UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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|_| Preliminary Proxy Statement
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|X| Definitive Proxy Statement
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|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
KATY INDUSTRIES, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which
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KATY INDUSTRIES, INC.
765 Straits Turnpike
Middlebury, Connecticut 06762
(203) 598-0397
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Katy Industries, Inc.:
We are holding an annual meeting of stockholders of Katy Industries, Inc.
on May 30, 2002 at 10:00 a.m., local time. The meeting will be held at the
Inter-Continental Central Park South, located at 112 Central Park South, New
York, New York. At the meeting, you will be asked to vote on the following:
1. The election of four Class I members of the Board of Directors to serve
for a term of two years.
2. A proposal to approve an amendment to Katy's Restated Certificate of
Incorporation to change the treatment of the previously authorized
convertible preferred stock in the event of a liquidation of the Company.
3. A proposal to approve the 2002 Stock Incentive Plan.
4. The transaction of other business as may properly come before the annual
meting or any adjournment thereof.
The Proxy Statement that we are delivering with this Notice contains
important information concerning the proposals to be considered at the annual
meeting. You will be able to vote your shares at the Annual Meeting if you were
a stockholder of Katy at the close of business on April 19, 2002.
By Order of the Board of Directors
Amir Rosenthal
Secretary
Middlebury, Connecticut
April 30, 2002
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
THE ANNUAL MEETING
The annual meeting will be held on May 30, 2002 at the Inter-Continental
Central Park South, located at 112 Central Park South, New York, New York, at
10:00 a.m. local time.
THIS PROXY SOLICITATION
We are sending you this Proxy Statement because our Board of Directors is
seeking your proxy to vote your shares at the annual meeting. This Proxy
Statement includes information that we are required to provide to you under the
rules of the Securities and Exchange Commission. It is intended to assist you in
voting your shares. On April 30, 2002, we began mailing information to all
people who, according to our stockholder records, owned shares at the close of
business on April 19, 2002.
Katy will pay the cost of requesting these proxies. Katy's directors,
officers and employees may request proxies in person or by telephone, mail,
telecopy or letter.
VOTING YOUR SHARES
You are entitled to one vote at the annual meeting for each share of
Katy's common stock that you owned of record at the close of business on April
19, 2002. The number of shares you own (and may vote) is listed on the enclosed
proxy card.
You may vote your shares at the annual meeting in person or by proxy. To
vote in person, you must attend the annual meeting and obtain and submit a
ballot. We will give you a ballot at the annual meeting. To vote by proxy, you
must complete and return the enclosed proxy card. By completing and returning
the proxy card, you will be directing the persons designated on the proxy card
to vote your shares at the annual meeting in accordance with the instructions
you give on the proxy card.
Your proxy card will be valid only if you sign, date and return it before
the annual meeting. IF YOU COMPLETE THE PROXY CARD EXCEPT FOR THE VOTING
INSTRUCTIONS, THEN YOUR SHARES WILL BE VOTED FOR EACH OF THE PROPOSALS. You may
revoke your proxy at any time before it is voted by any of the following means:
- Notifying the Secretary of Katy in writing that you wish to revoke
your proxy.
- Submitting a proxy dated later than your original proxy.
- Attending the annual meeting and voting. Merely attending the annual
meeting will not by itself revoke a proxy; you must vote your shares
at the annual meeting to revoke the proxy.
The Board of Directors does not expect any matter other than the proposals
discussed in this Proxy Statement to be presented at the annual meeting.
However, if any other matter properly comes before the annual meeting, your
proxies will act on such matter in their discretion.
QUORUM AND VOTES REQUIRED FOR APPROVAL
The presence in person or by proxy of holders of a majority of the
outstanding shares of common stock will constitute a quorum for the annual
meeting. Abstentions and "broker non-votes" will be treated as present in
determining whether the quorum requirement is satisfied. A "broker non-vote"
occurs when a broker holding shares for a beneficial owner votes on one proposal
pursuant to discretionary authority or instructions from the beneficial owner,
but does not vote on another proposal because the broker has not received
instructions from the beneficial owner and does not have discretionary power.
