form8-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________
FORM
8-K
_______________
CURRENT
REPORT
Pursuant
to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date
of
Report (Date of earliest event reported): August 10,
2007
Katy
Industries, Inc.
(Exact
name of registrant as specified in its charter)
Delaware 001-05558 75--1277589
(State
or
other
jurisdiction (Commission
File
Number) (IRS
Employer
of
incorporation) Identification
No.)
2461
South Clark Street, Suite 630
Arlington,
Virginia 22202
(Address
of principal executive offices) (Zip Code)
(703)
236-4300
(Registrant’s
telephone number, including area code)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
[ ] Written
communications pursuant to Rule 425 under the Securities Act
[ ] Soliciting
material pursuant to Rule 14a-12 under the Exchange Act
[ ] Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
[ ] Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
Item
4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit
Report or Completed Interim Review.
On
August
6, 2007, the Audit Committee of the Board of Directors, or the Audit Committee,
of Katy Industries, Inc. (the “Company”), in consultation with management,
concluded that our following previously issued financial statements should
no
longer be relied upon and should be restated based on identified errors: 1)
the
consolidated financial statements as of December 31, 2006 and 2005 and for
the
years then ended contained in the Company’s Annual Report on Form 10-K; and 2)
the consolidated financial statements for the quarters ending March 31, 2006
and
2007, June 30, 2006, and September 30, 2006 contained in the Company’s
corresponding Form 10-Qs. The Company intends to file its restated
Annual Report on Form 10-K as of December 31, 2006 and its Quarterly Report
on
Form 10-Q as of March 31, 2007 as soon as practical. In addition, the
unaudited quarterly financial information included in the Company’s Annual
Report on Form 10-K as of December 31, 2006 will be updated as the Annual Report
on Form 10-K is amended, and the unaudited quarterly financial information
included in the Company’s Quarterly Reports on Form 10-Q as of March 31, 2006,
June 30, 2006 and September 30, 2006 will be updated as the Company files its
corresponding Quarterly Reports for 2007.
In
the
second quarter of 2007, management of the Company noted discrepancies in its
physical raw material inventory levels and the corresponding perpetual inventory
records. These discrepancies led the Company to initiate an internal
investigation which resulted in the identification of errors in the physical
inventory count of raw material used for valuation purposes at the Company’s
wholly-owned subsidiary, Continental Commercial Products, LLC
(“CCP”). The Company has concluded these errors are isolated to
fiscal 2005, fiscal 2006 and the three months ended March 31, 2007.
When
management became aware of the issues referenced above, the Company, including
the Audit Committee, initiated an investigation of the
matter. Management has discussed the investigation, the resolution of
the problems and the strengthening of internal controls with the Audit
Committee.
Based
on
the results of the investigation, management and the Audit Committee determined
that (a) the errors were caused by intentional acts of a CCP employee who
improperly accounted for physical quantity of raw material inventory and who
has
since been dismissed; (b) the scope of the errors were contained in fiscal
2005,
fiscal 2006 and the three months ended March 31, 2007; and (c) the errors were
concentrated in the area discussed above.
The
Company’s management and the Audit Committee have discussed this matter with
PricewaterhouseCoopers LLP, the Company’s independent registered public
accounting firm.
Impact
of Error on Previously filed Financial Statements
The
impact of the raw material inventory error on loss from continuing operations
and net loss is approximately ($0.2) million and ($0.6) million for the years
ended December 31, 2005 and 2006, respectively. The impact of the raw
material inventory error on loss from continuing operations and net loss is
approximately ($0.2) million for the three months ended March 31, 2006, ($0.2)
million and ($0.4) million for the three and six months ended June 30, 2006,
($0.2) million and ($0.6) million for the three and nine months ended September
30, 2006, and $0.1 million for the three months ended March 31,
2007. In addition, as part of the restatement, the Company will be
recording additional items, certain of which were previously identified and
determined to be immaterial. The impact of these additional items on
net loss is approximately ($0.4) million and $0.2 million for the years ended
December 31, 2005 and 2006, respectively, and will be allocated between loss
from continuing operations and loss from discontinued operations as
appropriate.
