March
31,
2006 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, 2005 is
included in the table below (amounts in thousands):
SFAS
No. 143 Obligation at December 31, 2005
|
|
$
|
1,068
|
|
Accretion
expense
|
|
|
15
|
|
Changes
in estimates, including timing
|
|
|
-
|
|
SFAS
No. 143 Obligation at March 31, 2006
|
|
$
|
1,083
|
|
|
|
|
|
|
Stock
Options and Other Stock Awards
Prior
to
January 1, 2006, the Company accounted for stock options and other stock awards
under the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting
for Stock Issued to Employees
(“APB
No. 25”), as allowed by SFAS No. 123, Accounting
for Stock-Based Compensation (“SFAS
No. 123”), as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure (“SFAS
No. 148”). APB No. 25 dictated a measurement date concept in the determination
of compensation expense related to stock awards including stock options,
restricted stock, and stock appreciation rights (“SARs”). Katy’s outstanding
stock options all had established measurement dates and therefore, fixed plan
accounting was applied, generally resulting in no compensation expense for
stock
option awards. However, the Company issued stock appreciation rights, stock
awards and restricted stock awards which were accounted for as variable stock
compensation awards for which compensation expense was recorded.
Compensation
(income) expense associated with stock appreciation rights was ($0.6 million)
for the three month period ended March 31, 2005. No compensation expense
relative to restricted stock awards was recognized in the three month period
ended March 31, 2005. Compensation expense for stock awards and stock
appreciation rights is recorded in selling, general and administrative expenses
in the Consolidated Statements of Operations.
In
December 2004, the FASB issued SFAS No. 123R, Share-Based
Payment
(“SFAS
No. 123R”). SFAS No. 123R, which sets accounting requirements for “share-based”
compensation to employees, requires companies to recognize the grant date fair
value of stock options and other equity-based compensation issued to employees
and disallows the use of the intrinsic value method of accounting for stock
compensation. This statement is effective for annual reporting periods beginning
after June 15, 2005. Subsequent to the effective date, the pro forma disclosures
previously permitted under SFAS No. 123 are no longer an alternative to
financial statement recognition. Effective January 1, 2006, the Company has
adopted SFAS No. 123R using the modified prospective method. Under this method,
compensation cost recognized during the three month period ended March 31,
2006
includes: a) compensation cost for all stock options granted prior to, but
not
yet vested as of January 1, 2006, based on the grant date fair value estimated
in accordance with SFAS No. 123R amortized over the options’ vesting period; b)
compensation cost for stock appreciation rights granted prior to, but vested
as
of January 1, 2006, based on the January 1, 2006 fair value estimated in
accordance with SFAS No. 123R; and c) compensation cost for stock appreciation
rights granted prior to and vested as of March 31, 2006 based on the March
31,
2006 fair value estimated in accordance with SFAS No. 123R.
The
following table shows total compensation expense (see Note 7 for descriptions
of
Stock Incentive Plans) included in the Condensed Consolidated Statement of
Operations for the three month period ended March 31, 2006:
|
|
Three
Months
|
|
|
|
Ended
March 31,
|
|
|
|
|
2006
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
$
|
489
|
|
Cumulative
effect of a change in accounting principle
|
|
|
756
|
|
|
|
$
|
1,245
|
|
|
|
|
|
|
The
cumulative effect of a change in accounting principle reflects the compensation
cost for stock appreciation rights granted prior to, but vested as of January
1,
2006, based on the January 1, 2006 fair value. Prior to the effective date,
no
compensation cost was accrued associated with SARs as all of these stock awards
were out of the money. Pro forma results for the prior period have not been
restated. As a result of adopting SFAS No. 123R on January 1, 2006, the
Company’s net loss for the three month period ended March 31, 2006 is
approximately $1.2 million lower than had it continued to account for stock
based employee compensation under APB No. 25. Basic and diluted net loss per
share for the three month period ended March 31, 2006 would have been $0.57
loss
had the Company not adopted SFAS No. 123R, compared to reported basic and
diluted net loss per share of $0.73. The adoption of SFAS No. 123R had
approximately $1.0 million positive impact on cash flows from operations with
the recognition of liability for the outstanding and vested stock appreciation
rights. The adoption of SFAS No. 123R had no impact on cash flows from
financing.
The
fair
value for stock options was estimated at the date of grant using a Black-Scholes
option pricing model. The Company used the simplified method, as allowed by
Staff Accounting Bulletin (“SAB”) No. 107, Share-Based
Payment,
for
estimating the expected term equal to the average between the minimum and
maximum lives expected for each award, ranging from 5.30 years to 6.50 years.
In
addition, the Company estimated volatility, ranging from 53.8% to 57.6%, by
considering its historical stock volatility over a term comparable to the
remaining expected life of each award. The risk-free interest rate, ranging
from
3.98% to 4.48%, was the current yield available on U.S. treasury rates with
issues with a remaining term equal in term of each award. The Company estimates
forfeitures using historical results. Its estimates of forfeitures will be
adjusted over the requisite service period based on the extent to which actual
forfeitures differ, or are expected to differ, from their estimate.
The
fair
value for stock appreciation rights, a liability award, was estimated at the
effective date of SFAS No. 123R and March 31, 2006 using a Black-Scholes option
pricing model. The Company estimated the expected term equal to the average
between the minimum and maximum lives expected for each award, ranging from
3.0
years to 5.30 years. In addition, the Company estimated volatility, ranging
from
48.2% to 55.0%, by considering its historical stock volatility over a term
comparable to the remaining expected life of each award. The risk-free interest
rate, ranging from 4.37% to 4.83%, was the current yield available on U.S.
treasury rates with issues with a remaining term equal in term of each award.
The Company estimates forfeitures using historical results. Its estimates of
forfeitures will be adjusted over the requisite service period based on the
extent to which actual forfeitures differ, or are expected to differ, from
their
estimate.
The
following table illustrates the effect on net loss and net loss per share had
the Company applied the fair value recognition provisions of SFAS No. 123R
to
account for the Company’s employee stock option awards for the three month
period ended March 31, 2005 because these awards were not accounted for using
the fair value recognition method during that period. However, no impact was
present on net loss as all stock option awards were vested prior to the time
period presented. For purposes of pro forma disclosure, the estimated fair
value
of the stock awards, as prescribed by SFAS No. 123, is amortized to expense
over
the vesting period:
|
|
Three
Months
|
|
|
|
Ended
March 31,
|
|
|
|
|
2005
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,648
|
)
|
Deduct:
Total stock-based employee compensation expense determined
|
|
|
|
|
under
fair value based method for all awards, net of related tax
effects
|
|
|
-
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(4,648
|
)
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
(0.59
|
)
|
Basic
and diluted - pro forma
|
|
$
|
(0.59
|
)
|
The
historical pro forma impact of applying the fair value method prescribed by
SFAS
No. 123 is not representative of the impact that may be expected in the future
due to changes resulting from additional grants and changes in assumptions
such
as volatility, interest rates, and the expected life used to estimate fair
value
of stock options and other stock awards. Note that the above proforma disclosure
was not presented for the three month period ended March 31, 2006 because all
stock awards have been accounted for using the fair value recognition method
under SFAS No. 123R for this period.
Derivative
Financial Instruments
Effective
August 17, 2005, the Company entered into an interest rate swap agreement
designed to limit exposure to increasing interest rates on its floating rate
indebtedness. The differential to be paid or received is recognized as an
adjustment of interest expense related to the debt upon settlement. In
connection with the Company’s adoption of SFAS No. 133, Accounting
for Derivative Financial Instruments and Hedging Activities
(“SFAS
No. 133”), the Company is required to recognize all derivatives on its balance
sheet at fair value. As the derivative instrument held by the Company is
classified as a hedge under SFAS No. 133, changes in the fair value of the
derivative will be offset against the change in fair value of the hedged
liability through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. Hedge ineffectiveness associated
with
the swap will be reported by the Company in interest expense.
The
Company accounts for its interest rate swap in accordance with SFAS No. 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 SFAS No. 133, the Company
recorded an asset of $0.2 million on its balance sheet at March 31, 2006, with
changes in fair market value included in other comprehensive
income.
The
Company reported no gain or loss for the three months ended March 31, 2006,
as a
result of any 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 March 31, 2006 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)
|
|
$
158
|
|
|
|
|
|
|
|
|
|
(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.
|
Reclassifications
Certain
reclassifications were made to the 2005 amounts in order to conform to the
2006
presentation. In addition, the Company in the fourth quarter of 2005 determined
that certain items previously classified as severance, restructuring and related
charges during the first three quarters of 2005 of $1.1 million should have
been
classified as costs of goods sold ($0.7 million) and selling, general and
administrative expenses ($0.4 million). For the three months ended March 31,
2005, the Company reclassified $0.2 million from severance, restructuring and
related charges to selling, general and administrative expenses. These
misclassifications did not impact the Company’s reported net income (loss),
income (loss) from continuing operations or cash flows from operations.
Additionally, the impact to the Company’s reported gross profit in these
quarters was not significant.
(2)
New
Accounting Pronouncements
No
new
accounting pronouncements are present which will have a material impact on
the
Company’s results of operations and financial position. As discussed in Note 1,
the Company, effective January 1, 2006, adopted SFAS No. 151 and SFAS No.
123R.
(3)
Intangible
Assets
Following
is detailed information regarding Katy’s intangible assets (amounts in
thousands):
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
Gross
|
|
Accumulated
|
|
Net
Carrying
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Patents
|
|
$
|
1,445
|
|
$
|
(1,002
|
)
|
$
|
443
|
|
$
|
1,409
|
|
$
|
(954
|
)
|
$
|
455
|
|
Customer
lists
|
|
|
10,645
|
|
|
(8,046
|
)
|
|
2,599
|
|
|
10,643
|
|
|
(7,997
|
)
|
|
2,646
|
|
Tradenames
|
|
|
5,503
|
|
|
(2,140
|
)
|
|
3,363
|
|
|
5,498
|
|
|
(2,075
|
)
|
|
3,423
|
|
Other
|
|
|
441
|
|
|
(19
|
)
|
|
422
|
|
|
441
|
|
|
(19
|
)
|
|
422
|
|
Total
|
|
$
|
18,034
|
|
$
|
(11,207
|
)
|
$
|
6,827
|
|
$
|
17,991
|
|
$
|
(11,045
|
)
|
$
|
6,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
of Katy’s
intangible assets are definite long-lived intangibles. Katy recorded
amortization expense on intangible assets of $0.2 million and $0.2 million
in
the three month periods ending March 31, 2006 and 2005, respectively. Estimated
aggregate future amortization expense related to intangible assets is as follows
(amounts in thousands):
2006 $ 476
2007
615
2008
601
2009
566
2010
519
2011
495
(4)
Savannah
Energy Systems Company Partnership
In
1984,
Savannah Energy Systems Company (“SESCO”), an indirect wholly owned subsidiary
of Katy, entered into a series of contracts with the Resource Recovery
Development Authority of the City of Savannah, Georgia (“the Authority”) to
construct and operate a waste-to-energy facility. The facility would be owned
and operated by SESCO solely for the purpose of processing and disposing of
waste from the City of Savannah. In 1984, the Authority issued $55.0 million
of
Industrial Revenue Bonds (“the IRBs”) and lent the proceeds to SESCO under the
loan agreement for the acquisition and construction of the waste-to-energy
facility. The funds required to repay the loan agreement come from the monthly
disposal fee paid by the Authority under the service agreement for certain
waste
disposal services, a component of which is for debt service. The debt service
component of the monthly fee is paid into a trust, outside of the Company’s
control, which is then utilized to make the scheduled debt payments on the
IRBs.
The Authority is unconditionally obligated to pay the monthly fee whether or
not
the facility is operating unless SESCO and Katy are insolvent and the facility
is deemed incapable of handling the required amount of waste.
SESCO
has
a legally enforceable right to offset amounts it owes to the Authority under
the
loan agreement (scheduled principal repayments) against amounts that are owed
from the Authority under the service agreement. At March 31, 2006, this
outstanding amount was $15.3 million and will be paid by the end of 2006.
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 accordance with FASB Interpretation (“FIN”) No. 39,
Offsetting
of Amounts Related to Certain Contracts.
