-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S68q/2J5v7fku82Lh1570cS6PNSI5+UR67DicG/9lBy4NsrrC+74AysovOf5K3Ph rqZcmQY4ZyMOO+t8TKiISQ== 0000054681-97-000001.txt : 19970222 0000054681-97-000001.hdr.sgml : 19970222 ACCESSION NUMBER: 0000054681-97-000001 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970217 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970218 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KATY INDUSTRIES INC CENTRAL INDEX KEY: 0000054681 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 751277589 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05558 FILM NUMBER: 97537434 BUSINESS ADDRESS: STREET 1: 6300 S SYRACUSE WAY STE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80111-6723 BUSINESS PHONE: 3034860017 MAIL ADDRESS: STREET 1: 6300 S SYRACUSE WAY SUITE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80111 8-K/A 1 Securities and Exchange Commission Washington, D.C. 20549 FORM 8-K/A Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: February 17, 1997 (Date of earliest event reported): (December 2, 1996) Commission file number 1-5558 Katy Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 75-1277589 (State of Incorporation) (IRS Employer Identification Number) 6300 S. Syracuse #300, Englewood, Colorado 80111 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (303) 290-9300 (Former name or former address, if changed since last report) Not applicable Item 7. Financial Statements and Exhibits Set forth below is the information required by Items 7(a), Financial Statements of Acquired Businesses, and 7(b), Pro Forma Financial Statements, of Form 8-K with respect to the acquisition of Woods Industries, Inc. by Katy Industries, Inc. ("Katy"), as disclosed on Katy's Form 8-K, filed with the Securities and Exchange Commission on December 17, 1996. Financial Statements of Acquired Business and Pro Forma Financial Statements Unaudited Financial Statements Combined Balance Sheets as of September 30, 1996 and December 31, 1995 1 Combined Statements of Operations and Accumulated Deficit for the nine months ended September 30, 1996 and 1995 2 Combined Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 3 Notes to Combined Financial Statements 4 Audited Financial Statements Report of Independent Accountants 7 Combined Balance Sheet as of December 31, 1995 8 Combined Statement of Operations and Accumulated Deficit for the year ended December 31, 1995 9 Combined Statement of Cash Flows for the year ended December 31, 1995 10 Notes to Combined Financial Statements 11 Pro Forma Financial Statements Unaudited Pro Forma Statement of Operations for the nine months ended September 30, 1996 23 Unaudited Pro Forma Statement of Operations for the year ended December 31, 1995 24 Unaudited Pro Forma Balance Sheet as of September 30, 1996 25 Unaudited Notes to Pro Forma Financial Statements 27 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 hereunto duly authorized. Katy Industries, Inc. --------------------- (Registrant) By:/s/ John R. Prann, Jr. ---------------------- John R. Prann, Jr. Chief Executive Officer Date: February 17, 1997 Woods Industries, Inc. and Woods Worldwide Limited Combined Balance Sheets ($ in thousands) - ------------------------------------------------------------------------------- September 30, 1996 (unaudited) December 31, 1995 Current Assets Cash and cash equivalents $ 2,776 $ 1,866 Accounts receivable, net 30,021 29,846 Inventories, net 43,658 33,314 Prepaid expenses and other current assets 510 591 Income taxes receivable 159 344 ------------------ ----------------- 77,124 65,961 ------------------ ----------------- Noncurrent Assets Property and equipment, net 13,156 14,261 Receivable from former stockholder 560 545 Goodwill 4,950 5,165 Patents and trademarks 370 431 Other assets 114 267 ------------------ ----------------- 19,150 20,669 ------------------ ----------------- Total Assets $ 96,274 $ 86,630 ================== ================= Current Liabilities Short-term debt $ 16,168 $ 12,145 Short-term debt - affiliate 31,500 28,000 Current portion of long-term debt 164 158 Accounts payable 15,693 11,413 Accured liabilities 7,668 6,447 Amounts due affiliates 4,415 4,275 ------------------ ----------------- 75,608 62,438 ------------------ ----------------- Long-Term Liabilities Long-term debt, less current portion 100 187 Long-term debt - affiliate 25,000 25,000 Other liabilities 1,071 580 ------------------ ----------------- 26,171 25,767 ------------------ ----------------- Total Liabilities 101,779 88,205 ------------------ ----------------- Contingencies (Note 5) Stockholders' Deficit Common stock 4,155 4,155 Additional paid-in capital 789 789 Accumulated deficit (10,293) (6,363) Minimum pension liability (156) (156) ------------------- ----------------- Total Stockholders' Deficit (5,505) (1,575) ------------------- ----------------- Total Liabilities and Stockholders' Deficit $ 96,274 $ 86,630 =================== ================= See notes to combined financial statements. Woods Industries, Inc. and Woods Worldwide Limited Combined Statements of Operations and Accumulated Deficit ($ in thousands) - ------------------------------------------------------------------------------- Nine months ended 09/30/96 09/30/95 (unaudited) Net sales $ 131,785 $ 122,886 Cost of goods sold 104,105 97,819 ----------------------------- Gross profit 27,680 25,067 Selling, general and administrative expenses 26,755 24,141 ----------------------------- Income from operations 925 926 Interest expense 4,814 4,635 ----------------------------- Loss before income taxes (3,889) (3,709) Income tax benefit (provision) (41) 82 ----------------------------- Net loss (3,930) (3,627) Accumulated deficit- beginning of period (6,363) (1,801) ----------------------------- Accumulated deficit-end of period $ (10,293) $ (5,428) ============================= See notes to combined financial statements. Woods Industries, Inc. and Woods Worldwide