Internal
Control Considerations
In
connection with the Company's evaluation of the restatement described above,
management has concluded that the restatement is the result of previously
unidentified material weaknesses in the Company's internal control over
financial reporting. A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements will not be prevented or detected. Management
has also determined that the Company's disclosure controls and procedures were
ineffective as of December 31, 2005 and 2006, March 31, 2006 and 2007, June
30,
2006, and September 30, 2006 due to the material weaknesses described
below. In addition the Company expects to report that its disclosure
controls and procedures were ineffective as of June 30, 2007.
As
discussed above, these control deficiencies will result in the restatement
of
the Company's consolidated financial statements for December 31, 2005 and 2006,
March 31, 2006 and 2007, June 30, 2006, and September 30,
2006. Additionally, these control deficiencies could result in
further misstatements to the Company's financial statements, which would result
in a material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management determined that these control deficiencies represented material
weaknesses in internal control over financial reporting.
Management
has not yet finalized its assessment of internal controls over financial
reporting related to the matters described above, and, accordingly, the Company
may identify additional material weaknesses. The Company believes the
above errors resulted from the following material weaknesses in internal control
over financial reporting:
|
·
|
The
Company did not maintain a proper level of segregation of duties,
specifically the verification process of physical raw material inventory
on hand and the operational handling of this inventory;
and
|
|
·
|
The
Company did not maintain sufficient oversight of the raw material
inventory counting and reconciliation
process.
|
The
Company has undertaken the following steps during the second and third quarters
of 2007 to address the above material weaknesses within our internal controls
over physical counting of inventory:
|
·
|
Completed
a full resin physical inventory by independent employees not involved
in
the operational handling and reporting of resin
inventory;
|
|
·
|
Completed
a full comparison of the physical resin inventory to the general
ledger
and recorded the appropriate
adjustment;
|
|
·
|
Verified
the automated measurement systems with third parties as well as the
physical observation of the resin inventory by independent
employees;
|
|
·
|
Initiated
weekly physical counts of resin inventory and completed a comparison
to
the perpetual inventory system for any differences with any significant
differences investigated by management. We will continue to
perform these weekly physical counts until management believes the
process
and related controls are operating as designed;
and
|
|
·
|
Reviewed
and adjusted, as necessary, procedures and personnel involved in
the
physical inventory counting of
resin.
|
Management
and the Board of Directors are committed to the remediation and continued
improvement of our internal control over financial reporting associated with
inventory. We have dedicated and will continue to dedicate
significant resources to this remediation effort and believe that we have made
significant progress in reestablishing effective internal controls over
financial reporting associated with the above raw material inventory counting
process. The process of designing and implementing effective internal
controls is a continuous effort that requires us to anticipate and react to
changes in our business and the economic and regulatory environments and to
continue to expend significant resources to maintain a system of internal
controls that is adequate to satisfy our reporting obligations as a public
company. We have started to implement remedial measures for the
material weaknesses we have identified; however, we have very limited operating
experience with the remedial measures we have implemented to date and the
measures we have taken to date or any future measures we may take may not
adequately remedy all of the material weaknesses in internal control we have
identified. Despite our efforts, the measures we implement may not
enable us to maintain adequate controls over our financial and reporting
processes in the future.
Additional
material weaknesses in our internal controls could be discovered in the
future. Any failure to remedy the deficiencies identified by
management, any failure to implement required new or improved controls and
the
discovery of unidentified deficiencies could harm our operating results, cause
us to fail to meet our reporting obligations, subject us to increased risk
of
errors and fraud related to our financial statements or result in material
misstatements in, and untimely filing of, our financial
statements. Any such failure also could adversely affect the results
of the periodic management evaluations and annual auditor attestation reports
regarding the effectiveness of our “internal control over financial reporting”
that will become required under Section 404 of the Sarbanes-Oxley Act of
2002. The existence of a material weakness could result in errors in
our financial statements that could warrant an additional restatement of our
existing financial statements or could cause a restatement of future presented
financial statements. The need to restate our financial statements
could cause us to fail to meet our reporting obligations. Inadequate
internal controls and untimely financial reporting could harm our operating
results and cause investors to lose confidence in our reported financial
information, which could also have a negative effect on the trading price of
our
stock.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
KATY
INDUSTRIES, INC.
(Registrant)
By:
/s/ Amir Rosenthal
Amir
Rosenthal
Vice
President, Chief Financial Officer,
General
Counsel and
Secretary
Date: August
10, 2007