Each share of common stock is entitled to one vote on each matter to come
before the annual meeting. With regard to the election of directors, you may
vote for a candidate or withhold your vote. Directors will be elected by a
plurality of the shares present in person or by proxy and entitled to vote on
the election of directors. "Plurality" means that the nominees who receive the
largest number of votes cast will be elected as directors, up to the maximum
number of directors to be elected at the annual meeting. Consequently, any
shares not voted (whether by abstention, broker non-vote or withholding
authority) have no impact on the election of directors except to the extent the
failure to vote for an individual results in another individual receiving a
larger number of votes.
If a quorum is present, the approval of Proposal 3 requires the
affirmative vote of the holders of a majority of the common stock present, in
person or by proxy, at the annual meeting. The approval of Proposal 2 requires
the affirmative vote of the holders of a majority of the common stock
outstanding. With respect to these matters, a stockholder may (i) vote "For" the
matter, (ii) vote "Against" the matter, or (iii) "Abstain" from voting on the
matter. A vote to abstain from voting on a proposal has the same effect as a
vote against such matter. Broker non-votes will be treated as shares which are
not present with respect to such matters, although they will be counted for
purposes of determining a quorum as described above. Accordingly, broker
non-votes will not be counted in determining the required number of votes cast
with respect to a particular proposal and will have no effect on the outcome of
the voting on such proposal.
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PROPOSAL 1 - ELECTION OF DIRECTORS
NOMINEES
Katy's business is managed under the direction of its Board of Directors.
There are currently nine directors, divided into two classes. The classes are as
nearly equal in number as possible with four Class I directors, elected to an
initial one-year term at the 2001 annual meeting, and five Class II directors,
elected to two-year terms at the 2001 annual meeting. Stockholders will elect
four Class I directors at the annual meeting to serve for a two-year term ending
at the time of the 2004 annual meeting.
Nominees for election whose terms will expire 2004 (Class I):
C. Michael Jacobi
Robert M. Baratta
Daniel B. Carroll
Wallace E. Carroll, Jr.
All of the nominees are current directors of the Company and have
indicated their willingness to serve as directors. The five Class II directors
of Katy are: William F. Andrews (Chairman), Christopher Lacovara, Christopher
Anderson, Samuel P. Frieder, and James A. Kohlberg. The Class II directors are
not up for re-election at the annual meeting, as their terms expire at the time
of the 2003 annual meeting.
For information concerning the nominees for director and the current
directors, see "Information Concerning Directors and Executive Officers,"
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners."
REQUIRED VOTE
Directors are elected by the affirmative vote of a plurality of the votes
cast at the annual meeting.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF PROPOSAL 1. IF ANY NOMINEE BECOMES UNAVAILABLE TO SERVE ON THE BOARD
OF DIRECTORS FOR ANY REASON, YOUR PROXY WILL BE VOTED FOR A PERSON OR PERSONS TO
BE SELECTED BY THE BOARD OF DIRECTORS. PROXIES CANNOT BE VOTED FOR A NUMBER OF
NOMINEES GREATER THAN THE FOUR PERSONS NOMINATED BY THE BOARD OF DIRECTORS.
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INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
The following table shows information with respect to nominees for
director, current directors, and executive officers of Katy:
Nominees - Class I Directors
The following table shows information about the nominees to Katy's Board
of Directors who are currently Class I directors.
Principal Occupation and Period of
Business Experience Other Service as Katy
Name Age During the Past Five Years Directorships Director
---- --- -------------------------- ------------- --------
Robert M. Baratta 72 2001 to Present: Director of Katy None 2001 to Present
2001 (February) to 2001 (June):
President and Chief Executive Officer
and Director of Katy
1999 to 2000 (June):
Senior Vice President of Katy
1995 to 1999:
Executive Vice President of Katy
Daniel B. Carroll 66 1998 to Present: Member and Manager of None 1994 to Present
Newgrange LLC, a components supplier
to the global footwear industry
1994 to Present: Partner of Newgrange
LP, a holding company for Newgrange
LLC, a components supplier to the
global footwear industry
1985 to Present: Vice President of ATP
Manufacturing, LLC, a manufacturer of
molded poly-urethane components
Wallace E. Carroll, Jr. 64 1992 to Present: Chairman of CRL, Inc., None 1991 to Present
a diversified holding company
4
Principal Occupation and Period of
Business Experience Other Service as Katy
Name Age During the Past Five Years Directorships Director
---- --- -------------------------- ------------- --------
C. Michael Jacobi 60 2001 (June) to Present: Chief Executive Corrections Corp. 2001 to Present
Officer, President, and a Director of of America
Katy Webster Financial
2001 to Present: Chairman of Innotek, Corporation
Inc., a privately held company engaged
in the manufacturing and distribution
of electronic products for the
training, tracking and containment of
sporting dogs and companion pets
1999 to 2001: Consultant
1999 to 2000: Chairman of Timex Watches
Limited (India), a publicly held
company headquartered in New Delhi,
India
1999 to 2000: Chairman and Chief
Executive Officer of Beepwear Paging
Products, LLC, a company jointly owned
by Timex Corporation and Motorola, Inc.