Limited Combined Statements of Cash Flows ($ in thousands) - ------------------------------------------------------------------------------- Nine Nine months months ended ended 09/30/96 09/30/95 (unaudited) (unaudited) Cash Flows from Operating Activities Net loss $ (3,930) $ (3,627) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation expense 2,825 2,297 Amortization expense 310 373 Loss (gain) on disposal of property and equipment 418 (6) Changes in operating assets and liabilities- Increase in accounts receivable (175) (2,452) Increase in inventories (10,344) (10,777) Decrease (increase) in prepaid expenses 81 (438) Decrease (increase) in income taxes receivable 185 (182) Increase in accounts payable 4,280 170 Increase in accrued liabilities 1,712 1,574 Increase in amounts due affiliates 140 160 Other 104 (44) ----------- ------------ Net cash used for operating activities (4,394) (12,952) ----------- ------------ Cash Flows from Investing Activities Additions to property and equipment (2,210) (4,731) Sales proceeds from disposals of property and equipment 72 27 Patent and trademark expenditures (139) ------------ ------------ Net cash used for investing activities (2,138) (4,843) ------------ ------------ Cash Flows from Financing Activities Net increase (decrease) in short-term debt 4,023 (932) Net increase in short-term debt - affiliate 3,500 20,115 Payments on long-term debt (81) (121) ------------ ------------ Net cash provided by financing activities 7,442 19,062 ------------ ------------ Net increase in cash 910 1,267 Cash and cash equivalents at beginning of period 1,866 976 ------------ ------------ Cash and cash equivalents at end of period $ 2,776 $ 2,243 ============ ============ See notes to combined financial statements. Woods Industries, Inc. and Woods Worldwide Limited Notes to Combined Financial Statements ($ in thousands) Note 1 - Basis of Presentation and Description of Business The accompanying unaudited combined condensed financial statements should be read in conjunction with the combined financial statements of Woods Industries, Inc. and Woods Worldwide Limited (together referred to as "the Company") as of and for the year ended December 31, 1995. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. However, the Company believes that the financial statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company's results for the interim periods. Description of Business Woods Industries, Inc. manufactures and distributes consumer electric corded products and supplies electrical / electronic accessories. Woods Worldwide Limited distributes electrical products that are shipped from Far East suppliers to customers directly. Both Woods Industries, Inc. and Woods Worldwide Limited sell its products to retailers principally located in the United States and Canada. Woods Industries, Inc. is a wholly-owned subsidiary of Pentland U.S.A., Inc. which is ultimately owned by Pentland Group plc, a United Kingdom company. Woods Worldwide Limited operates out of Hong Kong and is ultimately owned by Pentland Group plc. Note 2 - Sale of Woods Industries, Inc. On December 2, 1996, all of the capital stock of Woods Industries, Inc. and the business of Woods Worldwide Limited was sold to Katy Industries, Inc. for an estimated price of approximately $47 million less the amount of outstanding Company debts to Marine Midland Bank and certain Hong Kong banks that were repaid as of that date. The Company's short-term and long-term debts with affiliates of Pentland Group plc, and all receivables and payables with affiliates of Pentland Group plc, were not assumed upon the stock purchase by Katy Industries, Inc. In accordance with the terms of the stock purchase agreement, the estimated purchase price, which was based on estimated net assets at November 30, 1996, is to be adjusted based on the difference between the estimated net assets and the net assets as determined in an audit of the November 30, 1996 balance sheet of Woods Industries, Inc. The audit and, hence, the determination of this net asset adjustment has not yet been finalized. The stock purchase agreement also required Woods Worldwide Limited to change its corporate name. Subsequent to December 2, 1996, all new sales, purchasing and other operating activities that were previously included in Woods Worldwide Limited will be included in Woods Industries, Inc. The Internal Revenue Code and the regulations thereunder impose certain limitations on a corporation's ability to use a net operating loss carryforward if such corporation experiences an ownership change. Pursuant to the sale of Woods Industries, Inc. on December 2, 1996, this limitation is estimated to result in none of the Company's net operating loss carryforwards being utilized subsequent to the sale date. Also in connection with the sale of Woods Industries, Inc., the lease with Pentland U.S.A., Inc. related to the Company's copper fabrication facility was modified so that (1) annual rents are $120 during the first three years ending December 31, 1998 of the 15-year lease which runs through December 31, 2010, (2) rent is adjusted every subsequent three-year period during the lease term based on the consumer price index, and (3) Woods Industries, Inc. has an option to purchase this facility prior to December Finally, in connection with the December 2, 1996 sale of the Company, the receivable from the former stockholder related to the 1993 acquisition was forgiven. Note 3 - Inventories September 30, December 31, 1996 1995 Raw materials and work-in-process $ 6,946 $ 7,680 Finished goods 37,578 26,601 Inventory reserves (866) (967) ------------- ------------ $ 43,658 $ 33,314 ============= ============ Note 4 - Common Stock Common stock in the accompanying September 30, 1996 and December 31, 1995 combined balance sheets comprises the common stock of Woods Industries, Inc. of $4,150 and the common stock of Woods Worldwide Limited of $5. Woods Industries, Inc. has 2,500 