On
April
29, 2002, SESCO entered into a partnership agreement with Montenay Power
Corporation and its affiliates (“Montenay”) that turned over the control of
SESCO's waste-to-energy facility to 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 Authority and the related receivable under the service
agreement with the Authority) to the partnership. While SESCO has a 99% interest
as a limited partner, profits and losses are allocated 1% to SESCO and 99%
to
Montenay. In addition, Montenay has the day to day responsibility for
administration, operations, financing and other matters of the partnership.
While the above partnership qualifies as a variable interest entity, the Company
is not the primary beneficiary as defined by FIN No. 46, Consolidation
of Variable Interest Entities,
and
accordingly, the partnership is not consolidated. SESCO does not meet the
criteria as the primary beneficiary as Montenay receives 99% of all profits
and
losses, Montenay is required to finance the partnership, partners are not
obligated to contribute additional capital, and Montenay has agreed to indemnify
SESCO for any losses incurred due to a breach in the service agreement.
Katy
agreed to pay Montenay $6.6 million over the span of seven years under a note
payable in return for Montenay assuming the risks associated with the
partnership and its operation of the waste-to-energy facility. In the first
quarter of 2002, the Company recognized a charge of $6.0 million consisting
of
1) the discounted value of the $6.6 million note, 2) the carrying value of
certain assets contributed to the partnership, consisting primarily of machinery
spare parts, and 3) costs to close the transaction. It should be noted that
all
of SESCO's long-lived assets were reduced to a zero value in 2001, so no
additional impairment was required. On a going forward basis, Katy would expect
that income statement activity associated with its involvement in the
partnership will not be material, and Katy's Consolidated Balance Sheet will
carry the liability mentioned above.
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.
To
induce the required parties to
consent to the SESCO partnership transaction, SESCO retained its liability
under
the loan agreement. In connection with that liability, SESCO also retained
its
right to receive the debt service component of the monthly disposal fee. In
addition to SESCO retaining its liabilities under the loan agreement, to induce
the required parties to consent to the partnership transaction, Katy 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.
The
table
below schedules the remaining payments due to Montenay as of March 31, 2006
which are reflected in accrued expenses and other liabilities in the Condensed
Consolidated Balance Sheet (in thousands):
2006
|
|
$
|
1,100
|
|
2007
|
|
|
1,100
|
|
2008
|
|
|
550
|
|
|
|
$
|
2,750
|
|
|
|
|
|
|
On
April
4, 2006, the Company and Montenay amended the partnership agreement in order
to
allow the Company to completely exit from the SESCO operations and related
obligations. The Company will pay $75 thousand to Montenay which will remove
the
Company as the performance guarantor under the service agreement. In addition,
Montenay will become the guarantor under the loan obligation for the IRBs.
Montenay will purchase the Company’s limited partnership interest for $75
thousand and a reduction of approximately $0.6 million in the face amount due
to
Montenay as agreed upon in the original partnership agreement. The above
transaction is expected to close during the second quarter of 2006; however,
it
is subject to approval of various parties, including the Authority.
(5)
Indebtedness
Long-term
debt consists of the following (amounts in thousands):
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Term
loan payable under Bank of America Credit Agreement, interest based
|
|
|
|
|
|
|
|
on
LIBOR and Prime Rates (7.88% - 9.00%), due through 2009
|
|
$
|
15,000
|
|
$
|
15,714
|
|
Revolving
loans payable under the Bank of America Credit Agreement,
|
|
|
|
|
|
|
|
interest
based on LIBOR and Prime Rates (7.50% - 8.75%)
|
|
|
50,477
|
|
|
41,946
|
|
Total
debt
|
|
|
65,477
|
|
|
57,660
|
|
Less
revolving loans, classified as current (see below)
|
|
|
(50,477
|
)
|
|
(41,946
|
)
|
Less
current maturities
|
|
|
(2,857
|
)
|
|
(2,857
|
)
|
Long-term
debt
|
|
$
|
12,143
|
|
$
|
12,857
|
|
|
|
|
|
|
|
|
|
Aggregate
remaining scheduled
maturities of the Term Loan as of March 31, 2006 are as follows (amounts in
thousands):
2006 $
2,143
2007
2,857
2008
2,857
2009
7,143
On
April
20, 2004, the Company completed a refinancing of its outstanding indebtedness
(the “Refinancing”) and entered into a new agreement with Bank of America
Business Capital (formerly Fleet Capital Corporation) (the “Bank of America
Credit Agreement”). Like the previous credit agreement with Fleet Capital
Corporation, the Bank of America Credit Agreement is a $110.0 million facility
with a $20.0 million term loan (“Term Loan”) and a $90.0 million revolving
credit facility (“Revolving Credit Facility”) with essentially the same terms as
the previous credit agreement. The Bank of America Credit Agreement is an
asset-based lending agreement and involves a syndicate of four banks, all of
which participated in the syndicate from the previous credit agreement. The
Bank
of America Credit Agreement, and the additional borrowing ability under the
Revolving Credit Facility obtained by incurring new term debt, results in three
important benefits related to the Company’s long-term strategy: (1) additional
borrowing capacity to invest in capital expenditures and/or acquisitions key
to
the Company’s strategic direction, (2) increased working capital flexibility to
build inventory when necessary to accommodate lower cost outsourced finished
goods inventory and (3) the ability to borrow locally in Canada and the United
Kingdom and provide a natural hedge against currency fluctuations.
The
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 the Company’s property,
plant and equipment.
The
Company’s borrowing base under the Bank of America Credit Agreement is reduced
by the outstanding amount of standby and commercial letters of credit. Vendors,
financial institutions and other parties with whom the Company conducts business
may require letters of credit in the future that either (1) do not exist today
or (2) would be at higher amounts than those that exist today. Currently, the
Company’s largest letters of credit relate to our casualty insurance
programs.
All
extensions of credit under the Bank of America Credit Agreement are
collateralized by a first priority security interest in and lien upon the
capital stock of each material domestic subsidiary (65% of the capital stock
of
each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary restrictions apply under the Bank of America
Credit Agreement. Until September 30, 2004, interest accrued on Revolving Credit
Facility borrowings at 175 basis points over applicable LIBOR rates and at
200
basis points over LIBOR for borrowings under the Term Loan. In accordance with
the Bank of America Credit Agreement, margins (i.e. the interest rate spread
above LIBOR) increased by 25 basis points in the fourth quarter of 2004 based
upon certain leverage measurements. Margins increased an additional 25 basis
points in the first quarter of 2005 based on the Company’s leverage ratio (as
defined in the Bank of America Credit Agreement) as of December 31, 2004 and
will increase another 50 basis points upon the effective date of the Third
Amendment (see below). Additionally, margins on the Term Loan will drop an
additional 25 basis points if the balance of the Term Loan is reduced below
$10.0 million. Interest accrues at higher margins on prime rates for swing
loans, the amounts of which were nominal at March 31, 2006.
At
December 31, 2004, 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 these 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 eliminated the maximum Consolidated
Leverage Ratio and the Minimum Consolidated EBITDA as established by the Second
Amendment and adjusted the Minimum Availability such that the Company’s eligible
collateral must exceed the sum of its outstanding borrowings and
letters
of credit under the Revolving Credit Facility by at least $5.0 million 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 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
$15.0 million to $10.0 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. Interest rate
margins
would have returned to levels set forth in the Bank of America Credit Agreement
subsequent to the delivery of its financial statements for the first quarter
of
2006 to its lenders.
During
2005, the Company obtained two additional amendments to the Bank of America
Credit Agreement. The Fourth Amendment allowed the Company to finance its
insurance premium to a certain level whereas the Fifth Amendment allowed the
acquisition of assets and assumption of certain liabilities of Washington
International Non-Wovens, LLC.
The
Company was in compliance with the above financial covenants in the Bank of
America Credit Agreement, as amended above, at December 31, 2005. Due to the
performance levels within its Maintenance Group, the Company determined that
it
would not meet the Fixed Charge Coverage Ratio (as defined in the amended Bank
of America Credit Agreement) during 2006. In anticipation of not achieving
the
minimum Fixed Charge Coverage Ratio, the Company obtained an amendment to the
Bank of America Credit Agreement (the “Sixth Amendment”) on March 9, 2006.
As
a
result of the Sixth Amendment, the Company’s current debt covenants under the
Bank of America Credit Agreement are as follows:
Minimum
Availability
-
Eligible collateral must exceed the sum of the Company’s outstanding borrowings
and letters of credit under the Revolving Credit Facility by at least $5.0
million from the effective date of the Sixth Amendment through September 29,
2006 and by at least $7.5 million from September 30, 2006 until the date the
Company delivers its financial statements for the first quarter of 2007 to
its
lenders.
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 Sixth Amendment,
this covenant was suspended and will be reinstated following the first quarter
of 2007.
Capital
Expenditures
- For
the year ended December 31, 2006, the Company is not to exceed $12.0 million
in
capital expenditures. Subsequent to 2006, 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 2007, the Leverage Ratio will be
utilized to determine the interest rate margin over the applicable LIBOR
rate.
If
the
Company is unable to comply with the terms of the amended covenants, it could
seek to obtain further amendments and pursue increased liquidity through
additional debt financing and/or the sale of assets (see discussion above);
however, the Company may not be able to obtain further amendments from the
lender under the Bank of America Credit Agreement or secure additional financing
or liquidity through the sale of assets on favorable terms or at all. However,
the Company believes that it will be able to comply with all covenants, as
amended, throughout 2006.
In
each
of the three months ended March 31, 2006 and 2005, the Company had amortization
of debt issuance costs of $0.3 million. In addition, the Company incurred $0.2
million and $0.1 million associated with amending the Bank of America Credit
Agreement, as discussed above, in the three months ended March 31, 2006 and
2005, respectively.
The
revolving credit facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence of a
material adverse effect (“MAE”) clause in the Bank of America Credit Agreement,
caused the revolving credit facility to be classified as a current liability,
per guidance in the Emerging Issues Task Force Issue No. 95-22,
Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement.
The
Company does not expect to repay, or be required to repay, within one year,
the
balance of the revolving credit facility classified as a current liability.
The
MAE clause, which is a fairly typical requirement in commercial credit
agreements, allows the lenders to require the loan to become due if they
determine there has been a material adverse effect on the Company’s operations,
business, properties, assets, liabilities, condition, or prospects. The
classification of the revolving credit facility as a current liability is
a
result only of the combination of the lockbox agreements and 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 the Company of any indication of a MAE at March 31, 2006,
and
the Company was not in default of any provision of the Bank of America Credit
Agreement at March 31, 2006.
Letters
of credit totaling $8.4 million were outstanding at March 31, 2006, which
reduced the unused borrowing availability under the Revolving Credit
Facility.
All
of
the debt under the Bank of America Credit Agreement is re-priced to current
rates at frequent intervals. Therefore, its fair value approximates its carrying
value at March 31, 2006.
(6)
Retirement
Benefit Plans
Several
subsidiaries have pension plans covering substantially all of their employees.
These plans are noncontributory, defined benefit pension plans. The benefits
to
be paid under these plans are generally based on employees’ retirement age and
years of service. The companies’ funding policies, subject to the minimum
funding 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 as of March 31, 2006 is as follows (amounts in
thousands):
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
March
31,
|
|
|
March
31,
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2
|
|
$
|
2
|
|
$
|
-
|
|
$
|
-
|
|
Interest
cost
|
|
|
22
|
|
|
23
|
|
|
36
|
|
|
47
|
|
Expected
return on plan assets
|
|
|
(22
|
)
|
|
(26
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
-
|
|
|
14
|
|
|
15
|
|
Amortization
of net loss
|
|
|
14
|
|
|
20
|
|
|
10
|
|
|
15
|
|
Net
periodic benefit cost
|
|
$
|
16
|
|
$
|
19
|
|
$
|
60
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required
contributions to the pension plans for 2006 are $0.1 million and Katy made
contributions of $0.1 million during the first quarter of 2006.
(7)
Stock
Incentive Plans
Stock
Options
At
the
1995 Annual Meeting, the Company’s stockholders approved the Long-Term Incentive
Plan (the “1995 Incentive Plan”) authorizing the issuance of up to 500,000
shares of Company common stock pursuant to the grant or exercise of stock
options, including incentive stock options, nonqualified stock options, SARs,
restricted stock, performance units or shares and other incentive awards to
executives and certain key employees. The Compensation
Committee
of the Board of Directors administers the 1995 Incentive Plan and determines
to
whom awards may be granted, the type of award as well as the number of shares
of
Company common stock to be covered by each award and the terms and conditions
of
such awards. The exercise price of stock options granted under the 1995
Incentive Plan cannot be less than 100 percent of the fair market value of
such
stock on the date of grant. In the event of a Change in Control of the Company,
awards granted under the 1995 Incentive Plan are subject to substantially
similar provisions to those described under the 1997 Incentive Plan. The
definition of Change in Control of the Company under the 1995 Incentive Plan
is
substantially similar to the definition described under the 1997 Incentive
Plan
below.
