-----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, C7/BeP79MJTabU3v8MsNVfZCQ8GeS4J8cNgvcLKKnUD01NqGDj/Fkl5IN6MNEXZm hM+3F58vYaMX8zqc6loNAQ== 0001169232-05-004154.txt : 20050815 0001169232-05-004154.hdr.sgml : 20050815 20050815164404 ACCESSION NUMBER: 0001169232-05-004154 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05558 FILM NUMBER: 051027323 BUSINESS ADDRESS: STREET 1: 765 STRAITS TURNPIKE STREET 2: SUITE 2000 CITY: MIDDLEBURY STATE: CT ZIP: 06762 BUSINESS PHONE: 2035980397 MAIL ADDRESS: STREET 1: 765 STRAITS TURNPIKE STREET 2: SUITE 2000 CITY: MIDDLEBURY STATE: CT ZIP: 06762 10-Q 1 d64886_10q.txt QUARTERLY REPORT United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q |x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly period ended: June 30, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______________ to________________ Commission File Number 001-05558 Katy Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 75-1277589 (State of Incorporation) (I.R.S. Employer Identification No.) 765 Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (203)598-0397 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| 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 August 15, 2005 Common Stock, $1 Par Value 7,951,377 1 KATY INDUSTRIES, INC. FORM 10-Q June 30, 2005 INDEX
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets June 30, 2005 and December 31, 2004 (unaudited) 3 Condensed Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2005 and 2004 (unaudited) 5 Condensed Consolidated Statements of Cash Flows 6 Six Months Ended June 30, 2005 and 2004 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 40 Item 4. Controls and Procedures 41 PART II OTHER INFORMATION Item 1. Legal Proceedings 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 4. Submission of Matters to a Vote of Security Holders 42 Item 5. Other Information 43 Item 6. Exhibits 43 Signatures 44 Certifications 45
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements KATY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) (Unaudited) ASSETS June 30, December 31, 2005 2004 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 4,063 $ 8,525 Accounts receivable, net 56,981 66,689 Inventories, net 58,548 65,674 Other current assets 4,493 4,233 --------- ------------ Total current assets 124,085 145,121 --------- ------------ OTHER ASSETS: Goodwill 2,239 2,239 Intangibles, net 7,239 7,428 Other 9,298 9,946 --------- ------------ Total other assets 18,776 19,613 --------- ------------ PROPERTY AND EQUIPMENT Land and improvements 1,789 1,897 Buildings and improvements 13,805 13,537 Machinery and equipment 135,265 132,825 --------- ------------ 150,859 148,259 Less - Accumulated depreciation (95,088) (88,529) --------- ------------ Property and equipment, net 55,771 59,730 --------- ------------ Total assets $ 198,632 $ 224,464 ========= ============ See Notes to Condensed Consolidated Financial Statements. 3 KATY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in Thousands, Except Share Data) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31, 2005 2004 ---- ---- CURRENT LIABILITIES: Accounts payable $ 32,650 $ 39,079 Accrued compensation 4,592 5,269 Accrued expenses 36,376 39,939 Current maturities of long-term debt 2,857 2,857 Revolving credit agreement 39,547 40,166 --------- ------------ Total current liabilities 116,022 127,310 --------- ------------ LONG-TERM DEBT, less current maturities 13,572 15,714 OTHER LIABILITIES 10,616 12,855 --------- ------------ Total liabilities 140,210 155,879 --------- ------------ COMMITMENTS AND CONTINGENCIES (Note 8) -- -- --------- ------------ 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 9,822,204 shares 9,822 9,822 Additional paid-in capital 27,016 25,111 Accumulated other comprehensive income 3,120 4,564 Accumulated deficit (67,952) (57,258) Treasury stock, at cost, 1,870,827 and 1,876,827 shares, respectively (21,840) (21,910) --------- ------------ Total stockholders' equity 58,422 68,585 --------- ------------ Total liabilities and stockholders' equity $ 198,632 $ 224,464 ========= ============
See Notes to Condensed Consolidated Financial Statements. 4 KATY INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (Thousands of Dollars, Except Share and Per Share Data) (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net sales $ 98,210 $ 100,522 $ 193,723 $ 200,417 Cost of goods sold 86,424 87,261 172,414 170,526 ---------- ---------- ---------- ---------- Gross profit 11,786 13,261 21,309 29,891 Selling, general and administrative expenses 13,885 14,240 26,239 28,988 Stock option expense 1,953 -- 1,953 -- Severance, restructuring and related charges (income) 940 (109) 1,313 1,789 Gain on sale of assets (166) (549) (166) (549) ---------- ---------- ---------- ---------- Operating loss (4,826) (321) (8,030) (337) Interest expense (1,392) (997) (2,656) (1,797) Other, net 38 144 (10) (231) ---------- ---------- ---------- ---------- Loss before (benefit) provision for income taxes (6,180) (1,174) (10,696) (2,365) (Benefit) provision for income taxes (134) 109 (2) 699 ---------- ---------- ---------- ---------- Net loss (6,046) (1,283) (10,694) (3,064) Payment-in-kind dividends on convertible preferred stock -- (3,462) -- (6,924) ---------- ---------- ---------- ---------- Net loss attributable to common stockholders $ (6,046) $ (4,745) $ (10,694) $ (9,988) ========== ========== ========== ========== Loss per share of common stock - Basic and diluted: Net loss attributable to common stockholders $ (0.76) $ (0.60) $ (1.35) $ (1.27) ========== ========== ========== ========== Weighted average common shares outstanding (thousands): Basic and diluted 7,948 7,870 7,947 7,877 ========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements. 5 KATY INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (Thousands of Dollars) (Unaudited)
2005 2004 ---- ---- Cash flows from operating activities: Net loss $(10,694) $ (3,064) Depreciation and amortization 5,869 7,709 Amortization of debt issuance costs 557 535 Stock option expense 1,953 -- Gain on sale of assets (166) (549) -------- -------- (2,481) 4,631 -------- -------- Changes in operating assets and liabilities: Accounts receivable 8,983 4,175 Inventories 6,552 (14,704) Other assets (341) (3,274) Accounts payable (5,922) (7,870) Accrued expenses (4,086) (3,071) Other, net (2,217) (1,959) -------- -------- 2,969 (26,703) -------- -------- Net cash provided by (used in) operating activities 488 (22,072) -------- -------- Cash flows from investing activities: Capital expenditures (2,954) (5,704) Collections of note receivable from sale of subsidiary 106 -- Proceeds from sale of assets 600 5,533 -------- -------- Net cash used in investing activities (2,248) (171) -------- -------- Cash flows from financing activities: Net (repayments) borrowings on revolving loans (410) 7,022 Proceeds of term loans -- 18,152 Repayments of term loans (2,142) (2,529) Direct costs associated with debt facilities (135) (1,296) Repurchases of common stock -- (75) -------- -------- Net cash (used in) provided by financing activities (2,687) 21,274 -------- -------- Effect of exchange rate changes on cash and cash equivalents (15) (95) Net decrease in cash and cash equivalents (4,462) (1,064) Cash and cash equivalents, beginning of period 8,525 6,748 -------- -------- Cash and cash equivalents, end of period $ 4,063 $ 5,684 ======== ========
See Notes to Condensed Consolidated Financial Statements 6 KATY INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (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 June 30, 2005 and December 31, 2004 and for the three and six month periods ended June 30, 2005 and June 30, 2004 are unaudited and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial condition and results of operations of the Company. Interim results may not be indicative of results to be realized for the entire year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories The components of inventories are as follows (amounts in thousands): June 30, December 31, 2005 2004 ---- ---- Raw materials $ 19,805 $ 23,220 Work in process 1,854 1,826 Finished goods 41,570 45,299 Inventory reserves (4,681) (4,671) ------------ ------------ $ 58,548 $ 65,674 ============ ============ At June 30, 2005 and December 31, 2004, approximately 35% 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 $5.0 million and $4.7 million at June 30, 2005 and December 31, 2004, respectively. Property, Plant and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives: buildings (10-40 years) generally using the straight-line method; machinery and equipment (3-20 years) using straight-line or composite methods; tooling (5 years) using the straight-line method; and leasehold improvements using the straight-line method over the remaining lease period or useful life, if shorter. Costs for repair and maintenance of machinery and equipment are expensed as incurred, unless the result significantly increases the useful life or functionality of the asset, in which case capitalization is considered. Depreciation expense from continuing operations was $2.8 million and $3.5 million and $5.5 million and $6.9 million for the three and six month periods ended June 30, 2005 and 2004, respectively. Katy adopted Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations, on January 1, 2003. SFAS No. 143 requires that an asset retirement obligation associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred or becomes determinable, with 7 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 June 30, 2005 an asset of $0.4 million and related liability of $1.0 million for retirement obligations associated with returning certain leased properties to the respective lessors upon the termination of the lease arrangements. A summary of the changes in asset retirement obligation since December 31, 2004 is included in the table below (amounts in thousands): SFAS No. 143 Obligation at December 31, 2004 $ 1,237 Accretion expense 23 Changes in estimates, including timing (22) Payments (250) ------- SFAS No. 143 Obligation at June 30, 2005 $ 988 ======= Stock Options and Other Stock Awards The Company follows the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, regarding accounting for stock options and other stock awards. APB Opinion No. 25 dictates a measurement date concept in the determination of compensation expense related to stock awards including stock options, restricted stock, and stock appreciation rights. The Company's outstanding stock options historically have had established measurement dates and therefore, fixed plan accounting was applied, generally resulting in no compensation expense for these stock option awards. In March 2004, the Company's Board of Directors approved the vesting of all previously outstanding and unvested stock options. The Company did not recognize any compensation expense upon this vesting of options because, based on the information available at that time, the Company did not have an expectation that the holders of the previously unvested options would terminate their employment with the Company prior to the original vesting period. In the second quarter of 2005, our former President and Chief Executive Officer retired from the Company. Upon this event, the Company recognized $2.0 million of compensation expense related to his 1,050,000 options using the intrinsic method of accounting under APB 25, because he would not have otherwise vested in these options but for the March 2004 accelerated vesting. Upon his retirement, our former President and Chief Executive Officer immediately forfeited 750,000 options while 300,000 options remain unexercised. 6,000 options were granted during the three and six months ended both June 30, 2005 and 2004. The Company has also issued stock appreciation rights and restricted stock awards which are accounted for as variable stock compensation awards and compensation expense or income has been recorded for these awards. Compensation expense recorded relative to stock awards was $22.1 thousand and $9.0 thousand for both the three and six month periods ended June 30, 2005 and 2004, respectively. Compensation income recorded associated with the vesting of stock appreciation rights was $0.2 million and $0.1 million for the three month periods ended June 30, 2005 and 2004, respectively. Compensation income recorded associated with the vesting of stock appreciation rights was $0.8 million and $0.2 million for the six month periods ended June 30, 2005 and 2004, respectively. No compensation expense was recorded relative to restricted stock awards during the three and six months ended June 30, 2005 and 2004, respectively. Compensation expense or income for stock awards and stock appreciation rights is recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. SFAS No. 123, Accounting for Stock-Based Compensation, changes the method for recognition of expense related to option grants to employees. Under SFAS No. 123, compensation cost would be recorded based upon the fair value of each option at the date of grant using an option-pricing model that takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option. The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model with an expected life of five to ten years for all grants. Had compensation cost been determined based on the fair value method of SFAS No. 123, the Company's net loss and loss per share would have been adjusted to the pro forma amounts indicated below (amounts in thousands, except per share data). 8
Three Months Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net loss attributable to common stockholders, as reported $ (6,046) $ (4,745) $(10,694) $ (9,988) Add: Stock-based employee compensation expense included in reported net income, with no related tax tax effects 1,953 -- 1,953 -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, with no related tax effects (14) (15) (14) (1,855) -------- -------- -------- -------- Pro forma net loss $ (4,107) $ (4,760) $ (8,755) $(11,843) ======== ======== ======== ======== Loss per share Basic and diluted - as reported $ (0.76) $ (0.60) $ (1.35) $ (1.27) Basic and diluted - pro forma $ (0.52) $ (0.60) $ (1.10) $ (1.50)
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"), which is a revision of SFAS No. 123. SFAS 123R supersedes APB Opinion No. 25, and amends FASB Statement No. 95, Statement of Cash Flows. The approach to quantifying stock-based compensation expense in SFAS 123R is similar to SFAS No. 123. However, the revised statement requires all share-based payments to employees, including grants of employee stock options, to be recognized as an expense in the Consolidated Statements of Operations based on their fair values as they are earned by the employees under the vesting terms. Pro forma disclosure of stock-based compensation expense, as is the Company's practice under SFAS No. 123, will not be permitted after 2005, since SFAS 123R must be adopted no later than the first interim or annual period beginning after December 15, 2005. The Company expects to follow the "modified prospective" method of adoption of SFAS 123R in the first quarter of 2006, whereby earnings for prior periods will not be restated as though stock based compensation had been expensed, rather than the "modified retrospective" method of adoption which would entail restatements of previously published earnings. The Company is currently evaluating the effect of SFAS 123R on the Company, which will be dependent in large part upon future equity-based grants. Reclassifications Certain amounts from prior periods have been reclassified to conform to the current period presentation. (2) New Accounting Pronouncements On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") became law in the U.S. The Act introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide retiree benefits in certain circumstances. FASB Staff Position (FSP) 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("FSP 106-2"), issued in May 2004, requires measures of the accumulated postretirement benefit obligation ("APBO") and net periodic postretirement benefit cost ("NPPBC") to reflect the effects of the Act. FSP 106-2 became effective for the Company in the third quarter of fiscal 2004; however Katy had chosen to defer adoption until its next measurement date, subject to the final provisions of the Act. While the Company expects that it may be entitled to the federal subsidy for certain of its plans, the effect of the Act on the Company's accumulated postretirement benefit obligations is not material. 9 In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company expects the adoption of SFAS 151 will not have a material impact on its results of operations and financial position. In December 2004, the FASB issued FSP No. 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The American Jobs Creation Act of 2004 includes a tax deduction of up to 9% of the lesser of qualified production activities income, as defined, or taxable income, after the deduction for the utilization of any net operating loss carryforwards. The FSP clarified that this deduction should be accounted for as a special tax deduction in accordance with SFAS No. 109. The Company expects that due to its net operating loss carryforwards and its full domestic valuation allowance, the new deduction will have no impact on income tax expense for fiscal years 2005 and 2006. In December 2004, the FASB issued FSP No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The Company has completed its review of the Repatriation Provision and has concluded that it will not benefit from the Act due to the Company's current tax position. As a result, the Repatriation Provision did not have any impact on income tax expense during fiscal 2004. (3) Intangible Assets Following is detailed information regarding Katy's intangible assets (amounts in thousands): June 30, December 31, 2005 2004 ---- ---- Customer lists $ 10,946 $ 10,976 Tradenames 6,620 6,577 Patents 3,070 2,932 ------------ ------------ Subtotal 20,636 20,485 Accumulated amortization (13,397) (13,057) ------------ ------------ Intangible assets, net $ 7,239 $ 7,428 ============ ============ All of Katy's intangible assets are definite long-lived intangibles. Katy recorded amortization expense on intangible assets of $0.1 million and $0.4 million for the three-month periods ended June 30, 2005 and 2004, respectively, and $0.3 million and $0.8 million for the six-month periods ended June 30, 2005 and 2004, respectively. Estimated aggregate future amortization expense related to intangible assets is as follows (amounts in thousands): 2005 $ 321 2006 670 2007 675 2008 665 2009 653 (4) Savannah Energy Systems Company Partnership On April 29, 2002, Savannah Energy Systems Company ("SESCO"), an indirect wholly owned subsidiary of Katy, entered into a partnership agreement with Montenay Power Corporation and its affiliates ("Montenay") that turned over the operational control of SESCO's waste-to-energy facility to the partnership. The Company caused SESCO to enter into this agreement as a result of evaluations of SESCO's business. First, Katy concluded that SESCO was not a core component of 10 the Company's long-term business strategy. Moreover, Katy did not feel it had the management expertise to deal with certain risks and uncertainties presented by the operation of SESCO's business, given that SESCO was the Company's only waste-to-energy facility. Katy had explored options for divesting SESCO for a number of years, and management felt that this transaction offered a reasonable strategy to exit this business. The partnership, with Montenay's leadership, assumed SESCO's position in various contracts relating to the facility's operation. Under the partnership agreement, SESCO contributed its assets and liabilities (except for its liability under the loan agreement with the Resource Recovery Development Authority (the "Authority") of the City of Savannah and the related receivable under the service agreement with the Authority) to the partnership. While SESCO has a 99% interest as a limited partner, Montenay has the day to day responsibility for administration, operations, financing and other matters of the partnership, and accordingly, the partnership will not be consolidated. Katy agreed to pay Montenay $6.6 million over the span of seven years under a note payable as part of the partnership and related agreements. Certain amounts may be due to SESCO upon expiration of the service agreement in 2008; also, Montenay may purchase SESCO's interest in the partnership at that time. Katy has not recorded any amounts receivable or other assets relating to amounts that may be received at the time the service agreement expires, given their uncertainty. The Company made a payment of $1.1 million in June 2005 on the remaining portion of the $6.6 million note. The table below schedules the remaining payments as of June 30, 2005 which are reflected in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet (amounts in thousands): 2006 $ 1,100 2007 1,100 2008 550 ------------ $ 2,750 ============ In the first quarter of 2002, the Company recognized a charge of $6.0 million consisting of 1) the discounted value of the $6.6 million note, 2) the carrying value of certain assets contributed to the partnership, consisting primarily of machinery spare parts, and 3) costs to close the transaction. It should be noted that all of SESCO's long-lived assets were reduced to a zero value at March 31, 2002, 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 Condensed Consolidated Balance Sheet will carry the liability mentioned above. In 1984, the Authority issued $55.0 million of Industrial Revenue Bonds and lent the proceeds to SESCO under the loan agreement for the acquisition and construction of the waste-to-energy facility that has now been transferred to the partnership. The funds required to repay the loan agreement come from the monthly disposal fee paid by the Authority under the service agreement for certain waste disposal services, a component of which is for debt service. To induce the required parties to consent to the SESCO partnership transaction, SESCO retained its liability under the loan agreement. In connection with that liability, SESCO also retained its right to receive the debt service component of the monthly disposal fee. Based on an opinion from outside legal counsel, SESCO has a legally enforceable right to offset amounts it owes to the Authority under the loan agreement against amounts that are owed from the Authority under the service agreement. At June 30, 2005, this amount was $23.7 million. Accordingly, the amounts owed to and due from SESCO have been netted for financial reporting purposes and are not shown on the Condensed Consolidated Balance Sheets. In addition to SESCO retaining its liabilities under the loan agreement, to induce the required parties to consent to the partnership transaction, Katy also continues to guarantee the obligations of the partnership under the service agreement. The partnership is liable for liquidated damages under the service agreement if it fails to accept the minimum amount of waste or to meet other performance standards under the service agreement. The liquidated damages, an off balance sheet risk for Katy, are equal to the amount of the Industrial Revenue Bonds outstanding, less $4.0 million maintained in a debt service reserve trust. Management does not expect non-performance by the other parties. Additionally, Montenay has agreed to indemnify Katy for any breach of the service agreement by the partnership. 11 Following are scheduled principal repayments on the loan agreement (and the Industrial Revenue Bonds) as of June 30, 2005 (amounts in thousands): 2005 $ 8,370 2006 15,300 ------------ Total $ 23,670 ============ (5) Indebtedness On April 20, 2004, the Company completed a refinancing of its outstanding indebtedness (the "Refinancing") and entered into a new agreement with Bank of America Business Capital (formerly Fleet Capital Corporation) (the "Bank of America Credit Agreement"). Like the previous credit agreement with Fleet Capital Corporation, the Bank of America Credit Agreement is a $110 million facility with a $20 million term loan ("Term Loan") and a $90 million revolving credit facility ("Revolving Credit Facility") with essentially the same terms as the previous credit agreement. The Bank of America Credit Agreement is an asset-based lending agreement and involves a syndicate of four banks, all of which participated in the syndicate from the previous credit agreement. In addition, the Bank of America Credit Agreement contains credit sub-facilities in Canada and the United Kingdom which allows the Company to borrow funds locally in these countries and provide a natural hedge against currency fluctuations. Under the Bank of America Credit Agreement, the Term Loan has a final maturity date of April 20, 2009 with quarterly payments of $0.7 million. The Term Loan is collateralized by the Company's property, plant and equipment. The Revolving Credit Facility also has an expiration date of April 20, 2009 and its borrowing base is determined by eligible inventory and accounts receivable. Unused borrowing availability on the Revolving Credit Facility was $22.6 million at June 30, 2005. All extensions of credit under the Bank of America Credit Agreement are collateralized by a first priority security interest in and lien upon the capital stock of each material domestic subsidiary (65% of the capital stock of each material foreign subsidiary), and all present and future assets and properties of Katy. 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 and 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 September 30 and December 31, 2004, respectively. Margins increased another 50 basis points upon the effective date of the Third Amendment (see below). Additionally, margins on the Term Loan will drop 25 basis points if the balance of the Term Loan is reduced below $10.0 million. Interest accrues at higher margins on prime rates for swing loans, the amounts of which were nominal at June 30, 2005. Long-term debt consists of the following (amounts in thousands):