shares of no par common stock authorized of which 100 shares has been issued, 80 shares is outstanding and 20 shares are held in treasury. Woods Worldwide Limited has 250,000 shares of $1 par value common stock authorized of which 5,000 shares are issued and outstanding. Note 5 - Contingencies In December 1996, Banco Atlantico, a bank located in Mexico, filed a lawsuit against the Company, certain past and present officers and directors and former owners of Woods Industries, Inc. alleging that the defendants participated in a violation of the Racketeer Influence and Corrupt Organizations Act involving allegedly fraudulently obtained loans from Mexican banks, including the plaintiff, and "money laundering" of the proceeds of the illegal enterprise. The plaintiff also alleges that it made loans to an entity controlled by officers and directors based upon fraudulent representations. The plaintiff seeks to hold Woods Industries, Inc. liable for its alleged damage under principles of respondeat superior and successor liability. The plaintiff is claiming damages in excess of $24,000 and is requesting treble damages under the statutes. As the litigation is in preliminary stages, it is impossible at this time for the Company to determine an outcome or reasonably estimate the range of potential exposure. The Company is subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, and employee-related matters. Management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows for the items discussed in the preceding sentence. Report of Independent Accountants To the Board of Directors and Stockholders of Woods Industries, Inc. and Woods Worldwide Limited In our opinion, the accompanying combined balance sheet and the related combined statements of operations and accumulated deficit and of cash flows present fairly, in all material respects, the combined financial position of Woods Industries, Inc. and Woods Worldwide Limited (together referred to as "the Company") at December 31, 1995, and the combined results of their operations and their combined cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As discussed in Note 2, the Company's businesses were sold to Katy Industries, Inc. on December 2, 1996. Price Waterhouse LLP Indianapolis, Indiana February 12, 1996 except for Notes 2 and 14 which are as of February 7, 1997 Woods Industries, Inc. and Woods Worldwide Limited Combined Balance Sheet December 31, 1995 ($ in thousands) - ------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $ 1,866 Accounts receivable, net 29,846 Inventories, net 33,314 Prepaid expenses and other current assets 591 Income taxes receivable 344 --------------- 65,961 --------------- Noncurrent Assets Property and equipment, net 14,261 Receivable from former stockholder 545 Goodwill 5,165 Patents and trademarks 431 Other assets 267 --------------- 20,669 --------------- Total Assets $ 86,630 =============== Current Liabilities Short-term debt $ 12,145 Short-term debt - affiliate 28,000 Current portion of long-term debt 158 Accounts payable 11,413 Accrued liabilities 6,447 Amounts due affiliates 4,275 --------------- 62,438 --------------- Long-Term Liabilities Long-term debt, less current portion 187 Long-term debt - affiliate 25,000 Other liabilities 580 --------------- 25,767 --------------- Total Liabilities 88,205 =============== Commitments and Contingencies (Notes 10 and 14) Stockholders' Deficit Common Stock 4,155 Additional paid-in capital 789 Accumulated deficit (6,363) Minimum pension liability (156) --------------- Total Stockholders' Deficit (1,575) --------------- Total Liabilities and Stockholders' Deficit $ 86,630 =============== See notes to combined financial statements. Woods Industries, Inc. and Woods Worldwide Limited Combined Statement of Operations and Accumulated Deficit Year Ended December 31, 1995 ($ in thousands) - ------------------------------------------------------------------------------- Net Sales $ 177,207 Cost of goods sold 142,012 ------------- Gross profit 35,195 Selling, general and administrative expenses 33,062 ------------- Income from operations 2,133 Interest expense 6,790 ------------- Loss before income taxes (4,657) Income tax benefit 95 ------------- Net loss (4,562) Accumulated deficit - beginning of year (1,801) ------------- Accumulated deficit - end of year $ (6,363) ============= See notes to combined financial statements. Woods Industries, Inc. and Woods Worldwide Limited Combined Statement of Cash Flows Year Ended December 31, 1995 ($ in thousands) - ------------------------------------------------------------------------------- Cash Flows from Operating Activities Net loss $ (4,562) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation expense 3,129 Amortization expense 490 Loss on disposal of property and equipment 207 Changes in operating assets and liabilities- Decrease in accounts receivable 548 Decrease in inventories 2,320 Decrease in prepaid expenses and other current assets 827 Increase in income taxes receivable (160) Decrease in accounts payable (4,049) Increase in accrued liabilities 381 Decrease in amounts due affiliates (155) Other (47) ------------- Net cash used for operating activities (1,071) ------------- Cash Flows from Investing Activities Additions to property and equipment (6,624) Sales proceeds from disposals of property and equipment 38 Patent and trademark expenditures (71) ------------- Net cash used for investing activities (6,657) ------------- Cash Flows from Financing Activities Net decrease in short-term debt (3,330) Net increase in short-term debt - affiliate 12,115 Payments on long-term debt (167) ------------- Net cash provided by financing activities 8,618 ------------- Net increase in cash 890 Cash and cash equivalents at beginning of year 976 ------------- Cash and cash equivalents at end of year $ 1,866 ============= See notes to combined financial statements. Woods Industries, Inc. and Woods Worldwide Limited Notes to Combined