At
the
1995 Annual Meeting, the Company’s stockholders approved the Non-Employee
Directors Stock Option Plan (the “Directors Plan”) authorizing the issuance of
up to 200,000 shares of Company common stock pursuant to the grant or exercise
of nonqualified stock options to outside directors. The Board of Directors
administers the Directors Plan. The exercise price of stock options granted
under the Directors Plan is equal to the fair market value of the Company’s
common stock on the date of grant. Stock options granted pursuant to the
Directors Plan are immediately vested in full on the date of grant and generally
expire 10 years after the date of grant. This plan has expired as of December
31, 2005 and no further grants will be made.
At
the
1998 Annual Meeting, the Company’s stockholders approved the 1997 Long-Term
Incentive Plan (the “1997 Incentive Plan”), authorizing the issuance of up to
875,000 shares of Company common stock pursuant to the grant or exercise of
stock options, including incentive stock options, nonqualified stock options,
SARs, restricted stock, performance units or shares and other incentive awards.
The Compensation Committee of the Board of Directors administers the 1997
Incentive Plan and determines to whom awards may be granted, the type of award
as well as the number of shares of Company common stock to be covered by each
award, and the terms and conditions of such awards. The exercise price of stock
options granted under the 1997 Incentive Plan cannot be less than 100 percent
of
the fair market value of such stock on the date of grant.
The
1997
Incentive Plan also provides that in the event of a Change in Control of the
Company, as defined below, 1) any SARs and stock options outstanding as of
the
date of the Change in Control which are neither exercisable or vested will
become fully exercisable and vested (the payment received upon the exercise
of
the SARs shall be equal to the excess of the fair market value of a share of
the
Company’s Common Stock on the date of exercise over the grant date price
multiplied by the number of SARs exercised); 2) the restrictions applicable
to
restricted stock will lapse and such restricted stock will become free of all
restrictions and fully vested; and 3) all performance units or shares will
be
considered to be fully earned and any other restrictions will lapse, and such
performance units or shares will be settled in cash or stock, as applicable,
within 30 days following the effective date of the Change in Control. For
purposes of subsection 3), the payout of awards subject to performance goals
will be a pro rata portion of all targeted award opportunities associated with
such awards based on the number of complete and partial calendar months within
the performance period which had elapsed as of the effective date of the Change
in Control. The Compensation Committee will also have the authority, subject
to
the limitations set forth in the 1997 Incentive Plan, to make any modifications
to awards as determined by the Compensation Committee to be appropriate before
the effective date of the Change in Control.
For
purposes of the 1997 Incentive Plan, “Change in Control” of the Company means,
and shall be deemed to have occurred upon, any of the following events: 1)
any
person (other than those persons in control of the Company as of the effective
date of the 1997 Incentive Plan, a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned directly
or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company) becomes the beneficial
owner, directly or indirectly, of securities of the Company representing
30 percent or more of the combined voting power of the Company’s then
outstanding securities; or 2) during any period of two consecutive years (not
including any period prior to the effective date), the individuals who at the
beginning of such period constitute the Board of Directors (and any new
director, whose election by the Company’s stockholders was approved by a vote of
at least two-thirds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was so approved), cease for any reason to constitute a majority
thereof, or 3) the stockholders of the Company approve: (a) a plan of complete
liquidation of the Company; or (b) an agreement for the sale or disposition
of
all or substantially all the Company’s assets; or (c) a merger, consolidation,
or reorganization of the Company with or involving any other corporation, other
than a merger, consolidation, or reorganization that would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to
represent at least 50 percent of the combined voting power
of
the
voting securities of the Company (or such surviving entity) outstanding
immediately after such merger, consolidation, or reorganization. The Company
has
determined that the Recapitalization did not result in such a Change in
Control.
In
March
2004, the Company’s Board of Directors approved the vesting of all previously
unvested stock options. The Company did not recognize any compensation expense
upon this vesting of options because, based on the information available at
that
time, the Company did not have an expectation that the holders of the previously
unvested options would terminate their employment with the Company prior to
the
original vesting period.
On
June
28, 2001, the Company entered into an employment agreement with C. Michael
Jacobi, its former President and Chief Executive Officer. To induce Mr. Jacobi
to enter into the employment agreement, on June 28, 2001, the Compensation
Committee of the Board of Directors approved the Katy Industries, Inc. 2001
Chief Executive Officer’s Plan. Under this plan, Mr. Jacobi was granted 978,572
stock options. Mr. Jacobi was also granted 71,428 stock options under the
Company’s 1997 Incentive Plan. Upon Mr. Jacobi’s retirement in May 2005, all but
300,000 of these options were cancelled. All of the remaining options are under
the 2001 Chief Executive Officer’s Plan. In the second quarter of 2005, Mr.
Jacobi retired from the Company. Upon this event, the Company recognized $2.0
million of non-cash compensation expense related to his 1,050,000 options using
the intrinsic method of accounting under APB No. 25, because he would not have
otherwise vested in these options but for the March 2004 accelerated
vesting.
On
September 4, 2001, the Company entered into an employment agreement with Amir
Rosenthal, its Vice President, Chief Financial Officer, General Counsel and
Secretary. To induce Mr. Rosenthal to enter into the employment agreement,
on
September 4, 2001, the Compensation Committee of the Board of Directors approved
the Katy Industries, Inc. 2001 Chief Financial Officer’s Plan. Under this plan,
Mr. Rosenthal was granted 123,077 stock options. Mr. Rosenthal was also granted
76,923 stock options under the Company’s 1995 Incentive Plan.
On
June
1, 2005, the Company entered into an employment agreement with Anthony T. Castor
III, its President and Chief Executive Officer. To induce Mr. Castor to enter
into the employment agreement, on July 15, 2005, the Compensation Committee
of
the Board of Directors approved the Katy Industries, Inc. 2005 Chief Executive
Officer’s Plan. Under this plan, Mr. Castor was granted 750,000 stock options.
These options vest evenly over a three-year period.
The
following table summarizes stock option activity under each of the 1997
Incentive Plan, 1995 Incentive Plan, the Chief Executive Officer’s Plan, the
Chief Financial Officer’s Plan and the Directors Plan:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
Options
|
|
Price
|
|
Life
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,856,350
|
|
$
|
3.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
$
|
0.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
(45,000
|
)
|
$
|
3.26
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
1,811,350
|
|
$
|
4.01
|
|
|
7.21
years
|
|
$
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at March 31, 2006
|
|
|
881,350
|
|
$
|
5.40
|
|
|
5.08
years
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
March 31, 2006, total unvested compensation expense associated with stock
options amounted to $0.7 million and is being amortized on a straight-line
basis
over the respective option’s vesting period. The weighted average period in
which the above compensation cost will be recognized is 1.22 years as of March
31, 2006.
Stock
Appreciation Rights
During
2002, a non-employee consultant was awarded 200,000 SARs under the 1997
Incentive Plan. As of December 31, 2005, these SARs were outstanding at an
exercise price of $6.00.
On
November 21, 2002, the Board of Directors approved the 2002 Stock Appreciation
Rights Plan (the “2002 SAR Plan”), authorizing the issuance of up to 1,000,000
SARs. Vesting of the SARs occurs ratably over three years from the date of
issue. The 2002 SAR Plan provides limitations on redemption by holders,
specifying that no more than 50% of the cumulative number of vested SARs held
by
an employee could be exercised in any one calendar year. The SARs expire ten
years from the date of issue. The Board approved grants on November 22, 2002,
of
717,175 SARs to 60 individuals with an exercise price of $3.15, which equaled
the market price of Katy’s stock on the grant date. In addition, 50,000 SARs
were granted to four individuals during 2003 with exercise prices ranging from
$3.01 through $5.05. In 2004, 275,000 SARs were granted to fifteen individuals
with exercise prices ranging from $5.20 through $6.45. No SARs were granted
in
2005. At December 31, 2005, Katy had 671,781 SARs outstanding at a weighted
average exercise price of $4.16.
The
2002
SAR Plan also provides that in the event of a Change in Control of the Company,
all outstanding SARs may become fully vested. In accordance with the 2002 SAR
Plan, a “Change in Control” is deemed to have occurred upon any of the following
events: 1) a sale of 100 percent of the Company’s outstanding capital stock, as
may be outstanding from time to time; 2) a sale of all or substantially all
of
the Company’s operating subsidiaries or assets; or 3) a transaction or series of
transactions in which any third party acquires an equity ownership in the
Company greater than that held by KKTY Holding Company, L.L.C. and in which
Kohlberg & Co., L.L.C. relinquishes its right to nominate a majority of the
candidates for election to the Board of Directors.
The
following table summarizes SARs activity under each of the 1997 Incentive Plan
and the 2002 SAR Plan:
Non-Vested
at December 31, 2005
|
|
|
85,115
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
Vested
|
|
|
(30,000
|
)
|
|
|
|
|
|
Non-Vested
at March 31, 2006
|
|
|
55,115
|
|
|
|
|
|
|
Total
Outstanding at March 31, 2006
|
|
|
871,781
|
|
|
|
|
|
|
(8)
Income
Taxes
As
of
March 31, 2006 and December 31, 2005, the Company had deferred tax assets,
net
of deferred tax liabilities, of $65.5 million. Domestic net operating loss
(“NOL”) carry forwards comprised $34.8 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 March 31, 2006 and December 31, 2005 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 months ended March 31, 2006 and 2005
reflects current expense for state and foreign income taxes. Tax benefits were
not recorded on the pre-tax net loss for the first quarter of 2006 as valuation
allowances were recorded related to deferred tax assets created as a result
of
operating losses in the United States and certain foreign jurisdictions.
(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 the EPA agreed to
resolve the proceeding through an Administrative Order on Consent under Section
7003 of RCRA. While the Company has completed the cleanup activities required
by
the Administrative Order on Consent under Section 7003 of RCRA, the Company
still has further obligations with respect to this matter in the areas of
groundwater and land treatment unit monitoring and closure as well as ongoing
site operation and maintenance costs.
Since
1990, the Company has spent in excess of $7.0 million undertaking cleanup and
compliance activities in connection with this matter. While ultimate liability
with respect to this matter is not easy to determine, the Company has recorded
and accrued amounts that it deems reasonable for prospective liabilities with
respect to this matter.
Asbestos
Claims
A. The
Company has been named as a defendant in 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 1,990 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 310 similar cases in New Jersey. These cases have also been tendered
by
Sterling. The Company has elected to defend these cases, many of which have
been
dismissed or settled for nominal sums.
While
the
ultimate liability of the Company related to the asbestos matters above cannot
be determined at this time, the Company has recorded and accrued amounts that
it
deems reasonable for prospective liabilities with respect to this matter.
Non-Environmental
Litigation - Banco del Atlantico, S.A.
Banco
del Atlantico, S.A. v. Woods Industries, Inc., et al. Civil
Action No. L-96-139
(now 1:03-CV-1342-LJM-VSS,
U.S.
District Court, Southern District of Indiana).
In
December 1996, Banco del Atlantico (“plaintiff”), a bank located in Mexico,
filed a lawsuit in Texas against Woods Industries, Inc., a subsidiary of Katy,
and against certain past and/or then present officers, directors and owners
of
Woods (collectively, “defendants”). The plaintiff alleges that it was defrauded
into making loans to a Mexican corporation controlled by certain past officers
and directors of Woods based upon fraudulent representations and purported
guarantees. Based on these allegations, and others, the plaintiff originally
asserted claims for alleged violations of the federal Racketeer Influenced
and
Corrupt Organizations Act (“RICO”); “money laundering” of the proceeds of the
illegal enterprise; the Indiana RICO and Crime Victims Act; common law fraud
and
conspiracy; and fraudulent transfer. As discussed below, certain of the
plaintiff’s claims were dismissed with prejudice by the Court. The plaintiff
also seeks recovery upon certain alleged guarantees purportedly executed by
Woods Wire Products, Inc., a predecessor company from which Woods purchased
certain assets in 1993 (prior to Woods’s ownership by Katy, which began in
December 1996). The primary legal theories under which the plaintiff seeks
to
hold Woods liable for its alleged damages are respondeat superior, conspiracy,
successor liability, or a combination of the three.