June 30, December 31, 2005 2004 ------------ ------------ Term loan payable under the Bank of America Credit Agreement, interest based on LIBOR and Prime Rates (6.375% - 7.5%), due through 2009 $ 16,429 $ 18,571 Revolving loans payable under the Bank of America Credit Agreement, interest based on LIBOR and Prime Rates (6% - 7.25%) 39,547 40,166 ------------ ------------ Total debt 55,976 58,737 Less revolving loans, classified as current (see below) (39,547) (40,166) Less current maturities (2,857) (2,857) ------------ ------------ Long-term debt $ 13,572 $ 15,714 ============ ============
12 Aggregate remaining scheduled maturities of the Term Loan as of June 30, 2005 are as follows (amounts in thousands): 2005 $ 715 2006 2,857 2007 2,857 2008 2,857 2009 7,143 The Revolving Credit Facility under the Bank of America Credit Agreement requires lockbox agreements which provide for all receipts to be swept daily to reduce borrowings outstanding. These agreements, combined with the existence of a material adverse effect ("MAE") clause in the Bank of America Credit Agreement, cause the Revolving Credit Facility to be classified as a current liability per guidance in Emerging Issues Task Force Issue No. 95--22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement. The Company does not expect to repay, or be required to repay, within one year, the balance of the Revolving Credit Facility classified as a current liability. The MAE clause, which is a typical requirement in commercial credit agreements, allows the lenders to require the loan to become due if they determine there has been a material adverse effect on the Company's operations, business, properties, assets, liabilities, condition or prospects. The classification of the Revolving Credit Facility as a current liability was a result only of the combination of the lockbox agreements and the MAE clause. The Revolving Credit Facility does not expire or have a maturity date within one year, but rather has a final expiration date of April 20, 2009. The lender has not notified Katy of any indication of a MAE at June 30, 2005, and to management's knowledge, the Company was not in violation of any provision of the Bank of America Credit Agreement, as amended, at June 30, 2005. The Company determined that due to declining profitability in the fourth quarter of 2004, potentially lower profitability in the first half of 2005 and the timing of certain restructuring payments, it would not meet its Fixed Charge Coverage Ratio (as defined in the Bank of America Credit Agreement) and could potentially exceed its maximum Consolidated Leverage Ratio (also as defined in the Bank of America Credit Agreement) as of the end of the first, second and third quarters of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage Ratio or exceeding the maximum Consolidated Leverage Ratio, the Company obtained an amendment to the Bank of America Credit Agreement (the "Second Amendment"). The Second Amendment applied only to the first three quarters of 2005 and the covenants would have returned to their original levels for the fourth quarter of 2005. Specifically, the Second Amendment eliminated the Fixed Charge Coverage Ratio, increased the maximum Consolidated Leverage Ratio, established a Minimum Consolidated EBITDA (on a latest twelve months basis) for each of the periods and also established a Minimum Availability (the eligible collateral base less outstanding borrowings and letters of credit) on each day within the nine-month period. Subsequent to the Second Amendment's effective date, the Company determined that it would likely not meet its amended financial covenants. On April 13, 2005, the Company obtained a further amendment to the Bank of America Credit Agreement (the "Third Amendment"). The Third Amendment eliminates the maximum Consolidated Leverage Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment and adjusts the Minimum Availability such that our eligible collateral must exceed the sum of the Company's outstanding borrowings and letters of credit under the Revolving Credit Facility by at least $5 million from the effective date of the Third Amendment through September 29, 2005 and by at least $7.5 million from September 30, 2005 until the date the Company delivers its financial statements for the first quarter of 2006 to its lenders. Subsequent to the delivery of the financial statements for the first quarter of 2006 the Third Amendment reestablishes the minimum Fixed Charge Coverage Ratio as originally set forth in the Bank of America Credit Agreement. The Third Amendment also reduces the maximum allowable capital expenditures for 2005 from $15 million to $10 million, and increases the interest rate margins on all of the Company's outstanding borrowings and letters of credit to the largest margins set forth in the Bank of America Credit Agreement. Effective April 13, 2005, interest accrues on the Revolving Credit Facility and Term Loan borrowings at 275 and 300 basis points over LIBOR, respectively. Interest rate margins will return to levels set forth in the Bank of America Credit Agreement subsequent to the delivery of the Company's financial statements for the first quarter of 2006 to its lenders. If the Company is unable to comply with the terms of the amended covenants, it may be required to obtain further amendments and pursue increased liquidity through additional debt financing and/or the sale of assets. The Company believes that given its strong working capital base, additional liquidity could be obtained through additional debt financing, if 13 necessary. However, there is no guarantee that such financing could be obtained. In addition, the Company is continually evaluating alternatives relating to the sale of excess assets and divestitures of certain of its business units. Asset sales and business divestitures present opportunities to provide additional liquidity by de-leveraging our financial position. Letters of credit totaling $9.1 million were outstanding at June 30, 2005, 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 June 30, 2005. Katy incurred additional debt issuance costs in 2004 associated with the Bank of America Credit Agreement. Additionally, at the time of the inception of the Bank of America Credit Agreement, Katy had approximately $4.0 million of unamortized debt issuance costs associated with the previous credit agreement. The remainder of the previously capitalized costs, along with the capitalized costs incurred in connection with the Bank of America Credit Agreement, will be amortized over the life of the Bank of America Credit Agreement through April 2009. Future quarterly amortization expense is expected to be approximately $0.3 million. During the six months ended June 30, 2004, Katy incurred fees and expenses of $0.4 million (reported in Other, net on the Condensed Consolidated Statements of Operations) associated with a financing which the Company chose not to pursue. (6) Retirement Benefit Plans Several of the Company's subsidiaries have pension plans covering substantially all of their employees. These plans are noncontributory, defined benefit pension plans. The benefits to be paid under these plans are generally based on employees' retirement age and years of service. The companies' funding policies, subject to the minimum funding requirement of employee benefit and tax laws, are to contribute such amounts as determined on an actuarial basis to provide the plans with assets sufficient to meet the benefit obligations. Plan assets consist primarily of fixed income investments, corporate equities and government securities. The Company also provides certain health care and life insurance benefits for some of its retired employees. The post-retirement health plans are unfunded. Katy uses an annual measurement date of December 31 for the majority of its pension and other postretirement benefit plans for all years presented. Information regarding the Company's net periodic benefit cost for pension and other postretirement benefit plans for the three and six months ended June 30, 2005 and 2004, is as follows (amounts in thousands): Pension Benefits ------------------------------------- Three Months Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ------ ------ ------ ------ Components of net periodic benefit cost: Service cost $ 2 $ 1 $ 4 $ 2 Interest cost 24 32 47 64 Expected return on plan assets (26) (32) (52) (65) Amortization of net gain 19 17 39 34 ------ ------ ------ ------ Net periodic benefit cost $ 19 $ 18 $ 38 $ 35 ====== ====== ====== ====== 14 Other Benefits ------------------------------------- Three Months Six Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ------ ------ ------ ------ Components of net periodic benefit cost: Service cost $ -- $ 7 $ -- $ 14 Interest cost 48 40 95 80 Amortization of prior service cost 15 15 30 30 Amortization of net gain 15 -- 30 -- ------ ------ ------ ------ Net periodic benefit cost $ 78 $ 62 $ 155 $ 124 ====== ====== ====== ====== There are no required contributions to the pension plans for 2005 and Katy did not make any contributions during the first and second quarters of 2005. (7) Income Taxes As of June 30, 2005 and December 31, 2004, the Company had deferred tax assets, net of deferred tax liabilities, of approximately $61.3 million. Domestic net operating loss (NOL) carry forwards comprised $28.9 million of the deferred tax assets. Katy's history of operating losses in many of its taxing jurisdictions provides significant negative evidence with respect to the Company's ability to generate future taxable income, a requirement in order to recognize deferred tax assets on the Condensed Consolidated Balance Sheets. For this reason, the Company was unable to conclude at June 30, 2005 and December 31, 2004 that NOLs and other deferred tax assets in the United States and certain unprofitable foreign jurisdictions would be utilized in the future. As a result, valuation allowances for these entities were recorded as of such dates for the full amount of deferred tax assets, net of the amount of deferred tax liabilities. The benefit for income taxes for the three and six months ended June 30, 2005 reflects a foreign income tax benefit net of a current expense for state income taxes. The provision for income taxes for the three and six months ended June 30, 2004 reflects a foreign income tax provision offset by a current benefit for state income taxes. In both 2005 and 2004, tax benefits were not recorded in the U.S. (for federal and most state income taxes) and for certain foreign jurisdictions on pre-tax net losses. As a result of accumulated operating losses in those jurisdictions, the Company has concluded that it was more likely than not that such benefits would not be realized. (8) Commitments and Contingencies General Environmental Claims 15 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 one to four years. W.J. Smith Wood Preserving Company ("W.J. Smith") The W. J. Smith matter originated in the 1980s when the United States and the State of Texas, through the Texas Water Commission, initiated environmental enforcement actions against W.J. Smith alleging that certain conditions on the W.J. Smith property (the "Property") violated environmental laws. In order to resolve the enforcement actions, W.J. Smith engaged in a series of cleanup activities on the Property and implemented a groundwater monitoring program. In 1993, the EPA initiated a proceeding under Section 7003 of the Resource Conservation and Recovery Act ("RCRA") against W.J. Smith and Katy. The proceeding sought certain actions at the site and at certain off-site areas, as well as development and implementation of additional cleanup activities to mitigate off-site releases. In December 1995, W.J. Smith, Katy and EPA agreed to resolve the proceeding through an Administrative Order on Consent under Section 7003 of RCRA. W. J. Smith and Katy have completed the cleanup activities required by the Order. 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 and believes that any additional liability with respect to this matter in excess of the accrual will not be material. In addition to the administrative claim specifically identified above, a purported class action lawsuit was filed by 20 individuals in federal court in the Marshall Division of the Eastern District of Texas, on behalf of "landowners and persons who reside and/or work in" an identified geographical area surrounding the W.J. Smith Wood Preserving facility in Denison, Texas. The lawsuit purported to allege claims under state law for negligence, trespass, nuisance and assault and battery. It sought damages for personal injury and property damage, as well as punitive damages. The named defendants were Union Pacific Corporation, Union Pacific Railroad Company, Katy Industries and W.J. Smith Wood Preserving Company, Inc. On June 10, 2002, Katy and W.J. Smith filed a motion to dismiss the case for lack of federal jurisdiction, or in the alternative, to transfer the case to the Sherman Division. In response, plaintiffs filed a motion for leave to amend the complaint to add a federal claim under the RCRA. On July 30, 2002, the court dismissed plaintiffs' lawsuit in its entirety. On July 31, 2002, plaintiffs filed a new lawsuit against the same defendants, again in the Marshall Division of the Eastern District of Texas, alleging property damage class action claims under the federal Comprehensive Environmental Response Compensation & Liability Act ("CERCLA"), as well as state common law theories. The Company deposed all of the proposed class representatives and on October 31, 2003, filed a motion for summary judgment on the grounds that the court lacked jurisdiction and that Plaintiffs' claims are barred by the applicable statute of limitations. Plaintiffs filed a motion for class certification on the property damage claims on that date as well. By Memorandum Opinion and Order dated June 8, 2004, the Court granted the Company's Motion for Summary Judgment on the federal jurisdictional claim and dismissed the case. The Company has not been notified of an appeal and the time for appealing the decision has passed. Asbestos Claims 16 A. The Company has recently been named as a defendant in seven lawsuits filed in state court in Alabama by a total of approximately 62 individual plaintiffs. There are over 100 defendants named in each case. In all seven cases, the Plaintiffs claim that they were exposed to asbestos in the course of their employment at a former U.S. Steel plant in Alabama and, as a result, contracted mesothelioma, asbestosis, lung cancer or other illness. They claim that they were exposed to asbestos in products in the plant which were manufactured by each defendant. In five of the cases, Plaintiffs also assert wrongful death claims. The Company will vigorously defend the claims against it in these matters. The liability of the Company cannot be determined at this time. B. Sterling Fluid Systems (USA) has tendered over 1,800 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 290 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. 17 Banco del Atlantico, S.A. v. Woods Industries, Inc., et al. Civil Action No. L-96-139 (U.S. District Court, Southern District of Texas). In December 1996, Banco del Atlantico ("plaintiff"), a bank located in Mexico, filed a lawsuit in Texas against Woods Industries, Inc. ("Woods"), a subsidiary of Katy, and against certain past and/or then present officers, directors and former owners of Woods (collectively, "defendants"). The plaintiff alleges that the defendants participated in violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") involving, among other things, allegedly fraudulently obtained loans from Mexican banks (including the plaintiff) and "money laundering" of the proceeds of the illegal enterprise. The plaintiff alleges that it made loans to a Mexican corporation controlled by certain past officers and directors of Woods based upon fraudulent representations and guarantees. The plaintiff also alleges violations of the Indiana RICO and Crime Victims Act, common law fraud and conspiracy, fraudulent transfer claims, and 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. After several years of procedural disputes, this lawsuit has become more active recently. In 2003, by order of the Southern District of Texas court, the case was transferred to the Southern District of Indiana on the ground that Indiana has a closer relationship to this case than Texas. The case is currently pending in the Southern District of Indiana. In December 2003, the plaintiff filed an Amended Complaint. There have been various motions to dismiss filed by the defendants. These motions have been denied by the court or have become mooted by subsequent filings by the plaintiff. In September 2004, the plaintiff and HSBC Mexico, S.A. (collectively, "plaintiffs"), an additional alleged owner of the Amended Complaint's claims against the defendants, filed a Second Amended Complaint, which includes new allegations and seeks additional relief from the defendants. The Second Amended Complaint also adds new defendants (none of which is affiliated with the Company) and claims, although the fundamental nature of the lawsuit, described above, remains the same. 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, forum non conveniens and failure to state a claim. The plaintiffs have responded to defendants' motions and the defendants have replied. A new Case Management Plan has also been entered in the case, which ties further case deadlines, including the date for close of discovery and trial of this action, to the court's "last ruling" on the pending motions to dismiss. Discovery is continuing. On June 15, 2005, the court denied defendants' renewed motion to dismiss for forum non conveniens. The defendants' other motions to dismiss remain pending before the court. The plaintiffs' Second Amended Complaint claims damages in excess of $24 million and is requesting that damages be trebled under Indiana and federal RICO, and/or the Indiana Crime Victims Act. The Second Amended Complaint also requests that the court void certain transactions and asset sales as purported "fraudulent transfers," including the 1993 Woods Wire Products, Inc. - Woods asset sale, and seeks other relief. Because various jurisdictional and substantive issues have not yet been fully adjudicated, it is not possible at this time for the Company to reasonably determine an outcome or accurately estimate the range of potential exposure. Katy may also 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 18 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. (9) 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): 19
Three months ended June 30, Six months ended June 2005 2004 2005 2004 ---- ---- ---- ---- Maintenance Products Group Net external sales $ 63,869 $ 69,736 $ 125,342 $ 140,226 Operating (loss) income (450) (810) (4,528) $ 1,596 Operating (deficit) margin (0.7%) (1.2%) (3.6%) 1.1% Depreciation and amortization 2,637 3,554 5,126 7,001 Capital expenditures 1,507 3,132 2,803 5,498 Electrical Products Group Net external sales $ 34,341 $ 30,786 $ 68,381 $ 60,191 Operating income 1,150 2,513 4,063 4,550 Operating margin 3.3% 8.2% 5.9% 7.6% Depreciation and amortization 349 281 703 584 Capital expenditures 44 156 151 204 Total Net external sales - Operating segments $ 98,210 $ 100,522 $ 193,723 $ 200,417 ------------------------- ------------------------- Total $ 98,210 $ 100,522 $ 193,723 $ 200,417 ========================= ========================= Operating income (loss) - Operating segments $ 700 $ 1,703 $ (465) $ 6,146 - Unallocated corporate (2,633) (2,133) (4,299) (4,694) - Stock option expense (1,953) -- (1,953) -- - Severance, restructuring, and related charges (income) (940) 109 (1,313) (1,789) ------------------------- ------------------------- Total $ (4,826) $ (321) $ (8,030) $ (337) ========================= ========================= Depreciation and amortization - Operating segments $ 2,986 $ 3,835 $ 5,829 $ 7,585 - Unallocated corporate 36 72 40 124 ------------------------- ------------------------- Total $ 3,022 $ 3,907 $ 5,869 $ 7,709 ========================= ========================= Capital expenditures - Operating segments $ 1,551 $ 3,288 $ 2,954 $ 5,702 - Unallocated corporate -- 1 -- 2 ------------------------- ------------------------- Total $ 1,551 $ 3,289 $ 2,954 $ 5,704 ========================= ========================= June 30, December 31, 2005 2004 ---- ---- Total assets - Maintenance Products Group $ 136,420 $ 154,635 - Electrical Products Group 54,210 57,698 - Other [a] 1,618 1,624 - Unallocated corporate 6,384 10,507 ------------------------- Total $ 198,632 $ 224,464 =========================