Financial Statements Year Ended December 31, 1995 - ------------------------------------------------------------------------------- Note 1 - Description of Business and Significant Accounting Policies Description of Business Woods Industries, Inc. manufactures and distributes consumer electric corded products and supplies electrical / electronic accessories. Woods Worldwide Limited distributes electrical products that are shipped from Far East suppliers to customers directly. Both Woods Industries, Inc. and Woods Worldwide Limited sell its products to retailers principally located in the United States and Canada. As of December 31, 1995, Woods Industries, Inc. is a wholly-owned subsidiary of Pentland U.S.A., Inc. which is ultimately owned by Pentland Group plc, a United Kingdom company. Woods Worldwide Limited operates out of Hong Kong and is ultimately owned by Pentland Group plc. Combined Financial Statements The accompanying financial statements present the combined balance sheet of Woods Industries, Inc. and Woods Worldwide Limited (together referred to as "the Company") at December 31, 1995 and the related combined statements of operations and accumulated deficit and of cash flows for the year then ended. All intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. Cash Equivalents For purposes of the Statement of Cash Flows, the Company considers all highly- liquid marketable securities with maturities of three months or less to be cash equivalents. Accounts Receivable Substantially all accounts receivable are uncollateralized and arise from sales to the retail industry. The accounts receivable for Woods Worldwide Limited are backed by letter of credit arrangements. Although the Company does not believe that there is significant credit risk, accounts receivable from the Company's ten largest customers aggregate approximately 75% of total accounts receivable at December 31, 1995. Inventories Inventories are stated at the lower of cost or market, with cost being determined on the first-in, first-out (FIFO) method. The cost of manufactured products comprise raw materials, direct labor and manufacturing overhead. The cost of imported products comprise the costs incurred to obtain products from suppliers. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight- line method over the following estimated useful lives: Years Leasehold improvements 5 - 32 Machinery and equipment 2 - 10 Office furniture and equipment 3 - 7 Goodwill In connection with the acquisition by Pentland U.S.A., Inc. of the Company in 1993 and the minority stockholder interest buyout in 1994, the acquisition price in excess of the fair value of the net assets acquired was recognized as goodwill. Goodwill is being amortized over 20 years using the straight-line method. Accumulated amortization of goodwill was $563 at December 31, 1995. Patents and Trademarks Costs incurred to third parties to obtain patents and trademarks are capitalized and amortized over their estimated economic lives which range from 5 to 10 years. Accumulated amortization of patents and trademarks was $56 at December 31, 1995. Revenue Recognition Sales are recognized upon shipment of products to customers. Sales to Significant Customers Sales to two customers were 33% and 12% of total sales, respectively, in 1995. Customer Allowances The Company has customer allowance programs, including cooperative advertising agreements, with certain customers. Customer allowance expenses are matched with the associated revenues and aggregated $8,746 in 1995. Income Taxes Woods Industries, Inc. is included in the consolidated U.S. income tax returns of its parent company, Pentland U.S.A., Inc. Woods Industries, Inc. files its own state income tax returns. Woods Worldwide Limited is a Bahamian corporation with operations in Hong Kong, and is subject to Hong Kong income tax jurisdiction. During 1995, Woods Worldwide Limited did not incur any Hong Kong income taxes as its income was "offshore" and thus tax-exempt in accordance with Hong Kong income tax regulations. Deferred tax assets and liabilities result from differences in the basis of assets and liabilities for financial statement and income tax purposes. Note 2 - Sale of Woods Industries, Inc. On December 2, 1996, all of the capital stock of Woods Industries, Inc. and the business of Woods Worldwide Limited was sold to Katy Industries, Inc. for an estimated price of approximately $47 million less the amount of outstanding Company debts to Marine Midland Bank and certain Hong Kong banks that were repaid as of that date. The Company's short-term and long-term debts with affiliates of Pentland Group plc (previously with Pentland Management Services Ltd. at December 31, 1995), and all receivables and payables with affiliates of Pentland Group plc, were not assumed upon the stock purchase by Katy Industries,Inc. In accordance with the terms of the stock purchase agreement, the estimated purchase price, which was based on estimated net assets at November 30, 1996, is to be adjusted based on the difference between the estimated net assets and the net assets as determined in an audit of the November 30, 1996 balance sheet of Woods Industries, Inc. The audit and, hence, the determination of this net asset adjustment has not yet been finalized. The stock purchase agreement also required Woods Worldwide Limited to change its corporate name. Subsequent to December 2, 1996, all new sales, purchasing and other operating activities that were previously included in Woods Worldwide Limited will be included in Woods Industries, Inc. As disclosed in Note 8, the Company has deferred tax assets of $2,127 related to net operating loss carryforwards at December 31, 1995. The Internal Revenue Code and the regulations thereunder impose certain limitations on a corporation's ability to use a net operating loss carryforward if such corporation experiences an ownership change. Pursuant to the sale of Woods Industries, Inc. on December 