The
case
was transferred from Texas to the Southern District of Indiana in 2003. In
September 2004, the plaintiff and HSBC Mexico, S.A. (collectively,
“plaintiffs”), who intervened in the litigation as an additional alleged owner
of the claims against the defendants, filed a Second Amended Complaint. The
defendants filed motions to dismiss the Second Amended Complaint on November
8,
2004. These motions sought dismissal of plaintiffs’ Second Amended Complaint on
grounds of, among other things, failure to state a claim and forum non
conveniens.
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. Fact discovery closed on April
11,
2006, although Plaintiffs have requested an extension of the discovery period
and additional depositions from Defendants and certain nonparties. In addition,
certain issues relating to Plaintiffs’ depositions are currently being
adjudicated before the Court and may lead to additional discovery being taken
in
the case. Expert discovery is also ongoing.
The
plaintiffs seek damages in excess of $24.0 million, request that the Court
void
certain asset sales as purported “fraudulent transfers” (including the 1993
Woods Wire Products, Inc./Woods asset sale), and continue to claim that the
Indiana Crime Victims Act entitles them to treble damages for some or all of
their claims. Katy may have recourse against the former owners of Woods and
others for, among other things, violations of covenants, representations and
warranties under the purchase agreement through which Katy acquired Woods,
and
under state, federal and common law. Woods may also have indemnity claims
against the former officers and directors. In addition, there is a dispute
with
the former owners of Woods regarding the final disposition of amounts withheld
from the purchase price, which may be subject to further adjustment as a result
of the claims by the plaintiff. The extent or limit of any such adjustment
cannot be predicted at this time.
While
the
ultimate liability of the Company related to this matter cannot be determined
at
this time, the Company has recorded and accrued amounts that it deems reasonable
for prospective liabilities with respect to this matter.
Other
Claims
Katy
also
has a number of product liability and workers’ compensation claims pending
against it and its subsidiaries. Many of these claims are proceeding through
the
litigation process and the final outcome will not be known until a settlement
is
reached with the claimant or the case is adjudicated. The Company estimates
that
it can take up to 10 years from the date of the injury to reach a final outcome
on certain claims. With respect to the product liability and workers’
compensation claims, Katy has provided for its share of expected losses beyond
the applicable insurance coverage, including those incurred but not reported
to
the Company or its insurance providers, which are developed using actuarial
techniques. Such accruals are developed using currently available claim
information, and represent management’s best estimates. The ultimate cost of any
individual claim can vary based upon, among other factors, the nature of the
injury, the duration of the disability period, the length of the claim period,
the jurisdiction of the claim and the nature of the final outcome.
Although
management believes that the actions specified above in this section
individually and in the aggregate are not likely to have outcomes that will
have
a material adverse effect on the Company’s financial position, results of
operations or cash flow, further costs could be significant and will be recorded
as a charge to operations when, and if, current information dictates a change
in
management’s estimates.
(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 March 31,
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Maintenance
Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
|
|
$
|
58,051
|
|
$
|
61,473
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
551
|
|
|
(4,093
|
)
|
Operating
margin (deficit)
|
|
|
|
|
|
|
|
|
0.9
|
%
|
|
(6.7
|
%)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
2,399
|
|
|
2,489
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
653
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
|
|
|
|
|
|
|
$
|
25,845
|
|
$
|
34,040
|
|
Operating
income
|
|
|
|
|
|
|
|
|
59
|
|
|
2,913
|
|
Operating
margin
|
|
|
|
|
|
|
|
|
0.2
|
%
|
|
8.6
|
%
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
239
|
|
|
354
|
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
163
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
external sales
|
- Operating
segments |
|
$
|
83,896
|
|
$
|
95,513
|
|
|
|
Total
|
|
|
|
|
$
|
83,896
|
|
$
|
95,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
- Operating
segments |
|
$
|
610
|
|
$
|
(1,180
|
)
|
|
- Unallocated
corporate |
|
|
(3,075
|
)
|
|
(1,666
|
)
|
|
- Severance,
restructuring and related charges |
|
|
(782
|
)
|
|
(172
|
)
|
|
- Loss
on sale of assets |
|
|
(102
|
)
|
|
(186
|
)
|
|
|
Total
|
|
|
|
|
$
|
(3,349
|
)
|
$
|
(3,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
-
Operating
segments |
|
$
|
2,638
|
|
$
|
2,843
|
|
|
- Unallocated
corporate |
|
|
34
|
|
|
4
|
|
|
|
Total |
|
|
|
|
$
|
2,672
|
|
$
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
-
Operating
segments |
|
$
|
816
|
|
$
|
1,403
|
|
|
|
Total |
|
|
|
|
$
|
816
|
|
$
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Total
assets
|
-
Maintenance
Products Group |
|
$
|
129,069
|
|
$
|
133,186
|
|
|
- Electrical
Products Group |
|
|
55,410
|
|
|
66,744
|
|
|
- Other
[a] |
|
2,217
|
|
|
2,217
|
|
|
- Unallocated
corporate |
|
|
6,844
|
|
|
10,536
|
|
|
|
Total |
|
|
|
|
$
|
193,540
|
|
$
|
212,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Amounts shown as “Other” primarily represent items associated with Sahlman
Holding Company, Inc., the Company’s equity method investment.
(11)
Severance,
Restructuring and Related Charges
Over
the
past three years, the Company has initiated several cost reduction and facility
consolidation initiatives, resulting in severance, restructuring and related
charges. Key initiatives were the consolidation of the St. Louis, Missouri
manufacturing/distribution facilities, shutdown of both Woods U.S. and Woods
Canada manufacturing as well as the consolidation of the Glit facilities. These
initiatives resulted from the on-going strategic reassessment of the Company’s
various businesses as well as the markets in which they operate.
A
summary
of charges by major initiative is as follows (amounts in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$
|
699
|
|
$
|
55
|
|
Consolidation
of Glit facilities
|
|
|
-
|
|
|
115
|
|
Consolidation
of administrative functions for CCP
|
|
|
-
|
|
|
21
|
|
Shutdown
of Woods Canada manufacturing
|
|
|
-
|
|
|
(19
|
)
|
Corporate
office relocation
|
|
|
83
|
|
|
-
|
|
Total
severance, restructuring and related charges
|
|
$
|
782
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
- In
2002, the Company committed to a plan to consolidate the manufacturing and
distribution of the four Continental Commercial Products, LLC (“CCP”) facilities
in the St. Louis, Missouri area. Management believed that in order to implement
a more competitive cost structure and combat competitive pricing pressure,
the
excess capacity at the Company’s 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 (St. Louis, Missouri) lease and changes in sublet assumptions. Charges
in
2006 were for an adjustment to the non-cancelable lease accrual at the
Hazelwood, Missouri facility due to the execution of a sublease on the property.
Charges in 2005 were for an adjustment to the non-cancelable lease accrual
at
the Hazelwood facility due to change on the amount of sublease rental income
anticipated as well as miscellaneous costs for the termination of the Warson
Road facility lease. Management believes that no further costs will be incurred
for this activity. Following is a rollforward of restructuring liabilities
by
type for the consolidation of St. Louis manufacturing/distribution facilities
(amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
1,845
|
|
$
|
-
|
|
$
|
1,845
|
|
Additions
|
|
|
699
|
|
|
-
|
|
|
699
|
|
Payments
|
|
|
(186
|
)
|
|
-
|
|
|
(186
|
)
|
Restructuring
liabilities at March 31, 2006
|
|
$
|
2,358
|
|
$
|
-
|
|
$
|
2,358
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
of Glit
facilities
- In
2002, the Company approved a plan to consolidate the manufacturing facilities
of
its Glit business
unit in
order to implement
a more competitive cost structure. It was anticipated that this activity would
begin in early 2003 and be completed by the end of the second quarter of 2004.
Due to numerous operational issues, including management turnover and a small
fire at the Wrens, Georgia facility, the completion of this consolidation was
delayed. In 2005, the Company completed the closure of the Lawrence,
Massachusetts facility and is expected to close the Pineville, North Carolina
facility in 2006. In 2005, the Company recorded a charge related to severance
for terminations at the Lawrence facility. Other than closure costs and
severance for the Pineville facility, management does not anticipate any
material costs beyond 2005. Following is a rollforward of restructuring
liabilities by type for the consolidation of Glit facilities (amounts in
thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
505
|
|
$
|
255
|
|
$
|
250
|
|
Additions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payments
|
|
|
(164
|
)
|
|
(164
|
)
|
|
-
|
|
Restructuring
liabilities at March 31, 2006
|
|
$
|
341
|
|
$
|
91
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation
of administrative functions for CCP
- In
2002, in order to streamline processes and eliminate duplicate functions, the
Company initiated a plan to centralize certain administrative and back office
functions into Bridgeton, Missouri from certain businesses within the
Maintenance Products Group. This plan was anticipated to be completed in 2004
upon the transfer of functions from the Lawrence, Massachusetts facility (see
Consolidation of Glit facilities above); however, the closure was delayed and
subsequently contributed to the delay in this plan until completion in 2005.
Katy has incurred primarily severance costs over the past three years for this
integration of back office and administrative functions. The most significant
project is the centralization of the customer service functions for the
Continental, Glit, Wilen, and Disco business units. Charges in 2005 relate
to
costs associated with an accrual for idle space at the Company’s facility in
Atlanta. There was no activity for this initiative during the first quarter
of
2006. The Company does not expect to incur any additional costs on this
initiative.
Shutdown
of Woods Canada manufacturing
- In
2003, the Company approved a plan to shut down the manufacturing operation
in
Toronto, Ontario and source substantially all of its products from Asia.
Management believed that this action was necessary in order to implement a
more
competitive cost structure to combat pricing pressure by producers in Asia.
In
connection with this shutdown, the Company also anticipated the sale and
leaseback of this facility, which would provide additional liquidity. In
December 2003, Woods Canada closed this manufacturing facility in Toronto,
Ontario, but was unable to complete the sale/leaseback transaction at that
time.
Accordingly, the charge for the non-cancelable lease accrual was recorded in
the
first quarter of 2004, upon the completion of the sale/leaseback transaction.
The idle capacity was a direct result of the elimination of the manufacturing
function from this facility. A portion of the facility was available for
sublease at the time the accrual was established. In 2005, a credit was recorded
to finalize the severance paid over the past two years. Management believes
that
no more costs will be incurred for this activity, except for potential
adjustments to non-cancelable lease liabilities. Following is a rollforward
of
restructuring liabilities by type for the shutdown of Woods Canada manufacturing
(amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
717
|
|
$
|
-
|
|
$
|
717
|
|
Additions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payments
|
|
|
(52
|
)
|
|
-
|
|
|
(52
|
)
|
Restructuring
liabilities at March 31, 2006
|
|
$
|
665
|
|
$
|
-
|
|
$
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
office relocation
- In
November 2005, the Company announced the closing of its corporate office in
Middlebury, Connecticut, and the relocation of certain corporate functions
to
the CCP location in Bridgeton, Missouri, the outsourcing of other functions,
and
the balance to a new location in Arlington, Virginia. The amounts recorded
in
2006 relate to severance for employees at the Middlebury office. Following
is a
rollforward of restructuring liabilities by type for the corporate office
relocation (amounts in thousands):
|
|
One-time
|
|
|
|
Termination
|
|
|
|
Benefits
[a]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
157
|
|
Additions
|
|
|
83
|
|
Payments
|
|
|
(196
|
)
|
Restructuring
liabilities at March 31, 2006
|
|
$
|
44
|
|
|
|
|
|
|
Shutdown
of Woods US manufacturing
- During
2002, a major restructuring occurred at the Woods business unit. After
significant study and research into different sourcing alternatives, Katy
decided that Woods would source all of its products from Asia. In December
2002,
Woods shut down all U.S. manufacturing facilities, which were in suburban
Indianapolis and in southern Indiana. All 2005 activity reflects payments on
the
non-cancelable lease accrual. No charges were recorded in the three months
ended
March 31, 2006 and 2005. Following is a rollforward of restructuring liabilities
by type for the shutdown of Woods US manufacturing (amounts in
thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
195
|
|
$
|
20
|
|
$
|
175
|
|
Additions
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payments
|
|
|
(31
|
)
|
|
-
|
|
|
(31
|
)
|
Restructuring
liabilities at March 31, 2006
|
|
$
|
164
|
|
$
|
20
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
The
table
below details activity in restructuring reserves since December 31, 2005
(amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
3,419
|
|
$
|
432
|
|
$
|
2,987
|
|
Additions
|
|
|
782
|
|
|
83
|
|
|
699
|
|
Payments
|
|
|
(629
|
)
|
|
(360
|
)
|
|
(269
|
)
|
Restructuring
liabilities at March 31, 2006 [c]
|
|
$
|
3,572
|
|
$
|
155
|
|
$
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Includes severance, benefits, and other employee-related costs associated with
employee terminations.