[a] The amount shown as "Other" represents an equity investment in a shrimp harvesting and farming operation. 20 (10) Severance, Restructuring and Related Charges The Company has initiated several cost reduction and facility consolidation initiatives since its recapitalization in mid-2001, resulting in severance, restructuring and related charges over the past three years. A summary of severance, restructuring and related charges (income) (by major initiative) for the three and six months ended June 30, 2005 and 2004, respectively, is as follows (amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30, 2005 2004 2005 2004 -------- -------- -------- -------- Consolidation of abrasives facilities $ 809 $ 317 $ 924 $ 663 Consolidation of St. Louis manufacturing/distribution facilities (33) (279) 48 (102) Consolidation of administrative functions for CCP -- 32 21 172 Shutdown of Woods Canada manufacturing -- (60) (19) 1,042 Other 164 (119) 339 14 -------- -------- -------- -------- Total severance, restructuring and related (income) costs $ 940 $ (109) $ 1,313 $ 1,789 ======== ======== ======== ========
Consolidation of abrasives facilities - In 2002, the Company initiated a plan to consolidate the manufacturing facilities of its abrasives business in order to implement a more competitive cost structure. The Lawrence, Massachusetts, facility ceased production in the second quarter of 2005, while the Pineville, North Carolina, facility is expected to close in early 2006. Each of these operations will be consolidated into the newly expanded Wrens, Georgia facility. Costs incurred in the six months ended June 30, 2005 related to severance associated with the Lawrence facility ($0.3 million), idle facility costs ($0.2 million), costs for demolition and repair of the Loren facility ($0.1 million) and various other consolidation related costs ($0.3 million). Costs incurred in the six months ended June 30, 2004 related to the closure of the Pineville facility ($0.3 million), severance for expected terminations at the Lawrence facility ($0.2 million) and expenses for the preparation of the Wrens facility ($0.1 million). Consolidation of St. Louis manufacturing/distribution facilities - Starting in 2001, the Company developed a plan to consolidate the manufacturing and distribution of the four CCP facilities in the St. Louis area. Charges in 2005 were for miscellaneous costs for the termination of the Warson Road facility lease and the movement of equipment from Hazelwood to Bridgeton, offset by a credit related to the non-cancelable lease adjustment at the Hazelwood facility. In the first half of 2004, a credit of $0.4 million was recorded to reverse a non-cancelable lease accrual based on a change in usage of leased facility (Hazelwood, Missouri) that was previously impaired and was offset by costs of $0.2 million related primarily to the movement of equipment between facilities. Consolidation of administrative functions for CCP - Katy has incurred various costs in 2005 and 2004 for the integration of back office and administrative functions into St. Louis, Missouri from the various operating divisions within the Maintenance Products Group. For the three and six months ended June 30, 2005, all costs related to an accrual for idle space at our Textiles facility in Atlanta. For the three and six months ended June 30, 2004, costs were incurred for system conversions and the consolidation of administrative personnel. Shutdown of Woods Canada manufacturing - In December 2003, Woods Canada closed its manufacturing facility in Toronto, Ontario, after a decision was made to source all of its products from Asia. In the first half of 2004, Woods Canada incurred a charge of $1.0 million for a non-cancelable lease accrual associated with a sale/leaseback transaction and idle capacity as a result of the shutdown of manufacturing. Also in the first half of 2004, Woods Canada recorded less than $0.1 million for additional severance. Other - Charges in the first six months of 2005 related to severance associated with the reduction in workforce principally due to the exit of certain product lines in the Consumer Plastics business units in the U.S. ($0.2 million) and the U.K. ($0.1 million). Costs in the first half of 2004 relate primarily to the closure of CCP's facility in Canada 21 and the subsequent consolidation into the Woods Canada facility, and the closure of CCP's metals facility in Santa Fe Springs, California. The table below details activity in restructuring reserves since December 31, 2004 (amounts in thousands):
One-time Contract Termination Termination Total Benefits [a] Costs [b] Other [c] -------- ------------ ------------ --------- Restructuring liabilities at December 31, 2004 $ 4,454 $ 807 $ 3,647 $ -- Additions 1,378 684 241 453 Reductions (65) (19) (46) -- Payments (1,773) (829) (580) (364) Currency translation and other 95 (1) 96 -- -------- ------------ ------------ -------- Restructuring liabilities at June 30, 2005 $ 4,089 $ 642 $ 3,358 $ 89 ======== ============ ============ ========
[a] Includes severance, benefits, and other employee-related costs associated with the employee terminations. [b] Includes charges related to non-cancelable lease liabilities for abandoned facilities, net of potential sub-lease revenue. [c] Includes charges associated with moving inventory, machinery and equipment, and the consolidation of administrative and operational functions. Katy expects to substantially complete its restructuring program in 2005. The remaining severance, restructuring and related charges for these initiatives are expected to be less than $1.0 million. Payments associated with non-cancelable lease liabilities for abandoned facilities are scheduled to end in 2011. The table below details activity in restructuring and related reserves by operating segment since December 31, 2004 (amounts in thousands):
Maintenance Electrical Products Products Total Group Group -------- ------------ ------------ Restructuring liabilities at December 31, 2004 4,454 $ 3,385 $ 1,069 Additions 1,378 1,378 -- Reductions (65) (46) (19) Payments (1,773) (1,559) (214) Currency translation and other 95 -- 95 -------- ------------ ------------ Restructuring liabilities at June 30, 2005 $ 4,089 $ 3,158 $ 931 ======== ============ ============
The table below summarizes the future obligations for severance, restructuring and other related charges by operating segment detailed above (amounts in thousands): 22 Maintenance Electrical Products Products Total Group Group -------- ------------ ------------ 2005 $ 1,286 $ 1,054 $ 232 2006 1,132 835 297 2007 446 275 171 2008 412 231 181 2009 289 243 46 Thereafter 524 524 -- -------- ------------ ------------ Total Payments $ 4,089 $ 3,162 $ 927 ======== ============ ============ 23 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three Months Ended June 30, 2005 versus Three Months Ended June 30, 2004
2005 2004 ------------------------ ------------------------ (Amounts in Millions, Except Per Share Data) ---------- ---------- ---------- ---------- $ % to Sales $ % to Sales ---------- ---------- ---------- ---------- Net sales $ 98.2 100.0 $ 100.5 100.0 Cost of goods sold 86.4 88.0 87.3 86.8 ---------- ---------- ---------- ---------- Gross profit 11.8 12.0 13.3 13.2 Selling, general and administrative expenses 13.9 14.1 14.2 14.2 Stock option expense 2.0 2.0 -- -- Severance, restructuring and related charges (income) 0.9 1.0 (0.1) (0.1) Gain on sale of assets (0.2) (0.2) (0.5) (0.5) ---------- ---------- ---------- ---------- Operating loss (4.8) (4.9) (0.3) (0.3) ========== ========== Interest expense (1.4) (1.0) Other, net -- 0.1 ---------- ---------- Loss before (benefit) provision for income taxes (6.2) (1.2) (Benefit) provision for income taxes (0.1) 0.1 ---------- ---------- Net loss (6.0) (1.3) Payment-in-kind dividends on convertible preferred stock -- (3.5) ---------- ---------- Net loss attributable to common stockholders $ (6.0) $ (4.7) ========== ========== Loss per share of common stock - basic and diluted: Net loss $ (0.76) $ (0.16) Payment-in-kind dividends on convertible preferred stock -- (0.44) ---------- ---------- Net loss attributable to common stockholders $ (0.76) $ (0.60) ========== ==========
Overview Our consolidated net sales for the three month period ended June 30, 2005 decreased $2.3 million compared to the three month period ended June 30, 2004. The decline in net sales of 2% was comprised of lower volumes [(7%)], higher pricing [4%] and favorable currency translation [1%]. Gross margins were 12.0% for the three month period ended June 30, 2005, a decrease of 1.2 percentage points compared to the three month period ended June 30, 2004. Higher raw material costs and incremental operating costs incurred due to the delayed consolidation of the abrasives facilities were partially offset by selling price increases. Selling, general and administrative expense (SG&A) as a percentage of sales decreased from 14.2% for the second quarter of 2004 to 14.1% in the second quarter of 2005, primarily due to cost containment in the Maintenance Products Group partially offset by non-recurring corporate costs. The operating loss increased by $4.5 million 24 to ($4.8) million, mostly due to lower sales volumes, lower gross margins , higher non-cash stock option expense and higher severance and restructuring costs. Overall, we reported a net loss attributable to common shareholders of ($6.0) million [($0.76) per share] for the three month period ended June 30, 2005, versus a net loss attributable to common shareholders of ($4.7) million [($0.60) per share] in the same period of 2004. During the second quarter of 2004, we recorded the impact of payment-in-kind dividends earned on our convertible preferred stock of ($3.5) million [($0.44) per share]. The payment-in-kind dividends ended in December 2004. Net Sales Maintenance Products Group Net sales from the Maintenance Products Group decreased from $69.7 million during the three month period ended June 30, 2004 to $63.9 million during the three month period ended June 30, 2005. Overall, this decline of 8% was primarily due to lower volumes [(13%)] partially offset by higher pricing [5%]. Sales volume for the Consumer Plastics business units in the U.S. and the U.K., which sell primarily to mass merchant customers, was significantly lower due to our decision to exit certain unprofitable product lines. In addition, volumes at our U.K. Consumer Plastics business unit were negatively impacted by softening demand due to a weak retail sector in the U.K. We also experienced volume declines in our Abrasives business unit in the U.S. due to shipping and production inefficiencies caused by the delayed consolidation of two abrasives facilities into the Wrens, Georgia facility and a fire at our facility in Wrens early in the fourth quarter of 2004 that disrupted production. The disruption to our Abrasives operations has resulted in the loss of certain customers. These decreases in Abrasives sales were partially offset by stronger sales of roofing products to the construction industry. Sales volumes for our Container business unit improved over last year principally due to available production capacity at our Norwalk, California facility, which resulted from the exit of certain product lines by the Consumer Plastics business. Higher pricing resulted from the implementation of selling price increases across the Maintenance Products Group, which took effect throughout the first half of 2005, with the most significant increases in the domestic business units. The implementation of price increases was in response to the accelerating cost of our primary raw materials, packaging materials, utilities and freight starting in 2004 and continuing into early 2005. Electrical Products Group The Electrical Products Group's sales improved from $30.8 million for the three month period ended June 30, 2004 to $34.3 million for the three month period ended June 30, 2005. The sales improvement of 12% was a primarily the result of increased volume [7%], higher pricing [3%] and favorable currency translation [2%]. Multiple selling price increases have been implemented since the beginning of 2004 at Woods U.S. (and to a lesser extent at Woods Canada) to offset the rising cost of copper and PVC. We continue to implement price increases; however there can be no assurance that such increases will be accepted. Woods Canada's pricing was negatively impacted by incremental program costs in the second quarter of 2005 necessary to retain business with a significant customer. Volume at Woods U.S. benefited principally from the timing of orders, which shipped ahead of last year. Woods Canada experienced volume increases primarily due to stronger sales of garden lighting, cords and multi outlet/surge protector products. In addition, sales at Woods Canada were favorably impacted by a stronger Canadian dollar versus the U.S. dollar in the second quarter of 2005 as compared to the same period in 2004. 25 Operating Income
Three months ended June 30, ------------------------------------- (Amounts in Millions) Operating income (loss) 2005 2004 Change ----------------- ----------------- ----------------- % of % of % of ---- ---- ---- $ Sales $ Sales $ Sales - ----- - ----- - ----- Maintenance Products Group $ (0.5) (0.7) $ (0.8) (1.2) $ 0.3 0.5 Electrical Products Group 1.2 3.3 2.5 8.2 (1.3) (4.9) Unallocated corporate expense (2.6) (2.1) (0.5) Stock option expense (2.0) -- (2.0) Severance, restructuring and related income (charges) (0.9) 0.1 (1.0) ------ ------ ------ Operating loss $ (4.8) $ (0.3) $ (4.5) ====== ====== ======
Maintenance Products Group The Maintenance Products Group's operating loss improved from $0.8 million (-1.2% of net sales) during the three month period ended June 30, 2004 to an operating loss of $0.5 million (-0.7% of net sales) for the three month period ended June 30, 2005. The improvement was primarily attributable to SG&A cost containment and the impact of higher selling prices which took effect in 2005 which outpaced the impact of higher raw material costs. Offsetting these items was a decline in the profitability of our domestic Abrasives business resulting from shipping and production inefficiencies caused by the delayed consolidation of two facilities into the Wrens, Georgia facility and the fire at our facility in Wrens in the fourth quarter of 2004 that disrupted production. In addition, the Maintenance Products Group recorded a gain on the sale of assets during the three months ended June 30, 2005 primarily related to the sale of excess equipment at our U.S. plastic molding facilities, while the gain on the sale of assets during the three months ended June 30, 2004 was for the sale of our former metals facility in Santa Fe Springs, California. Electrical Products Group The Electrical Products Group's operating income decreased from $2.5 million (8.2% of net sales) for the three month period ended June 30, 2004 to $1.2 million (3.3% of net sales) for the three month period ended June 30, 2005. The decrease in profitability was principally the result of selling price increases not quite keeping pace with the increasing costs of copper and PVC, partially offset by stronger volumes. SG&A expenses were up proportionately with the overall increase in sales. Corporate Corporate operating expenses increased from $2.1 million in the three month period ended June 30, 2004 to $2.6 million in three month period ended June 30, 2005 principally due to non-recurring severance costs and search fees associated with the CEO transition in the second quarter of 2005. Stock Option Expense The non-cash stock option expense of $2.0 million during the three months ended June 30, 2005 related to the March 2004 acceleration of vesting of options that were held by our former CEO at that time. A substantial portion of these options were forfeited by the former CEO upon his retirement, however. See Note 1 of the Notes to Condensed Consolidated Financial Statements. Severance, Restructuring and Related Charges Operating results for the Company during the three months ended June 30, 2005 and 2004 were impacted by severance, restructuring and related charges (income) of $0.9 million and ($0.1) million, respectively. Charges in 2005 26 related to severance, facility closure costs and inventory and equipment moves associated with the closure of one of our abrasives facilities ($0.8 million); and severance associated with the reduction in workforce principally due to the exit of certain product lines in the U.S. and U.K. Consumer Plastics business units ($0.1 million). Charges in the second quarter of 2004 related to the restructuring of the abrasives business ($0.3 million); the movement of inventory and equipment in connection with the consolidation of St. Louis manufacturing and distribution facilities ($0.1 million), and costs incurred for the consolidation of administrative functions for CCP and equipment removal and occupancy costs for the Santa Fe Springs, California metals facility ($0.1 million), offset by credits to reverse a non-cancelable lease accrual based on a change in usage of a previously impaired leased facility (Hazelwood, Missouri) ($0.4 million); to reverse a non-cancelable lease accrual based on a change in usage of leased facility that was previously impaired at Woods U.S. ($0.1 million) and to reverse a portion of a severance accrual at Woods Canada related to the December 2003 shutdown of their manufacturing facility ($0.1 million). Other Items Interest expense increased by $0.4 million in the second quarter of 2005 compared to the same period of 2004, primarily as a result of higher interest rates in 2005 and increased margins over LIBOR pursuant to the Third Amendment of our Bank of America Credit Agreement (see Note 5 of the Notes to Condensed Consolidated Financial Statements). The benefit for income taxes for the three months ended June 30, 2005 reflects a current expense for state income taxes and a foreign income tax benefit. The provision for income taxes for the three months ended June 30, 2004 reflects a current benefit for state income taxes and a foreign income tax provision. In both 2005 and 2004, tax benefits were not recorded in the U.S. (for federal and state income taxes) and for certain foreign subsidiaries on pre-tax net losses as a result of accumulated operating losses in the those jurisdictions, as we concluded that it was more likely than not that such benefits would not be realized. We recorded tax benefits for other foreign subsidiaries as we concluded that it was more likely than not that such benefits would be realized. 27 Six Months Ended June 30, 2005 versus Six Months Ended June 30, 2004
2005 2004 ------------------------ ------------------------ (Amounts in Millions, Except Per Share Data) ---------- ---------- ---------- ---------- $ % to Sales $ % to Sales ---------- ---------- ---------- ---------- Net sales $ 193.7 100.0 $ 200.4 100.0 Cost of goods sold 172.4 89.0 170.5 85.1 ---------- ---------- ---------- ---------- Gross profit 21.3 11.0 29.9 14.9 Selling, general and administrative expenses 26.2 13.5 29.0 14.5 Stock option expense 2.0 1.0 -- -- Severance, restructuring and related charges 1.3 0.7 1.8 0.9 Gain of sale of assets (0.2) (0.1) (0.5) (0.3) ---------- ---------- ---------- ---------- Operating loss (8.0) (4.1) (0.4) (0.2) ========== ========== Interest expense (2.7) (1.8) Other, net -- (0.2) ---------- ---------- Loss before provision for income taxes (10.7) (2.4) Provision for income taxes -- 0.7 ---------- ---------- Net loss (10.7) (3.1) Payment-in-kind dividends on convertible preferred stock -- (6.9) ---------- ---------- Net loss attributable to common stockholders $ (10.7) $ (10.0) ========== ========== Loss per share of common stock - basic and diluted: Net loss $ (1.35) $ (0.39) Payment-in-kind dividends on convertible preferred stock -- (0.88) ---------- ---------- Net loss attributable to common stockholders $ (1.35) $ (1.27) ========== ==========
Overview Our consolidated net sales for the six month period ended June 30, 2005 decreased $6.7 million compared to the six month period ended June 30, 2004. The decline in net sales of 3% was comprised of lower volumes [(9%)], offset by higher pricing [5%] and favorable currency translation [1%]. Gross margins were 11.0% for the six month period ended June 30, 2005; a decrease of 3.9 percentage points compared to the six month period ended June 30, 2004. Higher raw material costs and incremental operating costs incurred due to the delayed consolidation of the abrasives facilities were partially offset by selling price increases and the favorable impact of restructuring and cost containment. Selling, general and administrative expense (SG&A) as a percentage of sales declined from 14.5% for the first six months of 2004 to 13.5% in the first six months of 2005, primarily due to cost containment (mostly in the Electrical Products Group) offset by non-recurring corporate expenses. The operating loss increased by $7.7 million to ($8.0) million, mostly due to lower sales volumes, lower gross margins and higher non-cash stock option expense. Overall, we reported a net loss attributable to common shareholders of ($10.7) million [($1.35) per share] for the six month period ended June 30, 2005, versus a net loss attributable to common shareholders of ($10.0) million [($1.27) per share] in the same period of 2004. During the first half of 2004, we recorded the impact of payment-in-kind dividends 28 earned on our convertible preferred stock of ($6.9) million [($0.88) per share]. The payment-in-kind dividends ended in December 2004. Net Sales Maintenance Products Group Net sales from the Maintenance Products Group decreased from $140.2 million during the six month period ended June 30, 2004 to $125.3 million during the six month period ended June 30, 2005. Overall, this decline of 11% was primarily due to lower volumes [(15%)] net of higher pricing [4%]. Sales volume for the Consumer Plastics business units in the U.S. and the U.K., which sell primarily to mass merchant customers, was significantly lower due to our decision to exit certain unprofitable product lines. In addition, volumes at our U.K Consumer Plastics business unit were negatively impacted by softening demand due to a weak retail sector in the U.K. We also experienced volume declines in our Abrasives business unit in the U.S. due to shipping and production inefficiencies caused by the delayed consolidation of two abrasives facilities into the Wrens, Georgia facility and a fire at our facility in Wrens in the fourth quarter of 2004 that disrupted production. The disruption to our Abrasives operations has resulted in the loss of certain customers. These decreases in Abrasives sales were partially offset by stronger sales of roofing products to the construction industry. Sales of Metal Truck Box products declined in first half of 2005 versus the first half of 2004 primarily due to lower demand from a major retail outlet customer, while sales of Textiles were down slightly due to the loss of a customer. Sales volumes for our Container business unit improved over last year principally due to available production capacity at our Norwalk, California facility, which resulted from the exit of certain product lines by the U.S. Consumer Plastics business. Higher pricing resulted from the implementation of selling price increases across the Maintenance Products Group, which took effect throughout the first half of 2005, with the most significant increases in the domestic business units. The implementation of price increases was in response to the accelerating cost of our primary raw materials, packaging materials, utilities and freight starting in 2004 and continuing into early 2005. Electrical Products Group The Electrical Products Group's sales improved from $60.2 million for the six month period ended June 30, 2004 to $68.4 million for the six month period ended June 30, 2005. The sales improvement of 14% was primarily the result of higher pricing [8%], increased volume [4%] and favorable currency translation [2%]. Multiple selling price increases were implemented since the beginning of 2004 at Woods U.S. (and to a lesser extent at Woods Canada) to offset the rising cost of copper and PVC. We continue to implement price increases; however, there can be no assurance that such increases will be accepted. Woods Canada's net pricing was negatively impacted by incremental program costs necessary to retain business with a significant customer. Volume at Woods U.S. benefited principally from increased promotional activity at one of its largest mass merchant retailers in the first quarter of 2005 and from the timing of orders, which shipped ahead of last year. Sales at Woods Canada were favorably impacted by a stronger Canadian dollar versus the U.S. dollar in the first half of 2005 as compared to the same period in 2004. 29 Operating Income