2, 1996, this limitation is estimated to result in none of these net operating loss carryforwards being utilized subsequent to the sale date. Also in connection with the sale of Woods Industries, Inc., the lease with Pentland U.S.A., Inc. related to the Company's copper fabrication facility was modified so that (1) annual rents are $120 during the first three years ending December 31, 1998 of the 15-year lease which runs through December 31, 2010, (2) rent is adjusted every subsequent three-year period during the lease term based on the consumer price index, and (3) Woods Industries, Inc. has an option to purchase this facility prior to December 2, 1997 for $1,200. Finally, in connection with the December 2, 1996 sale of the Company, the receivable from the former stockholder related to the 1993 acquisition (December 31, 1995 balance of $545) was forgiven. Note 3 - Accounts Receivable Trade accounts receivable $ 30,027 Allowances for doubtful accounts (166) Allowances for returns and adjustments (810) Allowances for cash discounts (185) Volume rebates from suppliers 660 Other receivables 320 ------------------ $ 29,846 =================== Note 4 - Inventories Raw materials and work-in-process $ 7,680 Finished goods 26,601 Inventory reserves (967) -------------------- $ 33,314 ==================== Note 5 - Property and Equipment Leasehold improvements $ 1,267 Machinery and equipment 12,606 Office furniture and equipment 3,091 Construction in progress 4,130 -------------------- 21,094 Accumulated depreciation (6,833) -------------------- $ 14,261 ==================== Note 6 - Accrued Liabilities Customer allowances $ 3,333 Employee benefit plans 891 Vacation 486 Payroll liabilities 470 Property taxes 393 Interest 291 Other 583 -------------------- $ 6,447 ==================== Note 7 - Debt Short-term debt Notes payable - Pentland Management Services Ltd. $ 28,000 Notes payable - Hong Kong banks 8,039 Note payable - Marine Midland Bank 4,106 ------------------ $ 40,145 ================== Long-term debt Note payable - Pentland Management Services Ltd. $ 25,000 Capital lease obligations 345 ------------------ 25,345 Less amount due within one year (158) ------------------ $ 25,187 ================== The Company has a short-term loan facility with Pentland Management Services Ltd., a wholly-owned subsidiary of Pentland Group plc, whereby it could borrow up to $42,500. Interest on outstanding principal borrowings accrues at the prime rate (8.5% at December 31, 1995) plus 2%, and is payable semi-annually. This short-term loan is secured by the Company's assets and the outstanding principal of $28,000 is due December 31, 1996. The Company purchases certain of its inventories from Far East suppliers that are backed by letter of credit agreements with certain banks located in Hong Kong. Upon shipment by the supplier, the individual inventory purchases are financed by these banks under 120-day unsecured promissory notes. Interest accrues on these notes at the prime rate. The Company has an unsecured line of credit facility with Marine Midland Bank whereby it can borrow up to $5 million. Interest on outstanding principal borrowings accrues at the prime rate plus 0.75% and is payable monthly. This line of credit facility expires on March 31, 1996. The Company also has an unsecured long-term loan facility with Pentland Management Services Ltd. whereby the Company borrowed $25 million. Interest accrues at the annual rate of 8.75% and is payable semi-annually. This long- term loan is secured by the Company's assets and the outstanding principal of $25,000 is due April 29, 1998. Interest expense incurred during 1995 under the short-term and long-term loan facilities with Pentland Management Services Ltd. aggregated $5,075. Interest payments aggregated $6,307 in 1995. Note 8 - Income Taxes The significant components of the Company's 1995 income tax benefit are: Loss before income taxes: Domestic $ (5,616) Foreign 959 ----------------- $ (4,657) ================= Current items: Federal $ - State income tax benefit (159) Foreign income tax expense 64 ----------------- (95) ----------------- Deferred items: Federal (1,327) State (54) Valuation allowance increase 1,381 ----------------- - ----------------- Total income tax benefit $ (95) ================= A reconciliation of the federal statutory income tax rate to the Company's 1995 effective income tax rate is as follows: Percent of loss before income taxes Federal statutory income tax rate (34.0) State income taxes, net of federal benefit (5.2) Goodwill amortization - nondeductible amount 4.0 Increase in deferred tax asset valuation allowance 32.9 Other 0.3 ------------- Effective income tax benefit rate (2.0) ============= Deferred tax assets and liabilities at December 31, 1995 are: Deferred tax assets Accounts receivable reserves $ 454 Inventories 1,026 Accrued liabilities 606 Long-term liabilities 227 Packaging costs 378 Net operating loss carryforwards 2,127 ---------------- 4,818 ---------------- Deferred tax liabilities Property and equipment (606) Other (9) ---------------- (615) ---------------- Valuation allowance (4,203) ---------------- Net deferred tax assets recognized $ - ================ Included in the deferred tax asset valuation allowance is $1,588 related to 1993 acquisition purchase price allocation. Any reversal in the future of this valuation allowance would be recognized as an adjustment of goodwill. Income tax payments aggregated $128 in 1995. Note 9 - Common Stock Common stock in the accompanying December 31, 1995 combined balance sheet comprises the common stock of Woods Industries, Inc. of $4,150 and the common stock of Woods Worldwide Limited of $5. Woods Industries, Inc. has 2,500 shares of no par common stock authorized of which 100 shares has been issued, 80 shares is outstanding and 20 shares are held in treasury. Woods Worldwide Limited has 250,000 shares of $1 par value common stock authorized of which 5,000 shares are