[b]
Includes charges related to non-cancelable lease liabilities for abandoned
facilities, net of potential sub-lease revenue. Total maximum potential amount
of lease loss, excluding any sublease rentals, is $4.0 million as of March
31,
2006. The Company has included $0.6 million as an offset for sublease
rentals.
[c]
Katy
expects to substantially complete its current restructuring programs in 2006.
The remaining severance, restructuring and related costs for these initiatives
are expected to be approximately $0.4 million.
The
table
below details activity in restructuring and related reserves by operating
segment since December 31, 2005 (amounts in thousands):
|
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
Corporate
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
3,419
|
|
$
|
2,350
|
|
$
|
912
|
|
$
|
157
|
|
Additions
|
|
|
782
|
|
|
699
|
|
|
-
|
|
|
83
|
|
Payments
|
|
|
(629
|
)
|
|
(350
|
)
|
|
(83
|
)
|
|
(196
|
)
|
Restructuring
liabilities at March 31, 2006
|
|
$
|
3,572
|
|
$
|
2,699
|
|
$
|
829
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
table
below summarizes the future payments for severance, restructuring and other
related charges by operating segment detailed above (amounts in
thousands):
|
|
|
|
|
Maintenance
|
|
Electrical
|
|
|
|
|
|
|
|
|
|
Products
|
|
Products
|
|
|
|
|
|
|
Total
|
|
Group
|
|
Group
|
|
Corporate
|
|
2006
|
|
$
|
1,250
|
|
$
|
883
|
|
$
|
323
|
|
$
|
44
|
|
2007
|
|
|
630
|
|
|
412
|
|
|
218
|
|
|
-
|
|
2008
|
|
|
583
|
|
|
359
|
|
|
224
|
|
|
-
|
|
2009
|
|
|
395
|
|
|
331
|
|
|
64
|
|
|
-
|
|
2010
|
|
|
348
|
|
|
348
|
|
|
-
|
|
|
-
|
|
Thereafter
|
|
|
366
|
|
|
366
|
|
|
-
|
|
|
-
|
|
Total
Payments
|
|
$
|
3,572
|
|
$
|
2,699
|
|
$
|
829
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
Sale
of Metal Truck Box Division
On
April
24, 2006, the Company entered into an agreement to sell real estate, inventory
and equipment of the Metal Truck Box business unit within the Maintenance
Products Group with estimated carrying amount of $3.8 million as of March 31,
2006. Proceeds will be a combination of cash and note receivable from the buyer
with a payment schedule over three years. As of the agreement date, the Company
determined that criteria in SFAS No. 144, Accounting
for the Impairment or Disposal of Long - Lived Assets,
had
been met. No impairment of assets to be sold is expected from the transaction.
Management believes that this sale will be completed during the second quarter
of 2006. In the second quarter of 2006, the assets will be grouped and reported
as an asset held for sale.
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2006 versus Three Months Ended March 31,
2005
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
(Amounts
in Millions, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
%
to Sales
|
|
$
|
|
%
to Sales
|
|
Net
sales
|
|
$
|
83.9
|
|
|
100.0
|
|
$
|
95.5
|
|
|
100.0
|
|
Cost
of goods sold
|
|
|
72.8
|
|
|
86.8
|
|
|
85.8
|
|
|
89.9
|
|
Gross
profit
|
|
|
11.1
|
|
|
13.2
|
|
|
9.7
|
|
|
10.1
|
|
Selling,
general and administrative expenses
|
|
|
13.5
|
|
|
16.2
|
|
|
12.5
|
|
|
13.1
|
|
Severance,
restructuring and related charges
|
|
|
0.8
|
|
|
0.9
|
|
|
0.2
|
|
|
0.2
|
|
Loss
on sale of assets
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Operating
loss
|
|
|
(3.3
|
)
|
|
(4.0
|
)
|
|
(3.2
|
)
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1.8
|
)
|
|
|
|
|
(1.3
|
)
|
|
|
|
Other,
net
|
|
|
0.3
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(4.8
|
)
|
|
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
0.2
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
|
(5.0
|
)
|
|
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of a change in accounting principle (net of tax)
|
|
|
(0.8
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5.8
|
)
|
|
|
|
$
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share of common stock - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before cumulative effect of a change in accounting
principle
|
|
$
|
(0.63
|
)
|
|
|
|
$
|
(0.59
|
)
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
(0.10
|
)
|
|
|
|
|
-
|
|
|
|
|
Net
loss
|
|
$
|
(0.73
|
)
|
|
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Our
consolidated net sales for the three month period ending March 31, 2006
decreased $11.6 million compared to the three month period ending March 31,
2005. The decline in net sales of 12% was comprised of lower volumes of 17%
offset by higher pricing of 5%. Gross margins were 13.2% for the three month
period ending March 31, 2006, an increase of 3.1 percentage points compared
to
the three month period ending March 31, 2005. In 2005, higher raw material
costs
and incremental operating costs incurred due to the delayed consolidation of
the
abrasives facilities adversely impacted gross margin levels. In 2006, the lower
volume impact was offset by the improvement in pricing. Selling, general and
administrative expense (“SG&A”) as a percentage of sales increased to 16.2%
for the first quarter of 2006 from 13.1% in the first quarter of 2005, primarily
due to the variance of $1.1 million in the compensation cost recognized in
both
quarters related to stock awards, both options and SARs. The operating loss
of
($3.3) million was comparable to the operating loss of ($3.2) million in 2005
due to the factors noted above.
During
the three month period ending March 31, 2006, we reported a cumulative effect
of
a change in accounting principle of ($0.8) million [($0.10) per share]
associated with the adoption, effective January 1, 2006, of SFAS No. 123R.
Overall, we reported a net loss of ($5.8) million [($0.73) per share] for the
three month period ending March 31, 2006, versus a net loss of ($4.6) million
[($0.59) per share] in the same period of 2005.
Net
Sales
Maintenance
Products Group
Net
sales
from the Maintenance Products Group decreased from $61.5 million during the
three month period ending March 31, 2005 to $58.1 million during the three
month
period ending March 31, 2006. Overall, this decline of 6% was due to lower
volumes of 10% and currency translation of 1% offset by higher pricing of 5%.
Sales activity for the Contico business unit continues to be impacted by reduced
volumes. In addition, lower sales volume was present for the other business
units selling into mass merchants, several of whom reduced their inventory
levels and related reduction in orders. Volumes at our other business units
were
relatively stable with prior year.
Higher
pricing resulted from the implementation of selling price increases across
the
Maintenance Products Group, most of which took effect throughout 2005. The
implementation of price increases was in response to the accelerating cost
of
our primary raw materials, packaging materials, utilities and freight.
Electrical
Products Group
The
Electrical Products Group’s sales decreased from $34.0 million for the three
month period ending March 31, 2005 to $25.8 million for the three month period
ending March 31, 2006. The decrease in sales of 24% was a result of lower volume
of 30% offset by higher pricing of 5% and favorable currency translation of
1%.
Volume in the first quarter of 2006 in the U.S. was adversely impacted by the
absence of 2005 promotional activity with one of its major customers which
did
not repeat in 2006. In addition, sales in the Electrical Products Group were
lower given the inventory positions of certain customers and the related reduced
orders. Sales at Woods Canada were favorably impacted by a stronger Canadian
dollar versus the U.S. dollar in the first quarter of 2006 as compared to the
same period in 2005. Multiple selling price increases were implemented
throughout 2005 and early 2006 to offset the rising cost of copper and
PVC.
Operating
Income
|
|
Three
months ended March 31,
|
|
|
|
|
|
|
|
|
|
(Amounts
in Millions)
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
$
|
|
%
Margin
|
|
Maintenance
Products Group
|
|
$
|
0.6
|
|
|
0.9
|
|
$
|
(4.1
|
)
|
|
(6.7
|
)
|
$
|
4.7
|
|
|
7.6
|
|
Electrical
Products Group
|
|
|
0.1
|
|
|
0.2
|
|
|
2.9
|
|
|
8.6
|
|
|
(2.8
|
)
|
|
(8.4
|
)
|
Unallocated
corporate expense
|
|
|
(3.1
|
)
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
(2.4
|
)
|
|
(2.9
|
)
|
|
(2.8
|
)
|
|
(3.0
|
)
|
|
0.4
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance,
restructuring and related charges
|
|
|
(0.8
|
)
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
(0.6
|
)
|
|
|
|
Loss
on sale of assets
|
|
|
(0.1
|
)
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
0.1
|
|
|
|
|
Operating
loss
|
|
$
|
(3.3
|
)
|
|
(4.0
|
)
|
$
|
(3.2
|
)
|
|
(3.4
|
)
|
$
|
(0.1
|
)
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
Products Group
The
Maintenance Products Group’s operating income for the three month period ending
March 31, 2006 was $0.6 million (0.9% of net sales) compared to an operating
loss of ($4.1) million for the three month period ending March 31, 2005. The
improvement was primarily attributable to higher pricing levels in 2006. In
2005, lower volumes and higher raw material costs adversely impacted our
business units which sell plastics products. SG&A as a percentage of net
sales, in the first quarter of 2006, was 12.4% of net sales compared to 12.7%
of
net sales in the first quarter of 2005, which reflects the fixed nature of
these
expenses.
Electrical
Products Group
The
Electrical Products Group’s operating income decreased from $2.9 million (8.6%
of net sales) for the three month period ending March 31, 2005 to $0.1 million
(0.2% of net sales) for the three month period ending March 31, 2006. The
decrease in profitability was primarily due to the reduced volume levels at
the
Woods US business unit as discussed above. In addition, gross margin performance
in 2005 includes higher than historical promotional sales to a specific customer
which resulted in a favorable gross margin in 2005.
Corporate
Corporate
operating expenses increased from $1.6 million in the three month period ending
March 31, 2005 to $3.1 million in the three month period ending March 31, 2006
principally due to variation of compensation expense recognized for stock
options and SARs. During the first quarter of 2006, we adopted SFAS No. 123R
which resulted in approximately $0.2 million in compensation expense associated
with stock options. In addition, the Company recognized $0.3 million in
compensation expense associated with SARs during the three month period ending
March 31, 2006. In 2005, we recognized income associated with SARs of $0.6
million as a result of Katy’s reduced stock price.
Severance,
Restructuring and Related Charges
Operating
results for the Company during the three months ended March 31, 2006 and 2005
were negatively impacted by severance, restructuring and related charges of
$0.8
million and $0.2 million, respectively. Charges in 2006 related to changes
in
lease assumptions for an abandoned facility upon the execution of a sublease
($0.7 million) with the remaining charges primarily related to the relocation
of
the corporate headquarters. Charges
in 2005 related to the restructuring of the Glit business ($0.1 million) and
costs associated with various restructuring activities ($0.1
million).
Other
Items
Interest
expense increased by $0.5 million in the first quarter of 2006 versus the same
period of 2005, primarily as a result of higher interest rates and higher
average borrowings in 2006. The increased level of borrowings was principally
due to increased working capital levels and poor financial performance in the
second half of 2004. Other, net for the three months ended March 31, 2006
included gain on foreign currency transaction.
Effective
January 1, 2006, the Company adopted SFAS No. 123R. As a result, a cumulative
effect of this adoption of $0.8 million was recognized associated with the
fair
value of all vested SARs. See Note 2 to the Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a
discussion of the cumulative effect of a change in accounting
principle.
The
provision for income taxes for the three months ended March 31, 2006 and 2005
reflects current expense for state and foreign income taxes. Tax benefits were
not recorded on the pre-tax net loss for the first quarter of 2006 and 2005
as
valuation allowances were recorded related to deferred tax assets created as
a
result of operating losses in the United States and certain foreign
jurisdictions.