Six months ended June 30, ---------------------------------- (Amounts in Millions) Operating income (loss) 2005 2004 Change ----------------- ---------------- ----------------- % of % of % of ---- ---- ---- $ Sales $ Sales $ Sales - ----- - ----- - ----- Maintenance Products Group $ (4.5) (3.6) $ 1.6 1.1 $ (6.1) (4.7) Electrical Products Group 4.1 5.9 4.6 7.6 (0.5) (1.7) Unallocated corporate expense (4.3) (4.7) 0.4 Stock option expense (2.0) -- (2.0) Severance, restructuring and related charges (1.3) (1.8) 0.5 ------ ------ ------ Operating loss $ (8.0) $ (0.3) $ (7.7) ====== ====== ======
Maintenance Products Group The Maintenance Products Group's operating income decreased from $1.6 million (1.1% of net sales) during the six month period ended June 30, 2004 to an operating loss of ($4.5) million (-3.6% of net sales) for the six month period ended June 30, 2005. The decrease was primarily attributable to lower volumes in the U.S. and U.K. Consumer Plastics and domestic Abrasives business units. In addition, higher raw material costs in the first half of 2005 versus the first half of 2004 were partially recovered through higher selling prices. The impact of higher raw material costs had the most pronounced effect on the gross margins of our business units which sell plastics products, although the raw material costs appear to have stabilized and we were able to implement price increases across most business units starting in the first quarter of 2005. In addition, manufacturing throughput was low at our plastics molding facilities in the U.S. and the U.K. in the first quarter as we reduced inventory and adjusted our production levels in connection with our decision to exit certain unprofitable lines of Consumer Plastics business. We continue to experience declines in the profitability of our Abrasives business resulting from shipping and production inefficiencies caused by the delayed consolidation of two facilities into the Wrens, Georgia facility and the fire at our facility in Wrens in the fourth quarter of 2004 that disrupted production. SG&A as a percentage of net sales in the first half of 2005 was slightly lower versus the first half of 2004 due mostly to cost containment measures. In addition, the Maintenance Products Group recorded a gain on the sale of assets during the six months ended June 30, 2005 primarily related to the sale of excess equipment at our U.S. plastic molding facilities, while the gain on the sale of assets during the six months ended June 30, 2004 was for the sale of our former metals facility in Santa Fe Springs, California. Electrical Products Group The Electrical Products Group's operating income decreased from $4.6 million (7.6% of net sales) for the six month period ended June 30, 2004 to $4.1 million (5.9% of net sales) for the six month period ended June 30, 2005, a decline of 11%. The lower profitability was principally the result of selling price increases not quite keeping pace with the increasing costs of copper and PVC, most notably in the second quarter. Lower gross margins were partially offset by stronger volumes and lower SG&A which was primarily due to cost containment initiatives. Corporate Corporate operating expenses decreased from $4.7 million in the six month period ended June 30, 2004 to $4.3 million in the six month period ended June 30, 2005 principally due to lower bonus expense resulting from a decline in operating performance and decreased expense for stock appreciation rights due to a lower stock price offset by non-recurring severance costs and search fees associated with the CEO transition in the second quarter of 2005. Stock Option Expense The non-cash stock option expense of $2.0 million during the six months ended June 30, 2005 related to the March 2004 acceleration of vesting of options that were held by our former CEO at that time. A substantial portion of these options 30 were forfeited by the former CEO upon his retirement, however. See Note 1 of the Notes to Condensed Consolidated Financial Statements. Severance, Restructuring and Related Charges Operating results for the Company during the six months ended June 30, 2005 and 2004 were negatively impacted by severance, restructuring and related charges of $1.3 million and $1.8 million, respectively. Charges in 2005 related to severance, facility closure costs and inventory and equipment moves associated with the closure of one of our abrasives facilities ($0.9 million); severance associated with the reduction in workforce principally due to the exit of certain product lines in the U.S. and U.K. Consumer Plastics business units ($0.3 million) and charges aggregating to $0.1 million for miscellaneous costs for the termination of the Warson Road facility lease and the movement of inventory and equipment from Hazelwood to Bridgeton. Charges in the first half of 2004 related to a non-cancelable lease accrual associated with a sale/leaseback transaction and idle capacity as a result of the shutdown of manufacturing at Woods Canada ($1.0 million); the restructuring of the abrasives business ($0.7 million); costs incurred for the consolidation of administrative functions for CCP ($0.2 million); costs for the movement of inventory and equipment in connection with the consolidation of St. Louis manufacturing and distribution facilities ($0.2 million); and expenses for the closure of CCP's facility in Canada and the subsequent consolidation into the Woods Canada facility ($0.1 million); partially offset by credits for adjustments to non-cancelable leases based on changes in the usage of these leased facilities ($0.4 million). Other Items Interest expense increased by $0.9 million in the first half of 2005 versus the same period of 2004, primarily as a result of higher interest rates and increased margins over LIBOR pursuant to the Third Amendment of our Bank of America Credit Agreement (see Note 5 of the Notes to Condensed Consolidated Financial Statements). In addition, higher average borrowings in 2005 (principally due to increased working capital levels and poor financial performance in the second half of 2004), contributed to the increase. Other, net for the six months ended June 30, 2004 included the write-off of fees and expenses of $0.4 million associated with a financing which the Company chose not to pursue, offset by the write-off of net liabilities related to previously divested businesses of $0.1 million. The benefit for income taxes for the six months ended June 30, 2005 reflects a net foreign income tax benefit offset by a current expense for state income taxes. The provision for income taxes for the six months ended June 30, 2004 reflects a current benefit for state income taxes and a foreign income tax provision. In both 2005 and 2004, tax benefits were not recorded in the U.S. (for federal and state income taxes) and for certain foreign subsidiaries on pre-tax net losses as a result of accumulated operating losses in the those jurisdictions, as we concluded that it was more likely than not that such benefits would not be realized. We recorded tax benefits for other foreign subsidiaries as we concluded that it was more likely than not that such benefits would be realized. LIQUIDITY AND CAPITAL RESOURCES We require funding for working capital needs and capital expenditures. We believe that our cash flow from operations and the use of available borrowings under the Bank of America Credit Agreement (as defined below) provide sufficient liquidity for our operations for the foreseeable future. As of June 30, 2005, we had cash and cash equivalents of $4.1 million versus cash and cash equivalents of $8.5 million at December 31, 2004. Also as of June 30, 2005, we had outstanding borrowings of $56.0 million [49% of total capitalization], under the Bank of America Credit Agreement with unused borrowing availability on the Revolving Credit Facility of $22.6 million. As of December 31, 2004, we had outstanding borrowings of $58.7 million [46% of total capitalization]. We generated $0.5 million of cash flow from operations during the six months ended June 30, 2005 versus the utilization of $22.1 million of cash flow from operations during the six months ended June 30, 2004. The improvement in cash flow from operations was primarily attributable to a reduction of inventory in the first half of 2005 versus an inventory build in the first half of 2004 and to a lesser extent, lower capital expenditures. 31 We expect liquidity to generally stabilize for the remainder of 2005, with the exception of seasonal inventory builds in the third quarter offset by increased receivable collections in the fourth quarter (both primarily related to the Electrical Products Group). Other elements of working capital continue to be closely managed. Capital expenditures are expected to be higher in the second half of 2005 versus the first half of 2005, but overall are expected to be lower than 2004. We have a number of obligations and commitments, which are listed on the schedule later in this section entitled "Contractual and Commercial Obligations." We have considered all of these obligations and commitments in structuring our capital resources to ensure that they can be met. See the notes accompanying the table in that section for further discussions of those items. We believe that given our strong working capital base, additional liquidity could be obtained through additional debt financing, if necessary. However, there is no guarantee that such financing could be obtained. In addition, we are continually evaluating alternatives relating to the sale of excess assets and divestitures of certain of our business units. Asset sales and business divestitures present opportunities to provide additional liquidity by de-leveraging our financial position. Bank of America Credit Agreement On April 20, 2004, we completed a refinancing of our outstanding indebtedness (the "Refinancing") and entered into a new agreement with Bank of America Business Capital (formerly Fleet Capital Corporation) (the "Bank of America Credit Agreement"). Like the previous credit agreement with Fleet Capital Corporation, the Bank of America Credit Agreement is a $110 million facility with a $20 million term loan ("Term Loan") and a $90 million revolving credit facility ("Revolving Credit Facility") with essentially the same terms as the previous credit agreement. The Bank of America Credit Agreement is an asset-based lending agreement and involves a syndicate of four banks, all of which participated in the syndicate from the previous credit agreement. The Bank of America Credit Agreement, and the additional borrowing ability under the Revolving Credit Facility obtained by incurring new term debt, results in three important benefits related to our long-term strategy: (1) additional borrowing capacity to invest in capital expenditures and/or acquisitions key to our strategic direction, (2) increased working capital flexibility to build inventory when necessary to accommodate lower cost outsourced finished goods inventory and (3) the ability to borrow locally in Canada and the United Kingdom and provide a natural hedge against currency fluctuations. The Revolving Credit Facility has an expiration date of April 20, 2009 and its borrowing base is determined by eligible inventory and accounts receivable. The Term Loan also has a final maturity date of April 20, 2009 with quarterly payments of $0.7 million. A final payment of $6.4 million is scheduled to be paid in April 2009. The term loan is collateralized by our property, plant and equipment. All extensions of credit under the Bank of America Credit Agreement are collateralized by a first priority security interest in and lien upon the capital stock of each material domestic subsidiary (65% of the capital stock of each material foreign subsidiary), and all present and future assets and properties of Katy. Customary restrictions apply under the Bank of America Credit Agreement. 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 June 30, 2005, total outstanding letters of credit were $9.1 million. 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 and 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 September 30 and December 31, 2004, respectively. Margins increased another 50 basis points upon the effective date of the Third Amendment (see below). Additionally, margins on the Term Loan will drop 25 basis points if the balance of the Term Loan is reduced below $10.0 million. Interest accrues at higher margins on prime rates for swing loans, the amounts of which were nominal at June 30, 2005. 32 In the first half of 2005, we paid a fee of $0.1 million to our lenders in connection with the Second Amendment to our credit agreement. We incurred additional debt issuance costs in 2004 associated with the Bank of America Credit Agreement. Additionally, at the time of the inception of the Bank of America Credit Agreement, we had approximately $4.0 million of unamortized debt issuance costs associated with the previous credit agreement. The remainder of the previously capitalized costs, along with the capitalized costs from the Bank of America Credit Agreement, will be amortized over the life of the Bank of America Credit Agreement through April 2009. Also, during the first half of 2004, we incurred fees and expenses of $0.4 million associated with a financing which we chose not to pursue. The revolving credit facility under the Bank of America Credit Agreement requires lockbox agreements which provide for all receipts to be swept daily to reduce borrowings outstanding. These agreements, combined with the existence of a material adverse effect ("MAE") clause in the Bank of America Credit Agreement, caused the revolving credit facility to be classified as a current liability (except as noted below), per guidance in the Emerging Issues Task Force Issue No. 95-22 , Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement. We do not expect to repay, or be required to repay, within one year, the balance of the revolving credit facility classified as a current liability. The MAE clause, which 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 (except as noted above) is a result only of the combination of the lockbox agreements and the MAE clause. The Bank of America Credit Agreement does not expire or have a maturity date within one year, but rather has a final expiration date of April 20, 2009. The lender had not notified us of any indication of a MAE at June 30, 2005, and, to management's knowledge, we were not in default of any provision of the Bank of America Credit Agreement, as amended at June 30, 2005. 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 our amended financial covenants. On April 13, 2005, we obtained a further amendment to the Bank of America Credit Agreement (the "Third Amendment"). The Third Amendment eliminated the maximum Consolidated Leverage Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment and adjusted the Minimum Availability such that our eligible collateral must exceed the sum of our outstanding borrowings and letters of credit under the Revolving Credit Facility by at least $5 million from the effective date of the Third Amendment through September 29, 2005 and by at least $7.5 million from September 30, 2005 until the date we deliver our financial statements for the first quarter of 2006 to our lenders. Subsequent to the delivery of the financial statements for the first quarter of 2006, the Third Amendment reestablished the minimum Fixed Charge Coverage Ratio as originally set forth in the Bank of America Credit Agreement. The Third Amendment also reduced the maximum allowable capital expenditures for 2005 from $15 million to $10 million, and increased the interest rate margins on all of the Company's outstanding borrowings and letters of credit to the largest margins set forth in the Bank of America Credit Agreement. Effective April 13, 2005, interest accrues on the Revolving Credit Facility and Term Loan borrowings at 275 and 300 basis points over LIBOR, respectively. Interest rate margins will return to levels set forth in the Bank of America Credit Agreement subsequent to the delivery of our financial statements for the first quarter of 2006 to our lenders. If we are unable to comply with the terms of the amended covenants, we may be required to obtain further amendments and pursue increased liquidity through additional debt financing and/or the sale of assets (see discussion above). Contractual Obligations and Commercial Obligations 33 Katy's obligations as of June 30, 2005 are summarized below (amounts in thousands):
Due in Due Due Due less than in 1-3 in 3-5 after 5 Contractual Cash Obligations Total 1 year years years years --------- --------- --------- --------- --------- Revolving credit facility [a] $ 39,547 $ -- $ -- $ 39,547 $ -- Term loans 16,429 2,857 5,714 7,858 -- Interest on debt [b] 13,394 3,954 6,893 2,547 -- Operating leases [c] 27,403 7,478 11,415 5,289 3,221 Severance and restructuring [c] 2,697 1,369 700 373 255 SESCO payable to Montenay [d] 2,750 1,100 1,100 550 -- --------- --------- --------- --------- --------- Total Contractual Obligations $ 102,220 $ 16,758 $ 25,822 $ 56,164 $ 3,476 ========= ========= ========= ========= ========= Due in Due Due Due less than in 1-3 in 3-5 after 5 Other Commercial Commitments Total 1 year years years years --------- --------- --------- --------- --------- Commercial letters of credit $ 596 $ 596 $ -- $ -- $ -- Stand-by letters of credit 8,506 8,506 -- -- -- Guarantees [e] 23,670 8,370 15,300 -- -- --------- --------- --------- --------- --------- Total Commercial Commitments $ 32,772 $ 17,472 $ 15,300 $ -- $ -- ========= ========= ========= ========= =========