issued and outstanding. Note 10 - Leases The Company leases all of its manufacturing, distribution and office facilities under lease agreements accounted for as operating leases. The wire mill manufacturing facility, one satellite manufacturing facility and the office building are leased from companies affiliated with the Company's chief executive officer, where rent expense aggregated $348 during 1995. These leases run through March 2006 and rent is increased biannually based on the consumer price index. The Company's new copper fabrication manufacturing facility, that is currently under construction as of December 31, 1995, will be leased from Pentland U.S.A., Inc.. The terms of leasing this facility have not been determined yet. In addition, the Company leases two distribution centers, three other satellite manufacturing facilities, and certain equipment from unrelated third parties. Rent expense related to these leases aggregated $1,983 during 1995. Future minimum annual lease payments under these operating leases are as follows: Year ending December 31, 1996 $ 1,600 1997 1,437 1998 1,439 1999 1,411 2000 372 Thereafter 2,008 ----------------- $ 8,267 ================= Note 11 - Retirement Plans The Company has one defined benefit pension plan covering certain hourly employees. Pension benefits for this plan are based on a fixed amount per year of service. It is the Company's policy to fund at least the minimum amounts required under the Employee Retirement Income Security Act of 1974. The weighted average discount rate and the expected long-term rate of return on assets was 7.5% and 8.0%, respectively, at the beginning and end of 1995. Net pension expense in 1995 includes the following components: Service expense - benefits earned during the year $ 38 Interest expense on projected benefit obligation 33 Actual loss on plan assets 1 Net amortization and deferral (10) ----------- Net pension expense $ 62 =========== The funded status of the defined benefit plan is as follows: Accumulated benefit obligation - vested $ 466 Accumulated benefit obligation - nonvested 76 ----------- Accumulated benefit obligation and projected benefit obligation 542 Plan assets 349 ----------- Projected benefit obligation in excess of plan assets (193) Unrecognized net loss 410 Unrecognized transition asset (4) Underfunded liability recognized upon 1993 acquisition of the Company (250) Additional liability recognized (156) ----------- Accrued pension liability at December 31, 1995 $ (193) =========== The Company also has a defined contribution 401(k) retirement plan covering most full-time employees. The Company matches a portion of each employee's contributions. The Company-matching contributions vest over four years and aggregated $80 during 1995. Effective January 1, 1996, the Company established two nonqualified deferred compensation plans for seven key executives. Under one plan, the Company will contribute 5% of each executive's compensation as a supplemental retirement benefit which vests over five years. The other plan is a deferred compensation plan for these executives whereby the Company will match 50% of the executive's contributions, not to exceed 5% of their annual salary. These Company-matching contributions vest over five years. Note 12 - Transactions with Affiliates Asco Investments, Ltd., a Pentland Group plc company, performs certain administrative services for Woods Worldwide Limited. Charges to the Company for these services aggregated $392 during 1995. The Company is charged a monthly management fee from Pentland U.S.A., Inc. which aggregated $100 in 1995. At December 31, 1995, the Company had a receivable from a former stockholder of $545 related to the 1993 acquisition of the Company. Amounts due to affiliates at December 31, 1995 in the accompanying balance sheet represents amounts due to Pentland U.S.A., Inc. primarily for a $3,000 advance to the Company related to the 1994 buyout of the minority stockholders, $545 due to Pentland U.S.A., Inc. related to the receivable from the former stockholder, and $655 for litigation costs incurred by Pentland U.S.A., Inc. related to certain litigation that was settled in 1994. Interest charged to the Company on the $3,000 advance aggregated $322 in 1995. Note 13 - Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The carrying amounts of short-term debt approximate fair value as the interest rate is adjusted to current market rates. The carrying amounts of long-term debt and other long- term liabilities approximate fair value as the applicable interest rates approximate current market rates. Note 14 - Contingencies In December 1996, Banco Atlantico, a bank located in Mexico, filed a lawsuit against the Company, certain past and present officers and directors and former owners of Woods Industries, Inc. alleging the defendants participated in a violation of Racketeer Influence and Corrupt Organizations Act involving allegedly fraudulently obtained loans from Mexican banks, including the plaintiff, and "money laundering" of the proceeds of the illegal enterprise. The plaintiff also alleges that it made loans to an entity controlled by officers and directors based upon fraudulent representations. The plaintiff seeks to hold Woods Industries, Inc. liable for its alleged damage under principles of respondeat superior and successor liability. The plaintiff is claiming damages in excess of $24,000 and is requesting treble damages under the statutes. As the litigation is in preliminary stages, it is impossible at this time for the Company to determine an outcome or reasonably estimate the range of potential exposure. The Company is subject to various other claims and contingencies arising out of the normal course of business, including those relating to commercial transactions, product liability, and employee-related matters. Management believes that the ultimate liability, if any, in excess of amounts already provided or covered by insurance, is not likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows for the items discussed in the preceding sentence. KATY INDUSTRIES, INC. AND WOODS INDUSTRIES, INC. AND WOODS WORLDWIDE LIMITED UNAUDITED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1995 The following unaudited pro forma balance sheet as of September 30, 1996 and unaudited pro forma statements of operations for the nine months ended September 30, 1996 and the year ended December 31, 1995 give effect to the acquisition by Katy Industries, Inc. ("Katy") of the common stock of Woods Industries, Inc. and the business of Woods Worldwide Limited (together known as "Woods") as if the acquisition had occurred on September 30, 1996 for purposes of the balance sheet and on January 1, 1995 for purposes of the statements of operations. The transaction was accounted for as a purchase in accordance with the provisions of Accounting Principles Board Opinion No. 16. The historical financial data included in the pro forma statements is as of the periods presented. The historical financial data of Woods as of September 30, 1996 and for the nine months ended September 30,1996 was derived from unaudited financial statements for the nine months ended September 30, 1996. The historical financial data of Woods included in the pro forma statement of operations for the year ended December 31, 1995 was derived from audited financial statements for the year ended December 31, 1995. The unaudited pro forma financial data is based on management's best estimate of the effects of the acquisition of Woods. Pro forma adjustments are based on currently available information; however, the actual adjustments will be based on more precise appraisals, evaluations and estimates of fair values. It is possible that the actual adjustments could differ substantially from those presented in the unaudited pro forma financial statements. The unaudited pro forma balance sheet as of September 30, 1996 and the statements of operations for the nine months ended September 30, 1996 and the year ended December 31, 1995 are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition of Woods been consummated as of the dates indicated, or that may be achieved in the future. The unaudited pro forma financial statements should be read in conjunction with the accompanying notes and historical financial statements and notes thereto. In accordance with the rules regarding the preparation of pro forma financial statements, income of $12,289,000, or $1.37 per share, from discontinued operations and certain nonrecurring items (related to Katy historical financial statements) has not been considered in the unaudited pro forma statement of operation for the year ended December 31, 1995. Pursuant to the purchase agreement related to this transaction, the estimated purchase price of $46,800,000 was based on an estimated balance sheet as of November 30, 1996 and is subject to possible adjustment based on the November 30, 1996 balance sheet prepared on a post closing basis. The ultimate purchase price will be based upon an audit of this balance sheet which has not yet been completed. The accompanying pro forma financial statements do not include adjustments which may result from this audit or from the resolution of any issues between the parties. Certain balance sheet adjustments and/or resolution of issues between the parties will also affect the ultimate price of the acquisition and the allocation of the purchase price. KATY INDUSTRIES, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (in thousands except per share information) Katy Woods Pro forma Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- Net sales $133,390 $131,785 $(24,955)[b] $240,220 Cost of goods sold 90,907 104,105 (2,260)[a] 171,161 (21,591)[b] ------- ------- ------ ------- Gross profit 42,483 27,680 (1,104) 69,059 Selling, general and administrative expenses 35,444 26,755 (2,152)[a] 56,683 (3,364)[b] ------- ------- ------ ------- Income from operations 7,039 925 4,412 12,376 Interest expense (804) (4,814) 4,814 [a] (804) Interest income 1,789 - (1,270)[a] 519 Other, net 896 - 896 Gain on sale of marketable securities 4,914 - 4,914 ------- ------- ------ ------- Income (loss) before taxes and equity in income of unconsolidated subsidiaries 13,834 (3,889) 7,956 17,901 Provision for income taxes 5,051 41 991 [a] 6,083 ------- ------- ------ ------- Income (loss) before equity in income of unconsolidated subsidiaries 8,783 (3,930) 6,965 11,818 Equity in loss of unconsolidated subsidiaries (net of tax) (420) - (420) ------- ------- ------ ------- Net income (loss) $ 8,363 $ (3,930) $ 6,965 $ 11,398 ======= ======= ====== ======= Earnings per share of common stock $ 1.00 $ 1.36 ======= ======= Weighted average shares outstanding 8,380 8,380 ======= ======= KATY INDUSTRIES, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (in thousands except per share information) Katy Woods Pro forma Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- Net sales $171,269 $177,207 $(29,790)[b] $318,686 Cost of goods sold 120,437 142,012 (2,503)[a] 234,180 (25,766)[b] ------- ------- ------ ------- Gross profit 50,832 35,195 (1,521) 84,506 Selling, general and administrative expenses 46,293 33,062 (2,819)[a] 72,512 (4,024)[b] ------- ------- ------ ------- Income from operations 4,539 2,133 5,322 11,994 Interest expense (2,753) (6,790) 6,040 [a] (3,503) Interest income 1,011 - (1,011)[a] - Other income, net 3,575 - 3,575 Gain on sale of marketable securities 6,841 - 6,841 Reversal of previously recorded losses 4,920 - 4,920 ------- ------- ------ ------- Income (loss) before taxes and equity in income of unconsolidated subsidiaries 18,133 (4,657) 10,351 23,827 Provision (benefit) for income taxes 3,771 (95) 1,572 [a] 5,248 ------- ------- ------ ------- Income (loss) before equity in income of unconsolidated subsidiaries 14,362 (4,562) 8,779 18,579 Equity in income of unconsolidated subsidiaries (net of tax) 1,920 - 1,920 ------- ------- ------ ------- Net income (loss) $ 16,282 $ (4,562) $ 8,779 $ 20,499 ======= ======= ====== ======= Earnings per share of common stock $ 1.81 $ 2.28 ======= ======= Weighted average shares outstanding 8,986 8,986 ======= ======= KATY INDUSTRIES, INC. UNAUDITED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1996 (in thousands) Katy Woods Pro forma Historical Historical Adjustments Pro forma ---------- ---------- ----------- --------- Cash and cash equivalents $ 43,242 $ 2,776 $(42,120)[c] $3,898 Marketable securities - available for sale 8,395 - 8,395 Accounts receivable, trade, net 26,774 30,021 56,795 Notes and other receivables, net 1,505 159 1,664 Inventories 39,703 43,658 83,361 Other current assets 17,535 510 18,045 ------- ------ ------- ------- Total current assets 137,154 77,124 (42,120) 172,158 ------- ------ ------- ------- Investments at equity, in unconsolidated subsidiaries 6,617 - 6,617 Investment in waste-to- energy facility 11,134 - 11,134 Notes Receivable, net 1,265 - 1,265 Cost in excess of net assets of businesses acquired, net 6,861 4,950 (4,950)[d] 6,861 Deferred tax asset - - 6,000 [d] 6,000 Miscellaneous 5,420 1,044 (1,044)[d] 5,420 ------- ------ ------- ------- Total other assets 31,297 5,994 6 37,297 ------- ------ ------- ------- Property, plant and equipment, net 42,209 13,156 (13,156)[d] 42,209 ------- ------ ------- ------- Total assets $210,660 $96,274 $(55,270) $251,664 ======= ====== ======= ======= Short-term debt $ - $ 16,168 $(16,168)[d] $ - Short-term debt-affiliate - 31,500 (31,500)[d] - Accounts payable 9,833 15,693 25,526 Accrued compensation 3,228 - 3,228 Accrued expenses 25,077 7,668 3,532 [d] 36,277 Liability for remainder of estimated purchase price - - 4,680 [c] 4,680 Current maturities, long-term debt 676 164 (164)[d] 676 Amounts due affiliates - 4,415 (4,415)[d] - Dividends payable 683 - 683 ------- ------- ------ ------- Total current liabilities 39,497 75,608 (44,035) 71,070 ------- ------- ------ ------- Long-term debt, less current maturities 8,704 100 (100)[d] 8,704 ------- ------- ------ ------- Long-term debt - affiliate - 25,000 (25,000)[d] - ------- ------- ------ ------- Deferred income taxes 25,922 - 25,922 ------- ------- ------ ------- Other liabilities 8,232 1,071 8,516[d] 17,819 ------- ------- ------ ------- Total liabilities 82,355 101,779 (60,619) 123,515 ------- ------- ------ ------- Stockholders' equity (deficit): Common stock 9,822 4,155 (4,155)[d] 9,822 Additional paid-in capital 51,117 789 (789)[d] 51,117 Foreign currency translation adjustment (1,736) - (1,736) Unrealized holding gains, net of tax 2,762 - 2,762 Retained earnings (accumulated deficit) 88,364 (10,293) 10,293 [d] 88,364 Treasury stock (22,024) - (22,024) Minimum pension liability - (156) (156) ------- ------- ------ ------- Total stockholders' equity (deficit) 128,305 (5,505) 5,349 128,149 ------- ------- ------ ------- Total liabilities and stockholders' equity (deficit) $210,660 $ 96,274 $(55,270) $251,664 ======= ======= ====== ======= KATY INDUSTRIES, INC. UNAUDITED NOTES TO PRO FORMA FINANCIAL STATEMENTS (in thousands) [a] The following pro forma adjustments are reflected in the pro forma statement of operations: Nine Months Ended Year Ended September 30, 1996 December 31, 1995 ------------------ ----------------- 1. Elimination of Woods' depreciation due to write-down of plant, property and equipment pursuant to purchase accounting: Cost of sales $2,260 $2,503 Selling, general and administrative 565 626 2. Elimination of Woods' amortization due to write-down of cost in excess of businesses acquired pursuant to purchase accounting 310 490 3. Amortization of negative goodwill recorded pursuant to purchase accounting 1,277 1,703 4. Elimination of Woods' interest expense as all debt is repaid on date of purchase pursuant to the purchase agreement 4,814 6,790 5. Increase in interest expense due to assumed borrowings at applicable rates for purchase cost (for the nine month period Katy's cash position would have made borrowing unnecessary) - (750) 6. Decrease in interest income due to use of cash for purchase cost (1,270) (1,011) 7. Net tax effect related to items 1-6 above at the statutory rate (item 3 has no tax effect) (2,471) (3,200) 8. Net tax benefit from inclusion of Woods'operations 1,480 1,628 ----- ----- $6,965 $8,779 ===== ===== [b] Net sales and related costs attributable to direct imports have been eliminated. The net fee for this activity is recorded as revenue. [c] Pro forma adjustments represent 90%, or $42,120, of the estimated purchase price paid on the closing date and 10%, or $4,680, of the estimated purchase price due upon final determination of the net asset value as of November 30, 1996. [d] The following pro forma adjustments are made to reflect (1) the allocation of cost less than fair value of assets acquired resulting in the write-down to zero of Woods' noncurrent assets pursuant to purchase accounting, (2) the recording of a deferred tax asset for the difference between the book and tax basis of the net assets acquired, (3) the repayment of outstanding debt on the purchase date, the elimination of short-term and long-term debt with affiliates of Pentland Group plc, and all receivables and payables with affiliates of Pentland Group plc, as these items were not assumed upon the stock purchase by Katy, and (4) the elimination of Woods' shareholders' deficit as of September 30, 1996: Write-down of cost in excess of net assets of business acquired (4,950) Write-down of miscellaneous long-term assets (1,044) Write-down of net property, plant and equipment (13,156) Record deferred tax asset 6,000 Record acquisition liabilities (3,532) Record negative goodwill (8,516) Net elimination of due to/from affiliates 60,915 Elimination of short-term and long-term debt 16,432 Elimination of Woods' shareholders' deficit (5,349) ------ Total allocation of estimated purchase price $46,800 ====== -----END PRIVACY-ENHANCED MESSAGE-----