LIQUIDITY
AND CAPITAL RESOURCES
We
require funding for working capital needs and capital expenditures. We believe
that our cash flow from operations and the use of available borrowings under
the
Bank of America Credit Agreement (as defined below) provide sufficient liquidity
for our operations going forward. As of March 31, 2006, we had cash and cash
equivalents of $3.0 million versus cash and cash equivalents of $8.4 million
at
December 31, 2005. Also as of March 31, 2006, we had outstanding borrowings
of
$65.5 million [57% of total capitalization], under the Bank of America Credit
Agreement, as defined below, with unused borrowing availability on the Revolving
Credit Facility, as defined below, of $11.3 million. As of December 31, 2005,
we
had outstanding borrowings of $57.7 million [51% of total capitalization].
We
used $6.9 million of cash in operations during the quarter ended March 31,
2006
versus providing $2.0 million of cash flow from operations during the quarter
ended March 31, 2005. The use of cash flow in operations was primarily
attributable to an inventory build in 2006 versus an inventory reduction in
2005. We expect inventory levels to stabilize as we continue throughout 2006
as
inventory is being reduced (except for seasonal builds at the Woods US and
Woods
Canada business units) and other elements of working capital are being
managed.
We
have a
number of obligations and commitments, which are listed on the schedule later
in
this section entitled “Contractual and Commercial Obligations.” We have
considered all of these obligations and commitments in structuring our capital
resources to ensure that they can be met. See the notes accompanying the table
in that section for further discussions of those items. We believe that given
our strong working capital base, additional liquidity could be obtained through
additional debt financing, if necessary. However, there is no guarantee that
such financing could be obtained. In addition, we are continually evaluating
alternatives relating to the sale of excess assets and divestitures of certain
of our business units. Asset sales and business divestitures present
opportunities to provide additional liquidity by de-leveraging our financial
position.
Bank
of America Credit Agreement
On
April
20, 2004, we completed a refinancing of our outstanding indebtedness (the
“Refinancing”) and entered into a new agreement with Bank of America Business
Capital (formerly Fleet Capital Corporation) (the “Bank of America Credit
Agreement”). Like the previous credit agreement with Fleet Capital Corporation,
the Bank of America Credit Agreement is a $110.0 million facility with a $20.0
million term loan (“Term Loan”) and a $90.0 million revolving credit facility
(“Revolving Credit Facility”) with essentially the same terms as the previous
credit agreement. The Bank of America Credit Agreement is an asset-based lending
agreement and involves a syndicate of four banks, all of which participated
in
the syndicate from the previous credit agreement. The Bank of America Credit
Agreement, and the additional borrowing ability under the Revolving Credit
Facility obtained by incurring new term debt, results in three important
benefits related to 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.
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 March
31, 2006, total outstanding letters of credit were $8.4 million.
All
extensions of credit under the Bank of America Credit Agreement are
collateralized by a first priority security interest in and lien upon the
capital stock of each material domestic subsidiary (65% of the capital stock
of
each material foreign subsidiary), and all present and future assets and
properties of Katy. Customary restrictions apply under the Bank of America
Credit Agreement. Until September 30, 2004, interest accrued on Revolving Credit
Facility borrowings at 175 basis points over applicable LIBOR rates and at
200
basis points over LIBOR for borrowings under the Term Loan. In accordance with
the Bank of America Credit Agreement, margins (i.e. the interest rate spread
above LIBOR) increased by 25 basis points in the fourth quarter of 2004 based
upon certain leverage measurements. Margins increased an additional 25 basis
points in the first quarter of 2005 based on our leverage ratio (as defined
in
the Bank of America Credit Agreement) as of December 31, 2004 and will increase
another 50 basis points upon the effective date of the Third Amendment, as
defined below. Additionally, margins on the Term Loan will drop an additional
25
basis points if the balance of the Term Loan is reduced below $10.0 million.
Interest accrues at higher margins on prime rates for swing loans, the amounts
of which were nominal at March 31, 2006.
At
December 31, 2004, we determined that due to declining profitability in the
fourth quarter of 2004, potentially lower profitability in the first half of
2005 and the timing of certain restructuring payments, we would not meet our
Fixed Charge Coverage Ratio (as
defined in the Bank of America Credit Agreement) and
could
potentially exceed our maximum Consolidated Leverage Ratio (also as defined
in
the Bank of America Credit Agreement) as of the end of the first, second and
third quarters of 2005. In anticipation of not achieving the minimum Fixed
Charge Coverage Ratio or exceeding the maximum Consolidated Leverage Ratio,
we
obtained an amendment to the Bank of America Credit Agreement (the “Second
Amendment”). The Second Amendment applied only to the first three quarters of
2005 and the covenants would have returned to their original levels for the
fourth quarter of 2005. Specifically, the Second Amendment eliminated the Fixed
Charge Coverage Ratio, increased the maximum Consolidated Leverage Ratio,
established a Minimum Consolidated EBITDA (on a latest twelve months basis)
for
each of the periods and also established a Minimum Availability (the eligible
collateral base less outstanding borrowings and letters of credit) on each
day
within the nine-month period.
Subsequent
to the Second Amendment’s effective date, we determined that we would likely not
meet these 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 $5.0 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 $15.0 million to $10.0 million, and increased the
interest rate margins on all of our outstanding borrowings and letters of credit
to the largest margins set forth in the Bank of America Credit Agreement.
Interest rate margins would have returned 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.
During
2005, the Company obtained two additional amendments to the Bank of America
Credit Agreement. The Fourth Amendment allowed the Company to finance its
insurance premium to a certain level whereas the Fifth Amendment allowed the
acquisition of assets and assumption of certain liabilities of Washington
International Non-Wovens, LLC.
We
were
in compliance with the above financial covenants in the Bank of America Credit
Agreement, as amended above, at March 31, 2006. Due to the performance levels
within our Maintenance Group, we determined that we would not meet our Fixed
Charge Coverage Ratio (as defined in the amended Bank of America Credit
Agreement) during 2006. In anticipation of not achieving the minimum Fixed
Charge Coverage Ratio, we obtained an amendment to the Bank of America Credit
Agreement (the “Sixth Amendment”) on March 9, 2006.
As
a
result of the Sixth Amendment, the Company’s current debt covenants under the
Bank of America Credit Agreement are as follows:
Minimum
Availability
-
Eligible collateral must exceed the sum of our outstanding borrowings and
letters of credit under the Revolving Credit Facility by at least $5.0 million
from the effective date of the Sixth Amendment through September 29, 2006 and
by
at least $7.5 million from September 30, 2006 until the date we deliver our
financial statements for the first quarter of 2007 to our lenders.
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 Sixth Amendment,
this covenant was suspended and will be reinstated following the first quarter
of 2007.
Capital
Expenditures
- For
the year ended December 31, 2006, the Company is not to exceed $12.0 million
in
capital expenditures. Subsequent to 2006, 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 2007, the Leverage Ratio will be
utilized to determine the interest rate margin over the applicable LIBOR
rate.
If
we are
unable to comply with the terms of the amended covenants, we could seek to
obtain further amendments and pursue increased liquidity through additional
debt
financing and/or the sale of assets (see discussion above). However, the Company
believes that we will be able to comply with all covenants, as amended,
throughout 2006.
In
each
of the three months ended March 31, 2006 and 2005, the Company had amortization
of debt issuance costs of $0.3 million. In addition, the Company incurred $0.2
million and $0.1 million associated with amending the Bank of America Credit
Agreement, as discussed above, in the three months ended March 31, 2006 and
2005, respectively.
The
revolving credit facility under the Bank of America Credit Agreement requires
lockbox agreements which provide for all receipts to be swept daily to reduce
borrowings outstanding. These agreements, combined with the existence of a
MAE
clause in the Bank of America Credit Agreement, caused the revolving credit
facility to be classified as a current liability, per guidance in the Emerging
Issues Task Force Issue No. 95-22, Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement.
We do
not expect to repay, or be required to repay, within one year, the balance
of
the revolving credit facility classified as a current liability. The MAE clause,
which is a fairly typical requirement in commercial credit agreements, allows
the lenders to require the loan to become due if they determine there has been
a
material adverse effect on our operations, business, properties, assets,
liabilities, condition, or prospects. The classification of the revolving credit
facility as a current liability is a result only of the combination of the
lockbox agreements and MAE clause. The Bank of America Credit Agreement does
not
expire or have a maturity date within one year, but rather has a final
expiration date of April 20, 2009. The lender had not notified us of any
indication of a MAE at March 31, 2006, and we were not in default of any
provision of the Bank of America Credit Agreement at March 31,
2006.
Contractual
Obligations
We
have
contractual obligations associated with our debt, operating lease agreements,
severance and restructuring, and other obligations. Our obligations as of March
31, 2006, are summarized below (in thousands of dollars):
Contractual
Cash 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]
|
|
$
|
50,477
|
|
$
|
50,477
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Term
loans
|
|
|
15,000
|
|
|
2,857
|
|
|
5,714
|
|
|
6,429
|
|
|
-
|
|
Interest
on debt [b]
|
|
|
11,542
|
|
|
4,178
|
|
|
7,180
|
|
|
184
|
|
|
-
|
|
Operating
leases [c]
|
|
|
27,655
|
|
|
7,840
|
|
|
13,468
|
|
|
5,088
|
|
|
1,259
|
|
Severance
and restructuring [c]
|
|
|
1,775
|
|
|
767
|
|
|
561
|
|
|
257
|
|
|
190
|
|
SESCO
payable to Montenay [d]
|
|
|
2,750
|
|
|
1,100
|
|
|
1,650
|
|
|
-
|
|
|
-
|
|
Postretirement
benefits [e]
|
|
|
6,058
|
|
|
824
|
|
|
1,555
|
|
|
1,409
|
|
|
2,270
|
|
Total
Contractual Obligations
|
|
$
|
115,257
|
|
$
|
68,043
|
|
$
|
30,128
|
|
$
|
13,367
|
|
$
|
3,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Commercial Commitments
|
|
Total
|
|
Due
in less than 1 year
|
|
Due
in 1-3 years
|
|
Due
in 3-5 years
|
|
Due
after 5 years
|
|
Commercial
letters of credit
|
|
$
|
865
|
|
$
|
865
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Stand-by
letters of credit
|
|
|
7,489
|
|
|
7,489
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Guarantees
[f]
|
|
|
15,300
|
|
|
15,300
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Commercial Commitments
|
|
$
|
23,654
|
|
$
|
23,654
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
As
discussed in the Liquidity and Capital Resources section above and in Note
5 to
the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q, the entire Revolving Credit Facility under the
Bank of America Credit Agreement is classified as a current liability on the
Condensed Consolidated Balance Sheets as a result of the combination in the
Bank
of America Credit Agreement of (i) lockbox agreements on Katy’s depository bank
accounts, and (ii) a subjective Material Adverse Effect (MAE) clause. The
Revolving Credit Facility expires in April of 2009.
[b]
Represents interest on the Revolving Credit Facility and Term Loan of the Bank
of America Credit Agreement. Amounts assume interest accrues at the current
rate
in effect, including the effect of the impact of the increased margins through
the end of the first quarter of 2007 pursuant to the Sixth Amendment. The amount
also assumes the principal balance of the Revolving Credit Facility remains
constant through its expiration date of April 20, 2009 and the principal balance
of the Term Loan amortizes in accordance with the terms of the Bank of America
Credit Agreement. Due to the variable nature of the Bank of America Credit
Agreement, actual interest rates could differ from the assumptions above. In
addition, actual borrowing levels could differ from the assumptions above due
to
liquidity needs.
[c]
Future non-cancelable lease rentals are included in the line entitled “Operating
leases,” which also includes obligations associated with restructuring
activities. The Condensed Consolidated Balance Sheet at March 31, 2006 includes
$3.4 million in discounted liabilities associated with non-cancelable operating
lease rentals, net of estimated sub-lease revenues, related to facilities that
have been abandoned as a result of restructuring and consolidation activities.
[d]
Amount owed to Montenay as a result of the SESCO partnership, discussed in
Note
4 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q. $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 consist 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 4 to the Condensed Consolidated Financial Statements in Part
I, Item 1 of this Quarterly Report on Form 10-Q, 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 March 31, 2006, $15.3 million of the
Industrial Revenue Bonds remained outstanding. Katy and SESCO do not anticipate
non-performance by parties to the contracts.