[a] As discussed in the Liquidity and Capital Resources section above, the entire revolving credit facility under the Bank of America Revolving Credit Agreement is classified as a current liability on the Consolidated Statements of Financial Position as a result of the combination in the Bank of America Credit Agreement of (i) lockbox agreements on Katy's depository bank accounts, and (ii) a subjective Material Adverse Effect (MAE) clause. The Revolving Credit Facility expires in April of 2009. [b] Represents interest on the Revolving Credit Facility and Term Loan of the Bank of America Credit Agreement. Amounts assume interest accrues at the current rate in effect, including the effect the impact of the increased margins through the end of the first quarter of 2006 pursuant to the Third Amendment. Amount also assumes the principal balance of the Revolving Credit Facility remains constant through its expiration date of April 20, 2009 and the principal balance of the Term Loan amortizes in accordance with the terms of the Bank of America Credit Agreement. Due to the variable nature of the Bank of America Credit Agreement, actual interest rates could differ from the assumptions above. In addition, actual borrowing levels could differ from the assumptions above due to liquidity needs. [c] Future non-cancelable lease rentals are included in the line entitled "Operating leases," which also includes obligations associated with restructuring activities. The Condensed Consolidated Balance Sheet at June 30, 2005 and December 31, 2004, includes $3.4 million and $3.6 million, respectively, in discounted liabilities associated with non-cancelable operating lease rentals, net of estimated sub-lease revenues, related to facilities that have been abandoned as a result of restructuring and consolidation activities. [d] Amount owed to Montenay as a result of the SESCO partnership, discussed in Note 4 to the Condensed Consolidated Financial Statements. $1.1 million of this obligation is classified in the Condensed Consolidated Balance Sheets as an Accrued Expense in Current Liabilities, while the remainder is included in Other Liabilities, recorded on a discounted basis. 34 [e] As discussed in Note 4 to the Condensed Consolidated Financial Statements in Part I, Item 1, SESCO, an indirect wholly-owned subsidiary of Katy, is party to a partnership that operates a waste-to-energy facility, and has certain contractual obligations, for which Katy provides certain guarantees. If the partnership is not able to perform its obligations under the contracts, under certain circumstances SESCO and Katy could be subject to damages equal to the amount of Industrial Revenue Bonds outstanding (which financed construction of the facility) less amounts held by the partnership in debt service reserve funds. Katy and SESCO do not anticipate non-performance by parties to the contracts. Off-balance Sheet Arrangements See Note 4 to the Condensed Consolidated Financial Statements in Part II, Item 8 for a discussion of SESCO. Cash Flow Operating Activities Cash flow used in operating activities before changes in operating assets was $2.5 million in the first half of 2005 versus cash flow provided by operating activities before changes in operating assets of $4.6 million in the first half of 2004. While we had net losses in both periods, these amounts included non-cash items such as depreciation, amortization and amortization of debt issuance costs. We generated $3.0 million of cash related to operating assets and liabilities during the six months ended June 30, 2005 versus cash used related to operating assets and liabilities of $26.7 million during the six months ended June 30, 2004. Our operating cash flow was favorably impacted in the first half of 2005 by a decrease in inventory of $6.6 million, mostly in the business units in the Maintenance Products Group which sell plastics products, and by lower accounts receivable, principally resulting from a decrease in net sales in the second quarter of 2005 versus the fourth quarter of 2004. Operating cash flow during the first half of 2005 was negatively impacted by lower accounts payable (as we limited our purchases from suppliers in connection with the aforementioned reduction of inventory) and lower accruals due to the settlement of previously recorded restructuring charges. Operating cash flow in the first half of 2004 was negatively impacted by higher inventory and lower payables and accruals. The inventory build was due to the early purchase of certain materials in advance of scheduled supplier price increases, increased material prices and planned builds in connection with facility closures. Accounts payable were lower as a result of our decision to take advantage of discount terms offered by certain vendors while accruals were impacted by the settlement of previously recorded restructuring charges. During the first half of 2005, we were turning our inventory at 5.2 times per year versus 4.5 times per year during the first half of 2004. Cash of $1.8 million and $3.6 million was used in the six months ended June 30, 2005 and 2004, respectively, to satisfy severance, restructuring and related obligations. Severance, restructuring and related charges are expected to substantially end in 2005, however, cash payments will continue through 2011 to satisfy non-cancelable lease obligations. See Note 10 of the Notes to Condensed Consolidated Financial Statements. Investing Activities Capital expenditures totaled $3.0 million during the six months ended June 30, 2005 as compared to $5.7 million during the six months ended June 30, 2004. Capital expenditures are anticipated to be higher in the second half of 2005 versus the first half of 2005, but overall are expected to be lower in 2005 than in 2004. On March 31, 2004, Woods Canada sold its manufacturing facility for net proceeds of $3.2 million and immediately entered into a sale/leaseback arrangement to allow that business unit to occupy this property as a distribution facility. On June 28, 2004, CCP sold its vacant metals facility in Santa Fe Springs, California for net proceeds of $1.9 million. Financing Activities Overall, debt decreased $2.6 million during the six months ended June 30, 2005 versus an increase of $22.6 million during the six months ended June 30, 2004, primarily relating to the changes in working capital during those periods. Direct debt costs totaling $0.1 million in the first half of 2005 primarily represents a fee paid to our lenders in connection with the Second Amendment and $1.3 million in the first half of 2004 relates to the April 20, 2004 refinancing of the Bank of America Credit Agreement. On May 10, 2004, we suspended our $5.0 million share repurchase program after announcing the resumption of the plan on April 20, 2004. We had previously suspended the program in November 2003. There 35 currently are no plans to resume the share repurchase program. SEVERANCE, RESTRUCTURING AND RELATED CHARGES See Note 10 to the Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of severance, restructuring and related charges. OUTLOOK FOR 2005 We continue to experience a strong sales performance during the first half of 2005 from the Woods U.S. business unit, offset by lower volumes in our U.S. and U.K. Consumer Plastics and domestic Abrasives business units. Price increases were passed along to our Woods U.S. customers during 2004 and early 2005 as a result of the rise in copper prices since late 2003. We continue to implement price increases; however there can be no assurance that such increases will be accepted. We do anticipate modest volume growth from our Woods U.S. unit. We also expect continued softness in the U.K., especially in the consumer /retail sector. We have implemented price increases for the JanSan Plastics, Container and Consumer Plastics business units and for our Metal Truck Box business in response to the increase in raw material costs over the past few years. However, in the U.S. and U.K. Consumer Plastics business, we face the continuing challenge of passing through price increases to offset these higher costs, and sales volumes have been and will continue to be negatively impacted as a result of raising prices. The continued shipping and production inefficiencies at our Abrasives facilities have resulted in higher operating costs. The consolidation of one of the two facilities into the Wrens, Georgia facility is nearly complete and while we may experience higher operating costs in the near term, the consolidation will ultimately result in improved profitability of our Abrasives business. Early in the fourth quarter of 2004, we experienced a fire at the Wrens facility. The fire damaged certain production equipment and affected the operations of certain of our production lines. However, we have been able to continue to operate the remainder of our production lines at this facility and have obtained equipment allowing us to operate all product lines at this facility. These disruptions to our Abrasives operations have also resulted in the loss of certain customers, commencing in the second half of 2004. While we expect to recover some of these lost sales in the current year, we may experience additional lost sales in 2005. We believe that sales for the Abrasives business unit in the second half of 2005 will be approximately equal to the sales in the second half of 2004 and the first half of 2005. Cost of goods sold is subject to variability in the prices for certain raw materials, most significantly thermoplastic resins used in the manufacture of plastic products for the JanSan Plastics, Consumer Plastics and Container businesses. Prices of plastic resins, such as polyethylene and polypropylene have increased steadily from the latter half of 2002 through the early months of 2005. Prices for resin decreased in the second quarter of 2005, but have recently returned to historically high levels. 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 U.S. and Woods Canada business units. Prices for copper generally increased from late 2003 and have continued through the present time. Prices for copper appear to have stabilized in a historically high range in the second quarter of 2005. Prices for aluminum (a raw material used in our Metal Truck Box business), corrugated packaging material and other raw materials had also increased through the first quarter of 2005. We have not employed an active hedging program related to our commodity price risk, but are employing other strategies for managing this risk, including contracting for a certain percentage of resin needs through supply agreements and opportunistic spot purchases. In 2004, we experienced $24 million of cost increases in our primary raw materials, packaging materials, utilities and freight compared to 2003; these extraordinary cost increases continued into the first quarter of 2005. In 2004, we passed on about $15 million of these higher costs through price increases. We announced additional price increases in the first half of 2005 across almost all business units. We continue to implement price increases; however there can be no assurance that such increases will be accepted. In a climate of rising raw material costs (especially in 2004 and the first half of 2005), we experienced difficulty in raising prices to shift these higher costs to our customers, particularly major home improvement and mass market retail outlets. 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 the latter half of 2005 and beyond. 36 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; SG&A cost rationalization and organizational changes. In the future, we expect to benefit from sales growth opportunities across our various business units. We believe we can accomplish this without having to add significant capital because our facilities are currently under utilized. As a percentage of sales, SG&A in the latter half of 2005 should remain in line with the same period in 2004. SG&A has continually declined since 2001as a percentage of sales. We expect to maintain modest headcount and rental costs for our corporate office. We have completed the process of transferring back-office functions of our Textiles (Wilen), Abrasives (Glit-Microtron and Loren) and Filters and Grillbricks (Disco) business units from Georgia to Bridgeton, Missouri, the headquarters of CCP. We will continue to evaluate the possibility of further consolidation of administrative processes. Our cost reduction efforts, integration of back office functions and simplifications of our business transactions are all dependent on executing a system integration plan. This plan involves the migration of data across information technology platforms and implementation of new software and hardware. The domestic systems integration plan was substantially completed in October 2003, while our international systems integration plan is nearly complete. Interest rates rose in the second half of 2004 and we expect rates to continue to rise in 2005. 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 and 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 September 30, 2004 and December 31, 2004, respectively. Margins increased another 50 basis points upon the effective date of the Third Amendment (see below). Additionally, margins on the Term Loan will drop 25 basis points if the balance of the Term Loan is reduced below $10.0 million Given our history of operating losses, along with guidance provided by the accounting literature covering accounting for income taxes, we are unable to conclude it is more likely than not that we will be able to generate future taxable income sufficient to realize the benefits of domestic deferred tax assets and deferred tax assets of unprofitable foreign subsidiaries. Therefore, except for our profitable foreign subsidiaries, a full valuation allowance on the net deferred tax asset position was recorded at June 30, 2005 and December 31, 2004, and we do not expect to record the benefit of any deferred tax assets that may be generated in 2005 from domestic and certain unprofitable foreign jurisdictions. We will continue to record current expense associated with foreign and state income taxes. In 2004, our financial performance benefited from favorable currency translation as the British Pound Sterling and the Canadian dollar strengthened throughout the year against the U.S. dollar. In the first half of 2005, the Canadian dollar appears to have stabilized against the U.S. dollar and the British Pound Sterling has somewhat weakened against the U.S. dollar in the same period. While we cannot predict the ultimate direction of exchange rates, we do not expect to see the same favorable impact on our financial performance in 2005. We expect our current working capital levels to remain constant except for seasonal inventory builds during the third quarter of 2005, offset by increased receivable collections in the fourth quarter of 2005 (both primarily in the Electrical Products Group). Inventory carrying values may be impacted by higher material costs. Cash flow will be used in 2005 for additional costs related to the consolidation of the Abrasives facilities (which is expected to be substantially completed in the third quarter) 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. 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 37 defined in the Bank of America Credit Agreement) and could potentially exceed our maximum Consolidated Leverage Ratio (also as defined in the Bank of America Credit Agreement) as of the end of the first, second and third quarters of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage Ratio or exceeding the maximum Consolidated Leverage Ratio, we obtained the Second Amendment to the Bank of America Credit Agreement. The Second Amendment applied only to the first three quarters of 2005 and the covenants would have returned to their original levels for the fourth quarter of 2005. Specifically, the Second Amendment eliminated the Fixed Charge Coverage Ratio, increased the maximum Consolidated Leverage Ratio, established a Minimum Consolidated EBITDA (on a latest twelve months basis) for each of the periods and also established a Minimum Availability (the eligible collateral base less outstanding borrowings and letters of credit) on each day within the nine-month period. Subsequent to the Second Amendment's effective date, we determined that we would likely not meet our amended financial covenants. On April 13, 2005, we obtained the Third Amendment to the Bank of America Credit Agreement. The Third Amendment eliminated the maximum Consolidated Leverage Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment and adjusted the Minimum Availability such that our eligible collateral must exceed the sum of our outstanding borrowings and letters of credit under the Revolving Credit Facility by at least $5 million from the effective date of the Third Amendment through September 29, 2005 and by at least $7.5 million from September 30, 2005 until the date we deliver our financial statements for the first quarter of 2006 to our lenders. Subsequent to the delivery of the financial statements for the first quarter of 2006, the Third Amendment reestablished the minimum Fixed Charge Coverage Ratio as originally set forth in the Bank of America Credit Agreement. The Third Amendment also reduced the maximum allowable capital expenditures for 2005 from $15 million to $10 million, and increased the interest rate margins on all of the Company's outstanding borrowings and letters of credit to the largest margins set forth in the Bank of America Credit Agreement. Effective April 13, 2005, interest accrues on the Revolving Credit Facility and Term Loan borrowings at 275 and 300 basis points over LIBOR, respectively. Interest rate margins will return to levels set forth in the Bank of America Credit Agreement subsequent to the delivery of our financial statements for the first quarter of 2006 to our lenders. We expect to be in compliance with the amended covenants in the Bank of America Credit Agreement for the remainder of 2005. If we are unable to comply with the terms of the amended covenants, we may be required to obtain further amendments and pursue increased liquidity through additional debt financing and/or the sale of assets. We believe that given our strong working capital base, additional liquidity could be obtained through additional debt financing, if necessary. However, there is no guarantee that such 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. 38 Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 This report and the information incorporated by reference in this report contain various "forward-looking statements" as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934, as amended. The forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. We have based these forward-looking statements on current expectations and projections about future events and trends affecting the financial condition of our business. These forward-looking statements are subject to risks and uncertainties that may lead to results that differ materially from those expressed in any forward-looking statement made by us or on our behalf, including, among other things: - Our inability to achieve product price increases, especially as they relate to potentially higher raw material costs. - The potential impact of losing lines of business at large mass merchant retailers in the discount and do-it-yourself markets. - Competition from foreign competitors. - Increases in the cost of, or in some cases continuation of, the current price levels of plastic resins, copper, paper board packaging, and other raw materials. - Our inability to reduce product costs, including manufacturing, sourcing, freight, and other product costs. - Greater reliance on third parties for our finished goods as we increase the portion of our manufacturing that is outsourced. - Labor issues, including union activities that require an increase in production costs or lead to a strike, thus impairing production and decreasing sales. We are also subject to labor relations issues at entities involved in our supply chain, including both suppliers and those involved in transportation and shipping. - Our inability to 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. - The potential impact of rising costs for insurance for properties and various forms of liabilities. - The potential impact of rising interest rates on our LIBOR-based Bank of America Credit Agreement. - Our inability to meet covenants associated with the Bank of America Credit Agreement. - The potential impact of changes in foreign currency exchange rates related to our foreign operations. - Changes in significant laws and government regulations affecting environmental compliance and income taxes. 39 Words and phrases such as "expects," "estimates," "will," "intends," "plans," "believes," "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. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business and should be read in conjunction with the cautionary statements and risks included in our other filings with the SEC, including, but not limited to, our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. ENVIRONMENTAL AND OTHER CONTINGENCIES See Note 8 to the Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of environmental and other contingencies. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for a discussion of recently issued accounting pronouncements. CRITICAL ACCOUNTING POLICIES We disclosed details regarding certain of our critical accounting policies in the Management's Discussion and Analysis section of our 2004 Annual Report on Form 10-K (Part II, Item 7). There have been no changes to policies as of June 30, 2005. 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. We currently do not use derivative financial instruments relating to this exposure. Our interest obligations on outstanding debt at June 30, 2005 were indexed from short-term LIBOR. As a result of the current rising interest rate environment and the increase in the interest rate margins on our borrowings as a result of the Third Amendment to the Bank of America Credit Agreement, our exposures to interest rate risks could be material to our financial position or results of operations. Foreign Exchange Risk We are exposed to fluctuations in the Euro, British pound, Canadian dollar and Chinese Yuan Renminbi. Some of our subsidiaries make significant U.S. dollar purchases from Asian suppliers, particularly in China. An adverse change in foreign currency exchange rates of Asian countries could result in an increase in the cost of purchases. We do not currently hedge foreign currency transaction or translation exposures. In July, the Chinese Central Bank revalued the Yuan Renminbi, breaking the link to the U.S. Dollar. We are currently unable to determine the long-term effects of China's revaluation on the foreign currency exchange rate with the U.S. Commodity Price Risk We have not employed an active hedging program related to our commodity price risk, but are employing other strategies for managing this risk, including contracting for a certain percentage of resin needs through supply agreements and 40 opportunistic spot purchases. See Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - OUTLOOK FOR 2005, for further discussion of our exposure to increasing raw material costs. 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 SEC filings is reported within the time periods specified in the SEC's rules, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We also have investments in certain unconsolidated entities. As we do not control or manage these entities, the disclosure controls and procedures with respect to such entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries. 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 ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect Katy's internal control over financial reporting. 41 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS 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 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 its common stock were repurchased on the open market for approximately $2.6 million. The Company suspended further purchases under the plan on May 10, 2004. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of Katy Industries, Inc. was held at Katy Industries' Corporate Headquarters, 765 Straits Turnpike, Suite 2000, Middlebury, Connecticut, at 10:00 AM, on May 26, 2005. Stockholders voted on three proposals, summarized below with the accompanying number of votes in favor, opposed, or abstained. PROPOSAL No. 1: Election of Directors CLASS II DIRECTORS: Name Votes For Votes Withheld - ---- --------- -------------- Christopher W. Anderson 6,722,877 783,808 William F. Andrews 6,718,604 788,081 Samuel P. Frieder 6,723,077 783,608 James A. Kohlberg 6,732,881 773,804 Christopher Lacovara 6,723,077 783,608 The required vote for directors was the affirmative vote of a plurality of the votes cast at the annual meeting. As a result of the vote, each of the five nominees for Class II directors was elected. The specified term of the Company's Class I directors, Robert M. Baratta, Daniel B. Carroll, Wallace E. Carroll, Jr., and Anthony T. Castor III, is through the Company's 2006 Annual Meeting. PROPOSAL No. 2: To ratify the selection of PricewaterhouseCoopers LLP as the independent public accountants of Katy for the fiscal year ended December 31, 2005. Votes For Votes Against Votes Abstained - --------- ------------- --------------- 7,485,116 9,269 12,300 The required vote to ratify the appointment of PricewaterhouseCoopers LLP was the majority of Katy's outstanding common stock present, in person or by proxy, at the annual meeting. As a result of the vote, the selection of PricewaterhouseCoopers LLP was ratified. PROPOSAL No. 3: To consider and vote upon a stockholder proposal regarding Katy's Stockholder Rights Agreement: Votes For Votes Against Votes Abstained - --------- ------------- --------------- 2,728,694 3,385,058 9,392 The required vote for the approval of the stockholder proposal was the majority of Katy's outstanding common stock present, in person or by proxy, at the annual meeting. There were present in person or by proxy at the annual meeting 42 7,506,685 shares of common stock, a majority of which was 3,753,343 shares. As a result of the vote, the stockholder proposal was not approved. Item 5. OTHER INFORMATION Entry into Material Definitive Agreement We incorporate by reference the disclosure contained in Item 5.02 of our Current Report on Form 8-K filed with the SEC on May 31, 2005 and Item 5.02 of our Current Report on Form 8-K/A filed with the SEC on August 15, 2005, whereby we disclosed that effective June 1, 2005, we entered into an employment agreement with Anthony T. Castor, III to serve as our President and Chief Executive Officer, which provides for a base salary of $525,000 with a target incentive bonus of 70% of his base salary. For 2005 only, one half of Mr. Castor's target incentive bonus will be guaranteed. On July 15, 2005, pursuant to his employment agreement, Mr. Castor was also granted 750,000 options to purchase shares of our common stock with an exercise price of $2.75 per share, which vest in three annual installments on the anniversary of the effective date of his employment agreement and have a term of 10 years. Mr. Castor will be entitled to additional options to purchase common stock equal to 5% of new common shares issued in connection with a conversion of our 15% convertible preferred stock to common stock by the holder. These additional options will have an exercise price equal to the current market price of the common stock price at the time the 15% convertible preferred stock is converted by the holder. In addition, Mr. Castor is entitled to be covered by a company-matched non-qualified savings plan. On August 8, 2005, the Board of Directors approved the Katy Industries, Inc. 2005 Chief Executive Officer's Plan in order to provide the grant of 750,000 options to Mr. Castor. Item 6. EXHIBITS 10.1 Agreement effective as of June 1, 2005 between Anthony T. Castor III and the Company, filed herewith. 10.2 Fourth Amendment to Amended and Restated Loan Agreement dated as of June 8, 2005 with Fleet Capital Corporation, filed herewith. 10.3 Fifth Amendment to Amended and Restated Loan Agreement dated as of August 4, 2005 with Fleet Capital Corporation, filed herewith. 10.4 Katy Industries, Inc. 2005 Chief Executive Officer's Plan, filed herewith. 31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 43 Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KATY INDUSTRIES, INC. Registrant DATE: August 15, 2005 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 44 EX-10.1 2 d64886_ex10-1.txt MATERIAL CONTRACTS Exhibit 10.1 AGREEMENT AGREEMENT made and entered into by and between Katy Industries, Inc. (the "Company"), a Delaware corporation, with its principal place of business at 765 Straits Turnpike, Middlebury, Connecticut, and Anthony T. Castor III, of 1200 North Veitch Street, Arlington, Virginia (the "Executive"), effective as of the 1st day of June 2005. WHEREAS, the operations of the Company and its Affiliates are a complex matter requiring direction and leadership in a variety of arenas, including financial, strategic planning, regulatory, community relations and others; WHEREAS, the Executive is possessed of certain experience and expertise that qualify him to provide the direction and leadership required by the Company and its Affiliates; and WHEREAS, subject to the terms and conditions hereinafter set forth, the Company therefore wishes to employ the Executive as its President and Chief Executive Officer and the Executive wishes to accept such employment; NOW, THEREFORE, in consideration of the foregoing proemises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree: 1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company hereby offers and the Executive hereby accepts employment. 2. Term. The term of the Executive's employment hereunder shall commence as of June 1, 2005 (the "Employment Date") and shall continue until termination as hereafter provided. The Executive may be terminated by the Company at will at any time subject to the provisions of Section 5 below. The term of this Agreement is hereafter referred to as "the term of this Agreement" or "the term hereof". 3. Capacity and Performance. (a) During the term hereof, the Executive shall serve the Company as its Presidentits President and Chief Executive Officer, subject to his appointment by the Board of Directors of the Company (the "Board") as a condition precedent to the effectiveness of this Agreement. In addition, during the term hereof and without further compensation, the Executive shall serve as a director of the Company and a member of the Executive Committee of the Board, if so elected or appointed from time to time; provided, however, that the Executive's failure to be so elected or appointed shall not constitute a breach of this Agreement. (b) During the term hereof, the Executive shall be employed by the Company on a full-time basis, and shall have and perform such usual and customary duties, responsibilities, and authority of a Chief Executive Officer and President on behalf of the Company and its Affiliates as may be designated from time to time by the Board or by its designees. -1- (c) During the term hereof, the Executive shall devote his full business time (except for permitted vacation periods and reasonable periods of illness or other incapacity) and his best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and its Affiliates and to the discharge of his duties and responsibilities hereunder. The Executive shall not engage in any other business activity or serve in any industry, trade, professional, governmental or academic position during the term of this Agreement, except as may be expressly approved in advance by the Board in writing. (d) The foregoing restrictions shall not limit or prohibit the Executive from engaging in passive investment, inactive business ventures, and community, charitable, and social activities, including without limitation serving as a member of boards of directors (or other similar bodies) of entities not engaged in competition with the Company or any of its Affiliates and approved by the Board (which approval shall not be unreasonably withheld), in each case, so long as such activities do not interfere with the Executive's performance and obligations hereunder. (e) At the Executive's discretion and consistent with the business interests of the Company, the headquarters of the Company may be relocated from Middlebury, CT to the Washington, DC or Arlington, VA metropolitan areas, subject to the approval of the Board, which approval shall not be unreasonably withheld. 4. Compensation and Benefits. As compensation for all services performed by the Executive under and during the term hereof and subject to performance of the Executive's duties and obligations to the Company and its Affiliates, pursuant to this Agreement or otherwise: (a) Base Salary. During the term hereof, the Company shall pay the Executive a base salary at the rate of Five Hundred Twenty Five Thousand Dollars ($525,000.00) per annum, payable in accordance with the payroll practices of the Company for its executives and subject to increase from time to time by the Compensation Committee of the Board, in its sole and unreviewable discretion. The Board will review the Executive on or about June 1 of each year. Such base salary, as from time to time increased, is hereafter referred to as the "Base Salary". (b) Annual Bonus Compensation. During the term hereof, the Executive will be eligible to earn an annual bonus of up to 70% of Base Salary actually paid to the Executive (the "Target Bonus"), subject to the achievement of performance targets set by the Board, after consultation with the Executive, and subject further to the terms of the Company's management incentive plan (the "Bonus Plan"). The performance targets for each fiscal year will be set by the Board, after consultation with the Executive, within sixty (60) days of the beginning of said fiscal year. The amount of any Target Bonus awarded shall be determined by the Board based upon the achievement of said performance targets and the terms and conditions of the Bonus Plan. Notwithstanding the above, for calendar year 2005, the Executive's bonus will be based upon an EBITDA target to be determined jointly by the Executive Committee of the Board and the Executive, within thirty (30) days of the Executive's Employment Date, based upon the Company's current EBITDA forecasts and planned current period cost reductions; provided, -2- however, that the Executive is guaranteed a bonus in 2005 of no less than 50% of the Target Bonus, regardless of achievement of the determined EBITDA target. (c) Supplemental Bonus Compensation. During the term hereof, the Executive will be eligible to receive an additional, annual, supplemental bonus for performance materially in excess of annual targets. The decision whether to award a supplemental bonus and the amount of any such bonus shall be determined by the Compensation Committee of the Board in its sole and unreviewable discretion. (d) Stock Options. Subject to the approval of the Board, the Executive shall be granted options to purchase a total of 750,000 shares of common stock of the Company (the "Options"), subject to the terms and conditions set forth in any applicable award agreement and, in the 1997 Long-Term Incentive Plan and in any other applicable plan. The Options will be exercisable at the public trading price of the shares of the Company's common stock on the New York Stock Exchange on the date of the grant. The Options shall vest in three (3) equal installments on the first, second and third anniversaries of the Executive's Employment Date. Upon the occurrence of a Change of Control, the Options shall vest and become immediately exercisable. During the term hereof, the following provisions shall also apply: (i) If Kohlberg Affiliates exercise their right to convert the Convertible Preferred Stock of the Company held by them into common stock of the Company, the Company will grant to the Executive additional options to purchase common stock equal to 5% of the number of new common shares issued in connection with such conversion. These additional options will be exercisable at the conversion price of the Convertible Preferred Stock (equal to $6.00 per share), or, if the public trading price of the common stock of the Company on the New York Stock Exchange at the time of such grant is different from the conversion price, whether higher or lower, then at the public trading price of the common stock. In addition, if Kohlberg Affiliates purchase additional newly-issued shares of the Company's common stock, the Company will grant to the Executive additional options to purchase common stock equal to 5% of the number of shares purchased by Kohlberg Affiliates (up to a maximum Kohlberg purchase value of $25 million) with such options exercisable at the per share price paid by Kohlberg Affiliates in connection with such transactions, or, if greater, at the public trading price of the common stock of the Company on the date of the grant. Any options issued pursuant to this Section 4(d)(i) shall be subject to the terms and conditions set forth in any applicable award agreement (which shall be substantially similar to the Options award agreement) and incentive or stock option plan, and shall vest in three (3) equal installments on the first, second and third anniversaries of the Executive's execution of any applicable award agreement(s). (ii) Except as specifically provided in Section 4(d)(i) above, nothing herein shall prohibit or restrict the Company from taking any corporate action or engaging in any corporate transaction of any kind, including, without limitation, the issuance and sale of additional shares of capital stock of the Company, any merger, consolidation, liquidation or sale of assets, or create in the Executive any rights to acquire -3- or receive additional shares of capital stock of the Company or otherwise be protected against dilution. (e) Vacations. During the term hereof, the Executive shall be entitled to four (4) weeks of vacation per annum, to be taken at such times and intervals as shall be determined by the Executive, subject to the reasonable business needs of the Company. The Executive shall be entitled to cash compensation for vacation time not taken during the term hereof only to the extent approved by the Board or its designee in writing. (f) Other Benefits. During the term hereof and subject to any contribution therefor generally required of employees of the Company, the Executive shall be entitled to participate in any and all employee benefit plans from time to time in effect for employees of the Company generally, except to the extent such plans are in a category of benefit otherwise provided to the Executive. Such participation shall be subject to (i) the terms of the applicable plan documents, (ii) generally applicable Company policies and (iii) the discretion of the Board or any administrative or other committee provided for in or contemplated by such plan. The Company may alter, modify, add to or delete its employee benefit plans at any time as it, in its sole judgment, determines to be appropriate, without recourse by the Executive; provided, however, that any such alteration, modification, addition, or deletion applies to the Company's executive officers or employees generally. (g) Life Insurance. During the term hereof, the Company will pay a portion of the premium on the Executive's existing split-dollar life insurance policy with the annual Company contribution equal to 1.5% of the Executive's annual total cash compensation (Base Salary and bonuses) for every 1% of such annual total cash compensation (Base Salary and bonuses) contributed by the Executive, up to a maximum annual Company contribution equal to 9% of the Executive's total annual cash compensation (Base Salary and bonuses). (h) Automobile. During the term hereof, the Company will provide the Executive with an automobile at the Company's expense, or pay the Executive an automobile allowance, in either case not to exceed One Thousand Two Hundred Fifty Dollars ($1,250.00) per month. (i) Club Membership. During the term hereof, the Company will pay dues for the Executive's membership in a country club of his choosing not to exceed Ten Thousand Dollars ($10,000.00) per year. (j) Business Expenses. The Company shall pay or reimburse the Executive for reasonable, customary and necessary business expenses incurred or paid by the Executive in the performance of his duties and responsibilities hereunder, subject to such reasonable substantiation and documentation as may be specified by the Board or Company policy from time to time. 5. Termination of Employment and Severance Benefits. The Executive's employment hereunder shall terminate under the following circumstances: -4- (a) Death. In the event of the Executive's death during the term hereof, the Company shall pay to the Executive's designated beneficiary or, if no beneficiary has been designated by the Executive, to his estate, (i) any earned and unpaid Base Salary through the date of his death; (ii) a portion of his Target Bonus for the fiscal year in which such termination occurs, prorated through the date of death based on the good faith estimate of the Board of the actual Target Bonus that would have been payable to the Executive for such fiscal year (assuming the Executive had remained employed by the Company through the end of such fiscal year); and (iii) reimbursement for expenses accrued and payable under Section 4 hereof through the date of death. (b) Disability. (i) The Company may terminate the Executive's employment hereunder, upon written notice to the Executive, in the event that, in the good faith judgment of the Company, the Executive becomes disabled during his employment hereunder through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of his duties and responsibilities hereunder for one hundred twenty (120) days during any period of three hundred and sixty-five (365) consecutive calendar days. The Board may designate another employee to act in the Executive's place during any period of the Executive's disability. (ii) If any question shall arise as to whether during any period the Executive is disabled through any illness, injury, accident or condition of either a physical or psychological nature so as to be unable to perform substantially all of his duties and responsibilities hereunder, the Executive may, and at the request of the Company shall, submit to a medical examination by a licensed physician with the appropriate specialty selected by the Company and practicing within a 100-mile radius of the city or township nearest to the Executive's place of residence to whom the Executive or his duly appointed guardian, if any, has no reasonable objection to determine whether the Executive is so disabled and such determination shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and the Executive shall fail to submit to such medical examination, the Company's determination of the issue shall be binding on the Executive. (iii) Upon the giving of notice of termination of the Executive's employment hereunder, the Company shall have no further obligation or liability to the Executive, other than (1) for Base Salary earned and unpaid through the date of termination; (2) a portion of his Target Bonus for the fiscal year in which such termination occurs, prorated through the date of such termination based on the good faith estimate of the Board of the actual Target Bonus that would have been payable to the Executive for such fiscal year (assuming the Executive had remained employed by the Company through the end of such fiscal year); and (3) reimbursement for expenses accrued and payable under Section 4 hereof through the date of termination. -5- (c) By the Company for Cause. The Company may terminate the Executive's employment hereunder for Cause at any time upon written notice to the Executive setting forth in reasonable detail the nature or such Cause. The following, as determined by the Board in its reasonable judgment, shall constitute Cause for termination: (i) Willful failure to perform, or gross negligence in the performance of, the Executive's duties and responsibilities to the Company and its Affiliates; or (ii) Material breach by the Executive of any provision of this Agreement; or (iii) Commission of a material act of fraud, embezzlement or other material dishonesty; or (iv) Conviction of, or plea of nolo contendere to, a felony or other crime involving moral turpitude. In the event that any of the foregoing events or conditions under clauses (i) or (ii) above is reasonably capable of being cured, the Company shall provide written notice to the Executive describing the nature of such event or condition, and the Executive shall, thereafter, have ten (10) business days from receipt of such notice to cure such event or condition. Upon the giving of notice of termination of the Executive's employment hereunder for Cause, the Company shall have no further obligation or liability to the Executive, other than for Base Salary earned and unpaid through the date of termination and reimbursement for expenses accrued and payable under Section 4 hereof through the date of termination. (d) By the Company without Cause. The Company may terminate the Executive's employment hereunder without Cause at any time upon written notice to the Executive. In the event of such termination, and provided that no benefits are payable to the Executive under a separate severance agreement or an executive severance plan as a result of such termination, the Company shall provide the Executive with the following severance benefits: (i) If the Company terminates the Executive without Cause on or before May 31, 2006, the Company shall continue to pay the Executive his Base Salary at the rate in effect on the date of termination, and the health, dental and life benefits under Section 4(f) hereof to which the Executive is then entitled (provided that the plan terms permit and provided further that the Executive makes a timely COBRA election), for a period of twelve (12) months from the date of termination; or (ii) If the Company terminates the Executive without Cause after May 31, 2006, the Company shall continue to pay the Executive his Base Salary at the rate in effect on the date of termination, and the health, dental and life benefits under Section 4(f) hereof to which the Executive is then entitled (provided that the plan terms permit and provided further that the Executive makes a timely COBRA election), for a period of eighteen (18) months from the date of termination. -6- (iii) Notwithstanding anything in the foregoing to the contrary, if the Company terminates the Executive without cause ninety (90) or less days prior to the occurrence of a Change of Control, such termination shall be deemed to be as a result of a Change in Control and the provisions of Section 5(f) hereof shall apply with respect to the Executive's compensation. -7- (e) By the Executive. (i) Other than in connection with a termination for "Good Reason," the Executive may terminate his employment hereunder at any time upon sixty (60) days' notice to the Company, unless such termination would violate any obligation of the Executive to the Company under a separate severance agreement. In the event of termination of the Executive pursuant to this Section 5(e), the Board may elect to waive the period of notice, or any portion thereof, and, if the Board so elects, the Company will pay the Executive his Base Salary for the notice period (or for any remaining portion of the period). The Company shall have no further obligation or liability to the Executive other than Base Salary for the notice period. (ii) The Executive may terminate his employment at any time for Good Reason by delivering written notice to the Company. For purposes of this Agreement, "Good Reason" shall mean and refer to (1) the assignment to the Executive of any duties inconsistent with the Executive's status as Chief Executive Officer and President of the Company or a material adverse change made by the Company to the Executive's duties, responsibilities, or working conditions such that such duties, responsibilities, or working conditions are inappropriate and not customary for a Chief Executive Officer and President of a similarly situated company; (2) any reduction by the Company of the Executive's Base Salary as in effect on the Executive's Employment Date, as the same may be increased from time to time, or a reduction of the potential annual Target Bonus expressed as a percent of base salary (subject to attainment of goals, Board discretion and other conditions of the applicable bonus program); (32) the taking of any action by the Company which materially adversely affects the Executive's participation in, or reduces the Executive's benefits originally provided under, the Company's benefit plans specified in this Agreement, except to the extent that such action applies to the Company's executive officers or employees generally; (3) a material breach of any material provision of this Agreement, which breach is not cured within ten (10) days of the Executive having provided the Board with notice of said breach; (4) a material breach by the Company of its material obligations hereunder, but only if the Executive provides written notice to the Company describing such breach in reasonable detail and the Company fails to cure such breach within ten (10) business days of receipt of such notice; or (543) any failure by a successor or assign of the Company to assume this Agreement. (A) If the Executive terminates his employment for Good Reason on or before May 31, 2006, the Company shall continue to pay the Executive his Base Salary at the rate in effect on the date of termination, and the health, dental and life benefits under Section 4(f) hereof to which the Executive is then entitled (provided that the plan terms permit and provided further that the Executive makes a timely COBRA election), for a period of twelve (12) months from the date of termination; or (B) If the Executive terminates his employment for Good Reason after May 31, 2006, the Company shall continue to pay the Executive his Base Salary at the rate in effect on the date of termination, and the health, dental and life benefits under Section 4(f) hereof to which the Executive is then entitled (provided that the plan terms permit and provided further that the Executive makes a timely COBRA election), for a period of eighteen (18) months from the date of termination. -8- (C) Notwithstanding anything in the foregoing to the contrary, if the Executive terminates his employment for Good Reason within ninety (90) or less days prior to the occurrence of a Change of Control, such termination shall be deemed to be as a result of a Change in Control and the provisions of Section 5(f) hereof shall apply with respect to the Executive's compensation. (f) By a Change of Control. If a Change of Control occurs and as a result of such Change in Control, or within ninety (90) days prior to, or six months following, such Change of Control, the Company terminates the Executive's employment without Cause or the Executive terminates his employment for Good Reason, then, in lieu of any payments to or on behalf of the Executive under Section 5(d) or 5(e) hereof, as may be applicable, the Company shall continue to pay the Executive's Base Salary at the rate in effect on the date of termination, and the health, dental and life benefits under Section 4(f) hereof to which the Executive is then entitled (provided that the plan terms permit and provided further that the Executive makes a timely COBRA election), for a period of twenty-four (24) months from the date of termination. 