For
items
noted as [d] and [f], the Company and Montenay amended the partnership agreement
on April 4, 2006, in order to allow the Company to completely exit from the
SESCO operations and related obligations. The Company will pay $75 thousand
to
Montenay which will remove the Company as the performance guarantor under the
service agreement. In addition, Montenay will become the guarantor under the
loan obligation for the IRBs. Montenay will purchase the Company’s limited
partnership interest for $75 thousand and a reduction of approximately $0.6
million in the face amount due to Montenay as agreed upon in the original
partnership agreement. The above transaction is expected to close during the
second quarter of 2006; however, it is subject to approval of various parties,
including the Authority. The above table does not reflect the impact of this
amendment.
Off-balance
Sheet Arrangements
See
Note
4 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q for a discussion of SESCO.
Cash
Flow
Liquidity
was adversely impacted during the first quarter of 2006 as a result of higher
operating cash requirements. We used $6.9 million of operating cash compared
to
providing operating cash of $2.0 million during the first quarter of 2005.
Debt
obligations at March 31, 2006 increased $7.8 million from December 31, 2005,
primarily the result of higher working capital.
Operating
Activities
Cash
flow
used in operating activities before changes in operating assets was $1.8 million
in the first quarter of 2006 versus cash flow used in operating activities
before changes in operating assets of $1.3 million in the first quarter of
2005.
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
used $5.2 million of cash related to operating assets and liabilities during
the
three months ended March 31, 2006 versus generating cash related to operating
assets and liabilities of $3.3 million during the three months ended March
31,
2005. Our
operating cash flow was adversely impacted in the first quarter of 2006 by
an
increase in inventory of $5.1 million, mostly in the business units in the
Electrical Products Group. Sales in these business units were impacted by the
inventory levels held at their customers. During the first quarter of 2006,
we
were turning our inventory at 4.4 times per year versus 5.5 times per year
during the first quarter of 2005.
Investing
Activities
Capital
expenditures totaled $0.8 million during the three months ended March 31, 2006
as compared to $1.4 million during the three months ended March 31, 2005.
Anticipated capital expenditures in 2006 are expected to be comparable to
2005.
Financing
Activities
Overall,
debt increased $7.8 million during the three months ended March 31, 2006 versus
a decrease of $1.9 million during the three months ended March 31, 2005,
primarily relating to the changes in inventory balances and levels of accounts
payables during those periods. Direct debt costs totaling $0.2 million and
$0.1
million in the first quarter of 2006 and 2005, respectively, represents a fee
paid to our lenders in connection with the amendments made to the Bank of
America Credit Agreement.
SEVERANCE,
RESTRUCTURING AND RELATED CHARGES
Over
the past three
years, the Company has initiated several cost reduction and facility
consolidation initiatives, resulting in severance, restructuring and related
charges. Key initiatives were the consolidation of the St. Louis
manufacturing/distribution facilities, shutdown of both Woods U.S. and Woods
Canada manufacturing as well as the consolidation of the Glit facilities. These
initiatives resulted from the on-going strategic reassessment of our various
businesses as well as the markets in which they operate.
A
summary
of charges by major initiative is as follows (amounts in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Consolidation
of St. Louis manufacturing/distribution facilities
|
|
$
|
699
|
|
$
|
55
|
|
Consolidation
of Glit facilities
|
|
|
-
|
|
|
115
|
|
Consolidation
of administrative functions for CCP
|
|
|
-
|
|
|
21
|
|
Shutdown
of Woods Canada manufacturing
|
|
|
-
|
|
|
(19
|
)
|
Corporate
office relocation
|
|
|
83
|
|
|
-
|
|
Total
severance, restructuring and related charges
|
|
$
|
782
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
The
impact of actions in connection with the above initiatives on the Company’s
reportable segments (before tax) is as follows (amounts in
thousands):
|
|
Total
Expected Cost
|
|
Total
Provision to Date
|
|
|
|
|
|
|
|
|
|
Maintenance
Products Group
|
|
$
|
21,942
|
|
$
|
21,692
|
|
Electrical
Products Group
|
|
|
12,776
|
|
|
12,776
|
|
Corporate
|
|
|
12,323
|
|
|
12,156
|
|
|
|
$
|
47,041
|
|
$
|
46,624
|
|
|
|
|
|
|
|
|
|
A
rollforward of all restructuring and related reserves since December 31, 2005
is
as follows (amounts in thousands):
|
|
|
|
|
One-time
|
|
Contract
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
|
|
Total
|
|
Benefits
[a]
|
|
Costs
[b]
|
|
Restructuring
liabilities at December 31, 2005
|
|
$
|
3,419
|
|
$
|
432
|
|
$
|
2,987
|
|
Additions
|
|
|
782
|
|
|
83
|
|
|
699
|
|
Payments
|
|
|
(629
|
)
|
|
(360
|
)
|
|
(269
|
)
|
Restructuring
liabilities at March 31, 2006 [c]
|
|
$
|
3,572
|
|
$
|
155
|
|
$
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
[a]
Includes severance, benefits, and other employee-related costs associated with
the employee terminations.
[b]
Includes charges related to non-cancelable lease liabilities for abandoned
facilities, net of estimated sub-lease revenue. Total maximum potential amount
of lease loss, excluding any sublease rentals, is $4.0 million as of March
31,
2006. We have included $0.6 million as an offset for sublease
rentals.
[c]
Katy
expects to substantially complete its current restructuring programs in 2006.
The remaining severance, restructuring and related costs for these initiatives
are expected to be approximately $0.4 million.
Since
2001, the Company has been focused on a number of restructuring and cost
reduction initiatives, resulting in severance, restructuring and related
charges. With these changes, we anticipated cost savings from reduced headcount,
higher
utilized facilities and divested non-core operations. However, anticipated
cost
savings have been impacted from such factors as material price increases,
competitive markets and inefficiencies incurred from consolidation of
facilities. See Note 11 to the Condensed Consolidated Financial Statements
in
Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of
severance, restructuring and related charges.
SALE
OF
METAL TRUCK BOX DIVISION
On
April
24, 2006, the Company entered into an agreement to sell real estate, inventory
and equipment of the Metal Truck Box business unit within the Maintenance
Products Group with estimated carrying amount of $3.8 million as of March 31,
2006. Proceeds will be a combination of cash and note receivable from the buyer
with a payment schedule over three years. As of the agreement date, the Company
determined that criteria in SFAS No. 144, Accounting
for the Impairment or Disposal of Long - Lived Assets,
had
been met. No impairment of assets to be sold is expected from the transaction.
Management believes that this sale will be completed during the second quarter
of 2006. In the second quarter of 2006, the assets will be grouped and reported
as an asset held for sale.
OUTLOOK
FOR 2006
We
experienced strong sales performance during 2005 from the Woods US retail
electrical corded products business, offset by lower volumes in our Contico
and
Glit business units. Price increases were passed along to our Woods US customers
during 2005 as a result of the rise in copper prices in the last two years
and
we are implementing additional price increases in 2006. We anticipate a
reduction in net sales from Woods US, as experienced in the first quarter of
2006, due to customers moving more of their purchases directly to Asian
manufacturers. We continue to implement price increases for the Continental,
Container and Contico business units in response to higher raw material costs.
However, in the Contico business, we face the continuing challenge of passing
through price increases to offset these higher costs, and sales volumes have
been and are likely to continue to be negatively impacted as a result of raising
prices.
We
expect
that the quality, shipping and production issues present at our Glit facilities
in 2005 will continue to improve throughout 2006. We believe the Glit business
unit will improve its quality level and cost control in its current operations
and as they consolidate the Pineville, North Carolina operation into the Wrens,
Georgia facility. We currently believe this consolidation will occur in 2006
and
will result in improved profitability of our Glit business. In addition, we
believe the disruption to our Glit operations over the last two years resulted
in the loss of certain customers. While we expect to recover some of these
lost
sales, we may experience additional lost sales in 2006.
Cost
of
goods sold is subject to variability in the prices for certain raw materials,
most significantly thermoplastic resins used in the manufacture of plastic
products for the Continental and Contico businesses. Prices of plastic resins,
such as polyethylene and polypropylene, have increased steadily from the latter
half of 2002 through 2005. Management has observed that the prices of
plastic resins are driven to an extent by prices for crude oil and natural
gas,
in addition to other factors specific to the supply and demand of the resins
themselves. We are equally exposed to price changes for copper at our
Woods US and Woods Canada business units. Prices for copper increased in late
2003 and have continued through the first quarter of 2006, rising significantly
in the first quarter of 2006. Prices for aluminum and steel (raw materials
used
in our Metal Truck Box business), corrugated packaging material and other raw
materials have also accelerated over the past year. We have not employed an
active hedging program related to our commodity price risk, but are employing
other strategies for managing this risk, including contracting for a certain
percentage of resin needs through supply agreements and opportunistic spot
purchases. We have experienced cost increases in the prices of primary raw
materials used in our products and inflation on other costs such as packaging
materials, utilities and freight. In a climate of rising raw material costs
(and
especially in 2005), we experience difficulty in raising prices to shift these
higher costs to our consumer customers for our plastic products. Our
future earnings may be negatively impacted to the extent further increases
in
costs for raw materials cannot be recovered or offset through higher selling
prices. We cannot predict the direction our raw material prices will take during
2006 and beyond.
Since
the
Recapitalization, our management has been focused on a number of restructuring
and cost reduction initiatives, including the consolidation of facilities,
divestiture of non-core operations, selling general and administrative
(SG&A) cost rationalization and organizational changes. In the future, we
expect to benefit from various profit enhancing strategies such as process
improvements (including Lean Manufacturing and Six Sigma), value engineering
products, improved sourcing/purchasing and lean administration.
SG&A
expenses were comparable as a percentage of sales in 2005 versus 2004 and should
remain stable as a percentage of sales in 2006. We have completed the process
of
transferring back-office functions of our Wilen, Glit and 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.
Interest
rates rose in 2005 and we expect rates to increase slightly in 2006. Ultimately,
we cannot predict the future levels of interest rates. With the execution of
the
Sixth Amendment under the Bank of America Credit Agreement, the Company will
have the interest rate margins on all of our outstanding borrowings and letters
of credit set at the largest margins set forth in the Bank of America Credit
Agreement. Interest rate margins 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 2007 to our lenders.
Given
our
history of operating losses, along with guidance provided by the accounting
literature covering accounting for income taxes, we are unable to conclude
it is
more likely than not that we will be able to generate future taxable income
sufficient to realize the benefits of domestic deferred tax assets carried
on
our books. Therefore, except for our profitable foreign subsidiaries, a full
valuation allowance on the net deferred tax asset position was recorded at
December 31, 2005 and 2004, and we do not expect to record the benefit of any
deferred tax assets that may be generated in 2006. We will continue to record
current expense associated with federal, foreign and state income
taxes.
In
2005,
our financial performance benefited from favorable currency translation as
the
Canadian dollar strengthened throughout the year against the U.S. dollar. While
we cannot predict the ultimate direction of exchange rates, we do not expect
to
see the same favorable impact on our financial performance in 2006.
We
expect
our working capital levels to remain constant as a percentage of sales. However,
inventory carrying values may be impacted by higher material costs. Cash flow
will be used in 2006 for capital expenditures and payments due under our term
loan as well as the settlement of previously established restructuring accruals.
The majority of these accruals relate to non-cancelable lease obligations for
abandoned facilities. These accruals do not create incremental cash obligations
in that we are obligated to make the associated payments whether we occupy
the
facilities or not. The amount we will ultimately pay out under these accruals
is
dependent on our ability to successfully sublet all or a portion of the
abandoned facilities.
On
March
9, 2006, in anticipation of not achieving the minimum Fixed Charge Coverage
Ratio as of the end of each quarter of 2006, we obtained the Sixth Amendment
to
the Bank of America Credit Agreement. The Sixth Amendment adjusts the Minimum
Availability such that our eligible collateral must exceed the sum of our
outstanding borrowings and letters of credit under the Revolving Credit Facility
by at least $5.0 million from the effective date of the Sixth Amendment through
September 29, 2006 and by at least $7.5 million from September 30, 2006 until
the date we deliver our financial statements for the first quarter of 2007
to
our lenders. Subsequent to the delivery of the financial statements for the
first quarter of 2007, the Sixth Amendment reestablishes the minimum Fixed
Charge Coverage Ratio as originally set forth in the Bank of America Credit
Agreement. The Sixth Amendment also reduces the maximum allowable capital
expenditures for 2006 from $15.0 million to $12.0 million, and increases the
interest rate margins on all of our outstanding borrowings and letters of credit
to the largest margins set forth in the Bank of America Credit Agreement.