6. Effect of Termination. The provisions of this Section 6 shall apply to termination pursuant to Section 5 or otherwise. (a) Payment by the Company of any Base Salary, prorated Target Bonus, health, dental and life benefits under Section 4(f) hereof, and expenses that may be due to the Executive in each case under the applicable termination provision of Section 5 shall constitute the entire obligation of the Company to the Executive. In order to receive any severance benefits pursuant to Sections 5(d), 5(e), or 5(f), the Executive must execute a general release of claims in a form reasonably acceptable to the Company. With respect to any benefits continuation pursuant to Sections 5(d), 5(e) or 5(f), the Company shall contribute toward the premium cost of any such benefits continuation at the same rate that it contributes toward the premium cost for active employees. (b) Except as required by law or by the other applicable provisions of this Agreement, benefits shall terminate pursuant to the terms of the applicable benefit plans based on the date of termination of the Executive's employment without regard to any continuation of Base Salary or other payment to the Executive following such date of termination. (c) Provisions of this Agreement shall survive any termination if so provided herein or if necessary or desirable fully to accomplish the purposes of such provision, including without limitation the obligations of the Executive under Sections 7, 8 and 9 hereof. The obligation of the Company to make payments to or on behalf of the Executive under Sections 5(d), 5(e), or 5(f) hereof is expressly conditioned upon the Executive's continued full performance of obligations under Sections 7, 8 and 9 hereof. The Executive recognizes that, except as expressly provided in Sections 5(d), 5(e) or 5(f), no compensation is earned or due after termination of employment. -9- 7. Confidential Information. (a) The Executive acknowledges that the Company and its Affiliates continually develop Confidential Information, that the Executive may develop Confidential Information for the Company or its Affiliates and that the Executive may learn of Confidential Information during the course of employment. The Executive will comply with the policies and procedures of the Company and its Affiliates for protecting Confidential Information and shall never disclose to any Person (except as required by applicable law or for the proper performance of his duties and responsibilities to the Company and its Affiliates), or use for his own benefit or gain, any Confidential Information obtained by the Executive incident to his employment or other association with the Company or any of its Affiliates. The Executive understands that this restriction shall continue to apply after his employment terminates, regardless of the reason for such termination. (b) All documents, records, tapes and other media of every kind and description relating to the business, present or otherwise, of the Company or its Affiliates and any copies, in whole or in part, thereof (the "Documents"), whether or not prepared by the Executive, shall be the sole and exclusive property of the Company and its Affiliates. The Executive shall safeguard all Documents and shall surrender to the Company at the time his employment terminates, or at such earlier time or times as the Board or its designee may specify, all Documents then in the Executive's possession or control. 8. Assignment of Rights to Intellectual Property. The Executive shall promptly and fully disclose all Intellectual Property to the Company. The Executive hereby assigns and agrees to assign to the Company (or as otherwise directed by the Company) the Executive's full right, title and interest in and to all Intellectual Property. The Executive agrees to execute any and all applications for domestic and foreign patents, copyrights or other proprietary rights and to do such other acts (including without limitation the execution and delivery of instruments of further assurance or confirmation) requested by the Company to assign the Intellectual Property to the Company and to permit the Company to enforce any patents, copyrights or other proprietary rights to the Intellectual Property. The Executive will not charge the Company for time spent in complying with these obligations. All copyrightable works that the Executive creates shall be considered "work made for hire". 9. Restricted Activities. The Executive agrees that some restrictions on his activities during and after his employment are necessary to protect the goodwill, Confidential Information and other legitimate interests of the Company and its Affiliates: (a) While the Executive is employed by the Company and for a period of eighteen (18) months after his employment terminates (the "Non-Competition Period"), the Executive shall not, directly or indirectly, whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, compete with the Company or any of its Affiliates or undertake any planning for any business competitive with the Company or any of its Affiliates within the Restricted Territory. For purposes of this Agreement, "Restricted Territory" means (i) any state in the continental United States; (ii) Alaska and Hawaii; (iii) any other territory or possession of the United States; and (iv) any other country in which any Product has been -10- manufactured, provided, sold or offered or promoted for sale by the Company or any of its Affiliates at any time during the Employment Period or with respect to which the Company or any of its Affiliates has devoted substantial expense in anticipation of launching into such geographic area a portion of their business. Specifically, but without limiting the foregoing, the Executive agrees not to engage in any manner in any activity that is directly or indirectly competitive or potentially competitive with the business of the Company or any of its Affiliates as conducted or under consideration at any time during the Executive's employment. Restricted activity includes without limitation accepting employment or a consulting position with any Person who is, or at any time within twelve (12) months prior to termination of the Executive's employment has been, a customer of the Company or any of its Affiliates. For the purposes of this Section 9, the business of the Company and its Affiliates shall include all Products and the Executive's undertaking shall encompass all items, products and services that may be used in substitution for Products. (b) The Executive agrees that, during his employment with the Company, he will not undertake any outside activity, whether or not competitive with the business of the Company or its Affiliates, that could reasonably give rise to a conflict of interest or otherwise interfere with his duties and obligations to the Company or any of its Affiliates. (c) The Executive further agrees that while he is employed by the Company and during the Non-Competition Period, the Executive will not hire or attempt to hire any employee of the Company or any of its Affiliates, assist in such hiring by any Person, encourage any such employee to terminate his or her relationship with the Company or any of its Affiliates, or solicit or encourage any customer or vendor of the Company or any of its Affiliates to terminate its relationship with them, or, in the case of a customer, to conduct with any Person any business or activity which such customer conducts or could conduct with the Company or any of its Affiliates. 10. Enforcement of Covenants. The Executive acknowledges that he has carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed upon him pursuant to Sections 7, 8 and 9 hereof. The Executive agrees that said restraints are necessary for the reasonable and proper protection of the Company and its Affiliates and that each and everyone of the restraints is reasonable in respect to subject matter, length of time and geographic area. The Executive further acknowledges that, were he to breach any of the covenants contained in Sections 7, 8 or 9 hereof, the damage to the Company would be irreparable. The Executive therefore agrees that the Company, in addition to any other remedies available to it, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by the Executive of any of said covenants, without having to post bond. The parties further agree that, in the event that any provision of Section 7, 8 or 9 hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, such provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law. 11. Conflicting Agreements. The Executive hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder will not breach or -11- be in conflict with any other agreement to which the Executive is a party or is bound and that the Executive is not now subject to any covenants against competition or similar covenants that would affect the performance of his obligations hereunder. The Executive will not disclose to or use on behalf of the Company any proprietary information of a third party without such party's consent 12. Indemnification. The Company shall indemnify the Executive to the extent provided in its then current Articles or By-Laws. The Executive agrees to promptly notify the Company of any actual or threatened claim arising out of or as a result of his employment with the Company. 13. Definitions. Words or phrases which are initially capitalized or are within quotation marks shall have the meanings provided in this Section 13 and as provided elsewhere herein. For purposes of this Agreement, the following definitions apply: (a) "Affiliates" means all persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where control may be by either management authority or equity interest. (b) "Change in Control" means (i) a sale or transfer (in one or a series of related transactions) of 100% of the Company's outstanding capital stock to one Person or a group of Persons acting in concert; (ii) a sale or transfer (in one or a series of related transactions) of all or substantially all of the Company's operating subsidiaries or assets to one Person or a group of Persons acting in concert; or (iii) a transaction or transactions in which any Person or a group of Persons acting in concert acquires stock of the Company in an amount greater than that held by Kohlberg & Co. LLC ("Kohlberg") and Kohlberg Affiliates and in which Kohlberg relinquishes control of the Board. (c) "Confidential Information" means any and all information of the Company and its Affiliates that is not generally known by others with whom they compete or do business, or with whom they plan to compete or do business and any and all information, publicly known in whole or in part or not, which, if disclosed by the Company or its Affiliates would assist in competition against them. Confidential Information includes without limitation such information relating to (i) the development, research, testing, manufacturing, marketing and financial activities of the Company and its Affiliates, (ii) the Products, (iii) the costs, sources of supply, financial performance and strategic plans of the Company and its Affiliates, (iv) the identity and special needs of the customers of the Company and its Affiliates and (v) the people and organizations with whom the Company and its Affiliates have business relationships and those relationships. Confidential Information also includes comparable information that the Company or any of its Affiliates have received belonging to others or which was received by the Company or any of its Affiliates with any understanding that it would not be disclosed. Confidential Information will not include any information that has been published in a form generally available to the public prior to the date the Executive proposes to disclose or use such information. Confidential information will not be deemed to have been published merely because individual portions of the information have been separately published, but only if all material features comprising such information have been published in combination. -12- (d) "Intellectual Property" means inventions, discoveries, developments, methods, processes, compositions, works, concepts and ideas (whether or not patentable or copyrightable or constituting trade secrets) conceived, made, created, developed or reduced to practice by the Executive (whether alone or with others, whether or not during normal business hours or on or off Company premises) during the Executive's employment and during the period of six (6) months immediately following termination of his employment that relate to either the Products or any prospective activity of the Company or any of its Affiliates. (e) "Kohlberg Affiliates" means all persons and entities directly or indirectly controlling, controlled by or under common control with Kohlberg & Co. LLC, where control may be either management authority or equity interest. (f) "Person" means an individual, a corporation, an association, a partnership, an estate, a trust and any other entity or organization, other than the Company or any of its Affiliates. (g) "Products" mean all products planned, researched, developed, tested, manufactured, sold, licensed, leased or otherwise distributed or put into use by the Company or any of its Affiliates, together with all services provided or planned by the Company or any of its Affiliates, during the Executive's employment. 14. Withholding. All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law. 15. Assignment. Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this Agreement without the consent of the Executive in the event that the Company shall hereafter affect a reorganization, consolidate with, or merge into, any other Person or transfer all or substantially all of its properties or assets to any other Person. This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no succession had taken place. 16. Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 17. Waiver. No waiver of any provision hereof shall be effective unless made in -13- writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach' of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 18. Notices. Any and all notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be effective when delivered in person or deposited in the United States mail, postage prepaid, registered or certified, and addressed to the Executive at his last known address on the books of the Company or, in the case of the Company, at its principal place of business, attention of the Chief Financial Officer, or to such other address as either party may specify by notice to the other actually received. 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of the Executive's employment. -14- 20. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by an expressly authorized representative of the Company. 21. Headings. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement. 22. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 23. Governing Law. This is a Connecticut contract and shall be construed and enforced under and be governed in all respects by the laws of the State of Connecticut, without regard to the conflict of laws principles thereof. IN WITNESS WHEREOF. this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by the Executive, as of the date first above written. THE EXECUTIVE: KATY INDUSTRIES, INC. /s/ Anthony T. Castor III By: /s/ William F. Andrews - --------------------------- ----------------------------- Anthony T. Castor III Title: Chairman -------------------------- -15- EX-10.2 3 d64886_ex10-2.txt 4TH AMEND TO AMENDED AND RESTATED LOAN AGREE Exhibit 10.2 FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT THIS FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT ("Fourth Amendment") is made as of this 8th day of June, 2005, by and among FLEET CAPITAL CORPORATION ("Fleet"), a Rhode Island corporation with an office at One South Wacker Drive, Suite 3400, Chicago, Illinois 60606, individually as a Lender and as Agent ("Agent") for itself and any other financial institution which is or becomes a party hereto (each such financial institution, including Fleet, is referred to hereinafter individually as a "Lender" and collectively as the "Lenders"), the CANADIAN PARTICIPANTS party hereto, the U.K. PARTICIPANTS party hereto, FLEET CAPITAL GLOBAL FINANCE, INC., individually as a Lender and as Canadian Agent ("Canadian Agent"), BANK OF AMERICA, N.A., London branch (as successor-in-interest to Fleet National Bank, London branch, trading as FleetBoston Financial), individually as a Lender and as U.K. Agent ("U.K. Agent"), WELLS FARGO FOOTHILL, LLC, as Syndication Agent, LASALLE BANK NATIONAL ASSOCIATION, as Documentation Agent, the LENDERS, KATY INDUSTRIES, INC., a Delaware corporation, with its chief executive office and principal place of business at 765 Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762 ("Katy" or "U.S. Borrower"), WOODS INDUSTRIES (CANADA) INC., a Canadian corporation with its chief executive office and principal place of business at 375 Kennedy Road, Scarborough, Ontario M1K 2A3 ("Woods Canada" or "Canadian Borrower") and CEH LIMITED ("CEH" or "U.K. Borrower"), a private limited company incorporated under the laws of England and Wales and registered with Company No. 4992300 whose registered office is Cardrew Way, Redruth Cornwall, TR15 1ST, England. Katy, Woods Canada and CEH are sometimes hereinafter referred to individually as a "Borrower" and collectively as "Borrowers." W I T N E S S E T H: WHEREAS, Agent, Lenders, Canadian Participants, U.K. Participants, Canadian Agent, U.K. Agent and Borrowers entered into a certain Amended and Restated Loan Agreement dated as of April 20, 2004 as amended by a certain First Amendment to Amended and Restated Loan Agreement dated June 29, 2004 by and among Agents, Lenders and Borrowers, by a certain Second Amendment to Amended and Restated Loan and Security Agreement dated March 29, 2005 by and among Agent, Lenders and Borrowers and by a certain Third Amendment to Amended and Restated Loan and Security Agreement dated April 13, 2005 by and among Agent, Lenders and Borrowers (said Loan Agreement, as so amended, is hereinafter referred to as the "Loan Agreement"); and WHEREAS, Borrowers desire to amend and modify certain provisions of the Loan Agreement pursuant to the terms and conditions hereof; WHEREAS, subject to the terms and conditions hereof, Agent, Lenders, Canadian Participants, U.K. Participants, U.K. Agent and Canadian Agent are willing to so amend and modify the Loan Agreement; and NOW THEREFORE, in consideration of the premises, the mutual covenants and agreements herein contained, and any extension of credit heretofore, now or hereafter made by Agent and Lenders to Borrowers, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used herein without definition shall have the meanings given to them in the Loan Agreement. 2. Total Money Borrowed. Subsection 7.2.3 of the Loan Agreement is hereby deleted and the following is inserted in its stead: "7.2.3 Total Money Borrowed. Create, incur, assume, or suffer to exist, or permit any Subsidiary of Borrower to create, incur or suffer to exist, any Money Borrowed, except: (i) Obligations owing to Agent or any Lender under this Agreement or any of the other Loan Documents; (ii) Money Borrowed, including without limitation Subordinated Debt, existing on the date of this Agreement and listed on Exhibit 7.2.3; (iii) Permitted Purchase Money Borrowed; (iv) Guaranties of any Money Borrowed permitted hereunder; (v) Money Borrowed in respect of intercompany loans permitted under subsection 7.2.2(v), (vi) and (vii); (vi) Obligations to pay Rentals permitted by subsection 7.2.18; (vii) Second Lien Debt; (viii) unsecured Money Borrowed in connection with the financing of insurance premiums; provided that the aggregate amount of any such Money Borrowed does not exceed, at any point in time, $2,000,000; and (ix) Money Borrowed not included in paragraphs (1) through (viii) above which does not exceed at any time, in the aggregate, the sum of $500,000." 3. Condition Precedent. This Fourth Amendment shall become effective upon the execution and delivery of this Fourth Amendment by each of Borrowers, Agent and Majority Lenders. The date on which such condition precedent is satisfied shall be referred to as the "Fourth Amendment Effective Date." 4. Continuing Effect. Except as otherwise specifically set out herein, the provisions of the Loan Agreement shall remain in full force and effect. 