Interest rate margins will return to levels set forth in the Bank of America
Credit Agreement subsequent to the delivery of our financial statements for
the
first quarter of 2007 to our lenders.
If
we are
unable to comply with the terms of the amended covenants, we could seek to
obtain further amendments and pursue increased liquidity through additional
debt
financing and/or the sale of assets. We believe that given our strong working
capital base, additional liquidity could be obtained through additional debt
financing, if necessary. However, there is no guarantee that such financing
could be obtained. The Company believes that we will be able to comply with
all
covenants, as amended, throughout 2006. In addition, we are continually
evaluating alternatives relating to the sale of excess assets and divestitures
of certain of our business units. Asset sales and business divestitures present
opportunities to provide additional liquidity by de-leveraging our financial
position.
Cautionary
Statement Pursuant to Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
This
report
and the information incorporated by reference in this report contain various
“forward-looking statements” as defined in Section 27A of the Securities Act of
1933 and Section 21E of the Exchange Act of 1934, as amended. The
forward-looking statements are based on the beliefs of our management, as well
as assumptions made by, and information currently available to, our management.
We have based these forward-looking statements on current expectations and
projections about future events and trends affecting the financial condition
of
our business. These forward-looking statements are subject to risks and
uncertainties that may lead to results that differ materially from those
expressed in any forward-looking statement made by us or on our behalf,
including, among other things:
- |
Increases
in the cost of, or in some cases continuation of, the current price
levels
of plastic resins, copper, paper board packaging, and other raw
materials.
|
- |
Our
inability to reduce product costs, including manufacturing, sourcing,
freight, and other product costs.
|
- |
Greater
reliance on third parties for our finished goods as we increase the
portion of our manufacturing that is outsourced.
|
- |
Our
inability to reduce administrative costs through consolidation of
functions and systems improvements.
|
- |
Our
inability to execute our systems integration plan.
|
- |
Our
inability to successfully integrate our operations as a result of
the
facility consolidations.
|
- |
Our
inability to sub-lease rented facilities which have been abandoned
as a
result of consolidation and restructuring
initiatives.
|
- |
Our
inability to achieve product price increases, especially as they
relate to
potentially higher raw material
costs.
|
- |
The
potential impact of losing lines of business at large mass merchant
retailers in the discount and do-it-yourself
markets.
|
- |
Competition
from foreign competitors.
|
- |
The
potential impact of rising interest rates on our LIBOR-based Bank
of
America Credit Agreement.
|
- |
Our
inability to meet covenants associated with the Bank of America Credit
Agreement.
|
- |
The
potential impact of rising costs for insurance for properties and
various
forms of liabilities.
|
- |
The
potential impact of changes in foreign currency exchange rates related
to
our foreign operations.
|
- |
Labor
issues, including union activities that require an increase in production
costs or lead to a strike, thus impairing production and decreasing
sales.
We are also subject to labor relations issues at entities involved
in our
supply chain, including both suppliers and those involved in
transportation and shipping.
|
- |
Changes
in significant laws and government regulations affecting environmental
compliance and income taxes.
|
Words
and
phrases such as “expects,” “estimates,” “will,” “intends,” “plans,” “believes,”
“should”, “anticipates” and the like are intended to identify forward-looking
statements. The results referred to in forward-looking statements may differ
materially from actual results because they involve estimates, assumptions
and
uncertainties. Forward-looking statements included herein are as of the date
hereof and we undertake no obligation to revise or update such statements to
reflect
events or circumstances after the date hereof or to reflect the occurrence
of
unanticipated events. All forward-looking statements should be viewed with
caution.
ENVIRONMENTAL
AND OTHER CONTINGENCIES
See
Note 9 to
the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q 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 of this
Quarterly Report on Form 10-Q 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 Annual Report on Form 10-K
for the year ended December 31, 2005 (Part II, Item 7). There have been no
changes to policies as of March 31, 2006, except for the adoption of SFAS No.
123R.
Effective
January 1, 2006, the Company adopted SFAS No. 123R using the modified
prospective method. SFAS No. 123R sets the accounting requirement for
“share-based” compensation to employees. This statement requires companies to
recognize the grant-date fair value of stock options and other equity-based
compensation issued to employees and disallows the use of the intrinsic value
method of accounting for stock compensation. The fair value is estimated at
the
date of grant, for options, and quarterly, for stock appreciation rights, using
a Black-Scholes option pricing model with weighted average assumptions for
the
activity under the various stock plans. Pricing model input assumptions such
as
expected term, volatility and the risk-free interest rate impact the fair value
estimate. Further, the forfeiture rate impacts the amounts of aggregate
compensation. These assumptions are subjective and generally require significant
analysis and judgment to develop. When estimating fair value, some of the
assumptions will be based on or determined from external data and other
assumptions may be derived from our historical experience with share-based
payment arrangements. The appropriate weight to place on historical experience
is a matter of judgment, based on relevant facts and circumstances.
We
used
the simplified method, as allowed by Staff Accounting Bulletin (“SAB”) No. 107,
Share-Based
Payment,
for
estimating the expected term equal to the average between the minimum and
maximum lives expected for each award. We currently estimate volatility by
considering our historical stock volatility over a term comparable to the
remaining expected life of each award. The risk-free interest rate is the
current yield available on U.S. treasury rates with issues with a remaining
term
equal in term of each award. We estimate forfeitures using historical results.
Our estimates of forfeitures will be adjusted over the requisite service period
based on the extent to which actual forfeitures differ, or are expected to
differ, from their estimate.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
Our
exposure
to market risk associated with changes in interest rates relates primarily
to
our debt obligations. Accordingly, effective August 17, 2005, we entered into
a
two-year interest rate swap agreement on a notional amount of $25.0 million
in
the first year and $15.0 million in the second year. The fixed interest rate
under the swap at March 31, 2006 and over the life of the agreement is 4.49%.
Our interest obligations on outstanding debt at March 31, 2006 were indexed
from
short-term LIBOR. As a result of the current rising interest rate environment
and the increase in the interest rate margins on our borrowings as a result
of
the Sixth 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.
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 Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Outlook for 2006 in Part I, Item 2 of this Quarterly
Report on Form 10-Q, for further discussion of our exposure to increasing raw
material costs.
Item
4. CONTROLS AND PROCEDURES
(a) |
Evaluation
of Disclosure Controls and
Procedures
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings with the Securities and
Exchange Commission (“SEC”) is reported within the time periods specified in the
SEC's rules, and that such information is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. 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) |
Change
in Internal Controls
|
There
have been no changes in Katy’s internal control over financial reporting during
the quarter and year ending March 31, 2006 that has materially affected, or
is
reasonably likely to materially affect Katy’s internal control over financial
reporting.
As
noted
in our Annual Report on Form 10-K for the year ended December 31, 2004, our
Glit
facility in Wrens, Georgia lacks a perpetual inventory system and relies on
quarterly physicals to value inventory. Throughout 2004, we adjusted our
material cost of sales estimate (for preparation of non-quarter-end interim
financial statements) to reflect rising material cost of sales.
Also
during 2004 and 2005, the Wrens facility experienced significant personnel
turnover, consolidation of other operations (consistent with our strategy of
consolidating our abrasives operations into the Wrens facility), and
manufacturing disruption events such as the production interruption caused
by
the air handling system fire in October 2004. Management determined that key
inventory processes such as receiving, production reporting, scrap, and shipping
required improvement.
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,
in
the Spring of 2005, 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 and related status as of March 31,
2006:
· |
Implementation
of short term corrective actions in shipping and receiving
-
Revised shipping, receiving, physical inventory, period end cut-off
and
returned goods procedures have been issued. Training to reinforce
the
importance of the physical verification was provided to all appropriate
material handlers. Products loaded for shipment are now verified
against
system generated bill of ladings. A receiving log was implemented
in the
first quarter of 2005 and is reviewed at least weekly by the distribution
manager.
|
· |
Establishment
of improved interim recording of raw material usage - The shop floor
module in PRMS (the facility’s ERP system) was activated on July 1, 2005.
Large raw material variances are now 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 BOMs.
|
· |
Reestablishment
of a monthly physical inventory until the PRMS perpetual inventory
process
is re-implemented - This location’s monthly physical inventory was
reinstituted for the February 2005 accounting close. We continue
taking a
monthly physical inventory throughout the remaining part of 2005
and into
2006.
|
· |
Establishment
of security measures to mitigate the risk of theft - All employees
were issued parking permits to help identify on-site traffic of
non-employees. A security camera system was installed and became
operational in June 2005. Cameras provide monitoring of key plant
areas by
both security personnel and key
managers.
|
· |
Improvement
in bill of material and routing accuracy - In July 2005, a BOM
accuracy project was completed which encompassed the review of the
most
significant BOMs across all product lines. Efforts are now ongoing
to
review remaining BOMs, prioritizing based on sales volumes and comparative
analysis with other BOMs of like material/sizes. All remaining significant
BOMs, based on volume levels, were updated by February 1,
2006.
|
· |
Proper
staffing and planning of PRMS re-implementation - The PRMS
re-implementation was completed at the end of July 2005. The Material
Planning and Scheduling module of PRMS was completed in the fourth
quarter
of 2005. The total re-implementation was facilitated by a consultant
with
expertise with both PRMS and ERP system implementation across varied
industries.
|
· |
Establishment
of procedures for production reporting and inventory transactions -
Detailed procedures for reporting of production in PRMS have been
issued.
The implementation of scanning for inventory transactions
was completed in August and documented procedures were completed
in
September, 2005. Any additional procedures will be finalized and
documented when they are validated.
|
· |
Activation
of PRMS production and inventory system - The system was fully
activated on February 1, 2006 which allows the accumulation and reporting
of transactions, maintenance of perpetual inventory records, and
the
calculation of standard cost and related variances. The system will
continue to operate in parallel with the monthly physical inventory
until
all significant variances will be identified and
corrected.
|
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 and validation, to an appropriate accuracy level, of a perpetual
inventory system. Accordingly, we are unable to conclude as of March 31,
2006 that our inventory process controls at our Wrens facility are adequate
without the monthly physical inventory counts. In our Annual Report for the
year
ended December 31, 2005, we believed that the activation of the PRMS production
and inventory system would allow the Company to conclude on the adequacy of
internal controls at our Wrens, Georgia facility by the end of the second
quarter of 2006. To ensure the appropriate level of accuracy in the reporting
of
transactions is obtained, the Company now believes that it will not be able
to
conclude on the adequacy of internal controls at our Wrens, Georgia facility
until the third quarter of 2006.
PART
II -
OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
Except
as
otherwise noted in Note 9 to the Condensed Consolidated Financial Statements
in
Part I, Item 1 of this Quarterly Report on Form 10-Q, 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.
Item
1A. RISK FACTORS
We
are
affected by risks specific to us as well as factors that affect all businesses
operating in a global market. The significant factors known to us that could
materially adversely affect our business, financial condition, or operating
results are described in our most recently filed Annual Report on Form 10-K
(Item 1A of Part I). There has been no material change in those risk factors.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 common stock were repurchased on the open
market for approximately $2.5 million. The Company suspended further purchases
under the plan on May 10, 2004. On December 5, 2005, we announced the resumption
of the plan. During 2005, the Company purchased 3,200 shares of common stock
on
the open market for less than $0.1 million. During the three months ended March
31, 2006, the Company purchased 1,200 shares of common stock on the open market
for less than $0.1 million.
Item
3. DEFAULTS UPON SENIOR SECURITIES
None.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company has filed a Proxy Statement pursuant to Section 14(a) of the Securities
Exchange Act of 1934 in advance of our Annual Meeting of Shareholders to be
held
on Thursday, May 25, 2006.
Item
5. OTHER INFORMATION
None.
Item
6. EXHIBITS
|
31.1
|
CEO
Certification pursuant to Securities Exchange Act Rule 13a-14,
as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
CFO
Certification pursuant to Securities Exchange Act Rule 13a-14,
as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
CEO
Certification required by 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
CFO
Certification required by 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KATY
INDUSTRIES, INC.
Registrant
DATE:
May
10, 2006 By
/s/
Anthony T. Castor III
Anthony
T. Castor
III
President
and Chief Executive
Officer
By
/s/
Amir Rosenthal
Amir
Rosenthal
Vice
President, Chief Financial
Officer,
General
Counsel and
Secretary