5. Governing Law. This Fourth Amendment and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of 2 Illinois applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflicts of laws. 6. Counterparts. This Fourth Amendment may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. (Signature Page Follows) 3 (Signature Page to Fourth Amendment to Loan Agreement) IN WITNESS WHEREOF, this Fourth Amendment has been duly executed on the day and year specified at the beginning of this Fourth Amendment. KATY INDUSTRIES, INC. By: /s/ Amir Rosenthal ----------------------------------- Name: Amir Rosenthal Title: Vice President and CFO CEH LIMITED By: /s/ Christopher W. Anderson ---------------------------------- Name: Christopher W. Anderson Title: Director and By: /s/ Christopher Lacovara ---------------------------------- Name: Christopher Lacovara Title: Director WOODS INDUSTRIES (CANADA) INC. By: /s/ Amir Rosenthal ---------------------------------- Name: Amir Rosenthal Title: Secretary FLEET CAPITAL CORPORATION, as Agent and as a Lender By: /s/ Jason Riley ---------------------------------- Name: Jason Riley Title: Vice-President WELLS FARGO FOOTHILL LLC, as Syndication Agent and Lender By: /s/ Lan Wong ---------------------------------- Name: Lan Wong Title: Vice-President LASALLE BANK NATIONAL ASSOCIATION, as Documentation Agent and as a Lender By: ---------------------------------- Name: Title: UPS CAPITAL CORPORATION, as a Lender By: /s/ John P. Holloway --------------------------------------- Name: John P. Holloway Title: Director of Portfolio Management BANK OF AMERICA, N.A., London branch, as U.K. Agent and U.K. Lender By: --------------------------------------- Name: ---------------------------------- Title: ---------------------------------- FLEET CAPITAL GLOBAL FINANCE, INC., as Canadian Agent and Canadian Lender By: --------------------------------------- Name: ---------------------------------- Title: ---------------------------------- Accepted and Agreed to this 8th day of June, 2005. GUARANTORS: KKTY HOLDING COMPANY, L.L.C. By: /s/ Christopher W. Anderson ---------------------------------------- Name: Christopher W. Anderson Title: Authorized Manager AMERICAN GAGE & MACHINE CO. By: /s/ Amir Rosenthal ---------------------------------------- Name: Amir Rosenthal Title: Secretary CONTINENTAL COMMERCIAL PRODUCTS, LLC By: /s/ Amir Rosenthal ---------------------------------------- Name: Amir Rosenthal Title: Secretary PTR MACHINE CORP. By: /s/ Amir Rosenthal ---------------------------------------- Name: Amir Rosenthal Title: Secretary SAVANNAH ENERGY SYSTEMS COMPANY By: /s/ Amir Rosenthal ---------------------------------------- Name: Amir Rosenthal Title: Secretary WOODS INDUSTRIES, INC. By: /s/ Amir Rosenthal ---------------------------------------- Name: Amir Rosenthal Title: Secretary EX-10.3 4 d64886_ex10-3.txt 5TH AMEND TO AMENDED AND RESTATED LOAN AGREEMENT Exhibit 10.3 FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT THIS FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT ("Fifth Amendment") is made as of this 4th day of August, 2005, by and among FLEET CAPITAL CORPORATION ("Fleet"), a Rhode Island corporation with an office at One South Wacker Drive, Suite 3400, Chicago, Illinois 60606, individually as a Lender and as Agent ("Agent") for itself and any other financial institution which is or becomes a party hereto (each such financial institution, including Fleet, is referred to hereinafter individually as a "Lender" and collectively as the "Lenders"), the CANADIAN PARTICIPANTS party hereto, the U.K. PARTICIPANTS party hereto, FLEET CAPITAL GLOBAL FINANCE, INC., individually as a Lender and as Canadian Agent ("Canadian Agent"), BANK OF AMERICA, N.A., London branch (as successor-in-interest to Fleet National Bank, London branch, trading as FleetBoston Financial), individually as a Lender and as U.K. Agent ("U.K. Agent"), WELLS FARGO FOOTHILL, LLC, as Syndication Agent, LASALLE BANK NATIONAL ASSOCIATION, as Documentation Agent, the LENDERS, KATY INDUSTRIES, INC., a Delaware corporation, with its chief executive office and principal place of business at 765 Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762 ("Katy" or "U.S. Borrower"), WOODS INDUSTRIES (CANADA) INC., a Canadian corporation with its chief executive office and principal place of business at 375 Kennedy Road, Scarborough, Ontario M1K 2A3 ("Woods Canada" or "Canadian Borrower") and CEH LIMITED ("CEH" or "U.K. Borrower"), a private limited company incorporated under the laws of England and Wales and registered with Company No. 4992300 whose registered office is Cardrew Way, Redruth Cornwall, TR15 1ST, England. Katy, Woods Canada and CEH are sometimes hereinafter referred to individually as a "Borrower" and collectively as "Borrowers." W I T N E S S E T H: WHEREAS, Agent, Lenders, Canadian Participants, U.K. Participants, Canadian Agent, U.K. Agent and Borrowers entered into a certain Amended and Restated Loan Agreement dated as of April 20, 2004, as amended by a certain First Amendment to Amended and Restated Loan Agreement dated June 29, 2004, by and among Agents, Lenders and Borrowers, by a certain Second Amendment to Amended and Restated Loan and Security Agreement dated March 29, 2005, by and among Agent, Lenders and Borrowers, by a certain Third Amendment to Amended and Restated Loan and Security Agreement dated April 13, 2005, by and among Agent, Lenders and Borrowers and by a certain Fourth Amendment to Amended and Restated Loan and Security Agreement dated June 8, 2005 (said Loan Agreement, as so amended, is hereinafter referred to as the "Loan Agreement"); and WHEREAS, Borrowers desire to amend and modify certain provisions of the Loan Agreement pursuant to the terms and conditions hereof; WHEREAS, subject to the terms and conditions hereof, Agent, Lenders, Canadian Participants, U.K. Participants, U.K. Agent and Canadian Agent are willing to so amend and modify the Loan Agreement; and NOW THEREFORE, in consideration of the premises, the mutual covenants and agreements herein contained, and any extension of credit heretofore, now or hereafter made by Agent and Lenders to Borrowers, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms used herein without definition shall have the meanings given to them in the Loan Agreement. 2. WIN Acquisition. Agent and Majority Lenders consent to the acquisition (the "WIN Acquisition") by a Borrower of all or substantially all of the assets of Washington International Non-Wovens, LLC ("WIN") so long as (x) after giving effect to the consummation of such acquisition no Default or Event of Default will exist and be continuing, (y) such acquisition is consummated pursuant to a purchase and sale or similar agreement and related documents, which true and correct copies of which have been delivered to Agent and its counsel, and which are reasonably satisfactory to Agent and its counsel, (z) the total cash purchase price payable by Borrowers with respect to such acquisition, plus assumed Indebtedness does not exceed $2,350,000, plus related usual and customary acquisition expenses, (aa) Borrowers assume no Indebtedness in connection with such acquisition other than total accounts payable and accrued expenses, in each case not aged more than as provided by good business practice and industry custom and Money Borrowed to the extent permitted by clause (ix) of Subsection 7.2.3 and (bb) if Katy creates a new Subsidiary to effect such acquisition, such Subsidiary shall execute a joinder agreement in form and substance reasonably acceptable to Agent whereby such Subsidiary shall become an additional Borrower hereunder. 3. Total Money Borrowed. Subsection 7.2.3 of the Loan Agreement is hereby deleted and the following is inserted in its stead: "7.2.3 Total Money Borrowed. Create, incur, assume, or suffer to exist, or permit any Subsidiary of Borrower to create, incur or suffer to exist, any Money Borrowed, except: (i) Obligations owing to Agent or any Lender under this Agreement or any of the other Loan Documents; (ii) Money Borrowed, including without limitation Subordinated Debt, existing on the date of this Agreement and listed on Exhibit 7.2.3; (iii) Permitted Purchase Money Borrowed; (iv) Guaranties of any Money Borrowed permitted hereunder; (v) Money Borrowed in respect of intercompany loans permitted under subsection 7.2.2(v), (vi) and (vii); (vi) Obligations to pay Rentals permitted by subsection 7.2.18; (vii) Second Lien Debt; 2 (viii) unsecured Money Borrowed in connection with the financing of insurance premiums; provided that the aggregate amount of any such Money Borrowed does not exceed, at any point in time, $2,000,000; (ix) unsecured Money Borrowed owed from WIN to Farmers and Merchants Bank assumed by CCP in connection with the consummation of the WIN Acquisition (as defined in Section 2 of the Fifth Amendment) so long as the aggregate principal amount of such Money Borrowed does not exceed $620,000; and (x) Money Borrowed not included in paragraphs (i) through (ix) above, which does not exceed at any time, in the aggregate, the greater of (x) $150,000 and (y) the excess, if any, of $500,000 over the amount of unsecured Money Borrower owing from CCP to Farmers and Merchants Bank permitted to be incurred by clause (ix) above." 4. Condition Precedent. This Fifth Amendment shall become effective upon the execution and delivery of this Fifth Amendment by each of Borrowers, Agent and Majority Lenders. The date on which such condition precedent is satisfied shall be referred to as the "Fifth Amendment Effective Date." 5. Continuing Effect. Except as otherwise specifically set out herein, the provisions of the Loan Agreement shall remain in full force and effect. 6. Governing Law. This Fifth Amendment and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflicts of laws. 7. Counterparts. This Fifth Amendment may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. (Signature Page Follows) 3 (Signature Page to Fifth Amendment to Loan Agreement) IN WITNESS WHEREOF, this Fifth Amendment has been duly executed on the day and year specified at the beginning of this Fifth Amendment. KATY INDUSTRIES, INC. By: /s/ Amir Rosenthal ------------------------------------ Name: Amir Rosenthal Title: Vice President and CFO CEH LIMITED By: /s/ Anthony T. Castor III ------------------------------------ Name: Anthony T. Castor III Title: Director and By: /s/ Christopher W. Anderson ------------------------------------ Name: Christopher W. Anderson Title: Director WOODS INDUSTRIES (CANADA) INC. By: /s/ Amir Rosenthal ------------------------------------ Name: Amir Rosenthal Title: Secretary FLEET CAPITAL CORPORATION, as Agent and as a Lender By: /s/ Jason Riley ------------------------------------ Name: Jason Riley Title: Vice-President WELLS FARGO FOOTHILL LLC, as Syndication Agent and Lender By: /s/ Lan Wong ------------------------------------ Name: Lan Wong Title: Vice-President LASALLE BANK NATIONAL ASSOCIATION, as Documentation Agent and as a Lender By: /s/ Mark Mital ------------------------------------ Name: Mark Mital Title: First Vice-President UPS CAPITAL CORPORATION, as a Lender By: /s/ John P. Holloway ---------------------------------------- Name: John P. Holloway Title: Director of Portfolio Operations BANK OF AMERICA, N.A., London branch, as U.K. Agent and U.K. Lender By: /s/ Carmen Bernardis ------------------------------------ Name: Carmen Bernardis Title: Senior Vice-President FLEET CAPITAL GLOBAL FINANCE, INC., as Canadian Agent and Canadian Lender By: /s/ Mark Adkins ------------------------------------ Name: Mark Adkins Title: Vice-President Accepted and Agreed to this 4th day of August, 2005. GUARANTORS: KKTY HOLDING COMPANY, L.L.C. By: /s/ Christopher W. Anderson --------------------------------------- Name: Christopher W. Anderson Title: Authorized Manager AMERICAN GAGE & MACHINE CO. By: /s/ Amir Rosenthal --------------------------------------- Name: Amir Rosenthal Title: Secretary CONTINENTAL COMMERCIAL PRODUCTS, LLC By: /s/ Amir Rosenthal --------------------------------------- Name: Amir Rosenthal Title: Secretary PTR MACHINE CORP. By: /s/ Amir Rosenthal --------------------------------------- Name: Amir Rosenthal Title: Secretary SAVANNAH ENERGY SYSTEMS COMPANY By: /s/ Amir Rosenthal --------------------------------------- Name: Amir Rosenthal Title: Secretary WOODS INDUSTRIES, INC. By: /s/ Amir Rosenthal --------------------------------------- Name: Amir Rosenthal Title: Secretary EX-10.4 5 d64886_ex10-4.txt 2005 CHIEF EXECUTIVE OFFICERS PLAN Exhibit 10.4 - -------------------------------------------------------------------------------- KATY INDUSTRIES, INC. 2005 CHIEF EXECUTIVE OFFICER'S PLAN - -------------------------------------------------------------------------------- ARTICLE I DEFINITIONS Terms used herein and not otherwise defined shall have the meaning set forth in the Agreement. 1.1 "Administrator" means the Committee. 1.2 "Affiliate" means any subsidiary or parent corporation (within the meaning of Section 424 of the Code) of the Company. 1.3 "Agreement" means a written agreement (including any amendment or supplement thereto) between the Company and the Participant specifying the terms and conditions of an Option granted to such Participant. 1.4 "Board" means the Board of Directors of the Company. 1.5 "Cause" means (i) Participant's willful and repeated failure to comply with the reasonable and lawful directives of the Board that is not cured within ten (10) days of notice of such failure being provided by the Company; (ii) any criminal act or act of dishonesty, disloyalty, negligence, misconduct or moral turpitude by Participant that is materially injurious to the property, operations, business or reputation of the Company or any Subsidiary, or (iii) Participant's material breach of any confidentiality or non-compete obligation, with the Company or any Subsidiary. A termination for "Cause" shall be determined by the Board. 1.6 "Change in Control" of the Company means, and shall be deemed to have occurred upon, any of the following events: (a) a sale of 100% of the Company's outstanding capital stock; (b) a sale of all or substantially all of the Company's operating subsidiaries or assets; or (c) a transaction or transactions in which any third party acquires stock of the Company in an amount greater than that held by Kohlberg & Co., L.L.C. ("Kohlberg") and in which Kohlberg relinquishes control of the Board; 1.7 "Code" means the Internal Revenue Code of 1986, and any amendments thereto. 1.8 "Committee" means the Compensation Committee of the Board. 1.9 "Common Stock" means the common stock of the Company. 1.10 "Company" means Katy Industries, Inc. 1.11 "Employment Agreement" means the Employment Agreement between the Company and the Participant dated as of June 1, 2005. 1.12 "Option" means a stock option that entitles the holder to purchase from the Company a stated number of shares of Common Stock at the price set forth in an Agreement. 1.13 "Participant" means Anthony T. Castor III. 1.14 "Plan" means the Katy Industries, Inc. 2005 Chief Executive Officer's Plan. 1.15 "Termination Event" shall have the meaning set forth in Article VII. ARTICLE II PURPOSES The Plan is intended to induce the Participant to become an employee of the Company by enabling the Participant to participate in the future success of the Company and its Affiliates and to associate his interests with those of the Company and its shareholders. The proceeds received by the Company from the sale of Common Stock pursuant to this Plan shall be used for general corporate purposes. ARTICLE III ADMINISTRATION The Plan shall be administered by the Administrator. Notwithstanding any such conditions, the Administrator may, in its discretion, accelerate the time at which any Option may be exercised. In addition, the Administrator shall have complete authority to interpret all provisions of this Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator. Any decision made, or action taken, by the Administrator or in connection with the administration of this Plan shall be final and conclusive. Neither the Administrator nor any member of the Committee shall be liable for any act done in good faith with respect to this Plan or any Option or Stock Award. All expenses of administering this Plan shall be borne by the Company. ARTICLE IV STOCK SUBJECT TO PLAN 4.1 Shares Issued. Upon the award of shares of Common Stock pursuant to a Stock Award, the Company may issue shares of Common Stock from its authorized but unissued Common Stock. Upon the exercise of any Option the Company may deliver to the Participant 2 (or the Participant's broker if the Participant so directs), shares of Common Stock from its authorized but unissued Common Stock. 4.2 Aggregate Limit. The maximum aggregate number of shares of Common Stock that may be issued under this Plan pursuant to the exercise of Options is 1,500,000 shares. The maximum aggregate number of shares that may be issued under this Plan shall be subject to adjustment as provided in Article VI. ARTICLE V OPTIONS 5.1 Award. The Administrator will specify the number of shares of Common Stock to be covered by an award of an Option. The Administrator shall also determine the vesting schedule for such Options, which may be based on performance measures deemed appropriate by the Administrator. 5.2 Option Price. The price per share for Common Stock purchased on the exercise of an Option shall be determined by the Administrator on the date of grant. 5.3 Payment. Unless otherwise provided by the Agreement, payment of the Option price shall be made in cash or a cash equivalent acceptable to the Administrator. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of Common Stock to the Company that the Participant has held for at least six months. If Common Stock is used to pay all or part of the Option price, the sum of the cash and cash equivalent and the fair market value (determined as of the day preceding the date of exercise) of the shares surrendered must not be less than the Option price of the shares for which the Option is being exercised. ARTICLE VI ADJUSTMENT UPON CHANGE IN COMMON STOCK The maximum number of shares as to which Options may be granted under this Plan, the terms of outstanding Options, and the per individual limitations on the number of shares or for which Options may be granted, shall be adjusted as the Committee shall determine to be equitably required in the event that (a) the Company (i) effects one or more stock dividends, stock split-ups, subdivisions or consolidations of shares or (ii) engages in a transaction to which Section 424 of the Code applies or (b) there occurs any other event which, in the judgment of the Committee necessitates such action. Any determination made under this Article VI by the Committee shall be final and conclusive. ARTICLE VII EFFECT OF CHANGE OF CONTROL In the event of a Change in Control, unless otherwise specifically prohibited by applicable laws, or by the rules and regulations of any governing agency or national securities 3 exchange, any outstanding Options shall become immediately exercisable, and shall remain exercisable throughout their entire term. The Common Stock issuable upon exercise of the Option shall be subject to adjustment in accordance with Article VI hereof in the event of any changes affecting the Common Stock as a result of such Change in Control. Notwithstanding anything to the contrary set forth in the Agreement, the provisions of this Article VII shall not apply to the Participant if, prior to the date on which a Change in Control takes place (i) the Option ceases to vest for any reason, or (ii) the Participant ceases to serve in his current position with the Company. Otherwise, the provisions of this Article VII shall apply to Participant. ARTICLE VIII AMENDMENT The Board may amend or terminate this Plan from time to time; provided, however, that no amendment may become effective until shareholder approval is obtained if (i) the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan, (ii) the amendment changes the class of individuals eligible to become Participants or (iii) the amendment materially increases the benefits that may be provided under the Plan. No amendment shall, without the Participant's consent, adversely affect any rights of such Participant under any Option outstanding at the time such amendment is made. ARTICLE IX GENERAL PROVISIONS 9.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate Participant's employment at any time, nor confer upon Participant any right to continue in the employ of the Company. For purposes of this Plan, a transfer of Participant's employment between the Company and a Subsidiary, or between Subsidiaries, shall not be deemed to be a termination of employment. Upon such a transfer, the Committee may make such adjustments to outstanding Awards as it deems appropriate to reflect the changed reporting relationships. 9.2 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan. 9.3 Share Withholding. With respect to withholding required upon the exercise of Options or upon any other taxable event arising as a result of Awards granted hereunder, Participant may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All such elections shall be irrevocable, made in writing, 4 signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate. 9.4 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 9.5 Securities Law and Tax Law Compliance. With respect to insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act and Code Section 162(m). To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 9.6 Governing Law. To the extent not pre-empted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance and governed by the laws of the State of Delaware. 5 EX-31.1 6 d64886_ex31-1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Anthony T. Castor III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Katy Industries, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 15, 2005 By: By /s/ Anthony T. Castor III -------------------------- Anthony T. Castor III President and Chief Executive Officer 45 EX-31.2 7 d64886_ex31-2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Amir Rosenthal, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Katy Industries, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 15, 2005 By: /s/ Amir Rosenthal ------------------ Amir Rosenthal Chief Financial Officer 46 EX-32.1 8 d64886_ex32-1.txt SECTION 1350 CERTIFICATIONS Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Katy Industries, Inc. (the "Company") for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anthony T. Castor III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By /s/ Anthony T. Castor III --------------------------- Anthony T. Castor III President and Chief Executive Officer August 15, 2005 A signed original of this written statement or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to Katy Industries, Inc. and will be retained by Katy Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 47 EX-32.2 9 d64886_ex32-2.txt SECTION 1350 CERTIFICATIONS Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Katy Industries, Inc. (the "Company") for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Amir Rosenthal, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Amir Rosenthal - ------------------ Amir Rosenthal Chief Financial Officer August 15, 2005 A signed original of this written statement or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to Katy Industries, Inc. and will be retained by Katy Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 48 -----END PRIVACY-ENHANCED MESSAGE-----