1993 to 1999: Chief Executive Officer,
President, and a director of Timex
Corporation, a leading worldwide
manufacturer and marketer of watches
1993 to 1999: Chairman of Callanen
International, a company engaged in
the fashion watch business
5
Class II Directors
The following directors were elected to two year terms at the 2001 annual
meeting, and are not seeking re-election at the 2002 annual meeting.
Period of
Service as
Principal Occupation and Business Other Katy
Name Age Experience During the Past Five Years Directorships Director
---- --- ------------------------------------- ------------- --------
Christopher Anderson 27 1998 to Present: Associate at Kohlberg & Co., None 2001 to Present
L.L.C.
1997 to 1998: Financial Analyst at Warburg
Dillon Read L.L.C.
William F. Andrews 70 2001 to Present: Chairman of Katy Industries, Black Box 1991 to Present
Inc. Corporation
2000 to Present: Chairman of Corrections Corrections
Corp. of America, a private sector provider Corp. of
of detention and correction services America
1998 to 2001: Chairman of Northwestern TREX Corp.
Steel & Wire Company, a manufacturer of
steel rods and beams
1997 to Present: Consultant with Kohlberg &
Co., L.L.C.
1995 to 2001: Chairman of Scovill Fasteners,
a manufacturer of apparel and industrial
fasteners
Samuel P. Frieder 37 1989 to Present: Principal of Kohlberg & Co., Color Spot 2001 to Present
L.L.C. Nurseries Inc.
Holley
Performance
Products Inc.
James A. Kohlberg 44 1987 to Present: Co-Founder and Managing Color Spot 2001 to Present
Principal of Kohlberg & Co., L.L.C. Nurseries Inc.
Holley
Performance
Products Inc.
Christopher Lacovara 37 1988 to Present: Principal of Kohlberg & Co., Holley 2001 to Present
L.L.C. Performance
Products Inc.
6
Executive Officers
Principal Occupation and Business Experience
Name Age During the Past Five Years
------------------------ ----- ------------------------------------------------------------------------
David C. Cooksey 57 2001 to Present: Corporate Director-Internal Financial Reporting and
Assistant Treasurer, Katy
1999 to Present: Chief Financial Officer of Contico International
L.L.C., a wholly-owned subsidiary of Katy
1987 to 1999: Chief Financial Officer of Contico International, Inc.
Roger G. Engle 55 2000 to Present: Chief Information Officer, Katy
1999 to 2000: Chairman, Contico International, LLC
1998 to Present: Vice President, Katy
1996 to 1998: President of Woods Industries, Inc., a Katy subsidiary
that manufactures and distributes electric corded products, supplies
and electrical/electronic accessories; Waldom Electronics, Inc., a
Katy subsidiary that distributed electrical and electronic goods which
has been subsequently merged into GC/Waldom Electronics, Inc.
and GC Thorsen, Inc., a Katy subsidiary that distributed hand tools
which has subsequently changed its name to GC/Waldom
Electronics, Inc.
Mark P. Ingebritson 36 2001 to Present: Corporate Director-External Financial Reporting and
Treasurer, Katy
1999 to 2001: Controller, Katy
1997 to 1999: Manager of Corporate Accounting, Coors Brewing Company
Amir Rosenthal 41 2001 to Present: Vice President, Chief Financial Officer, General
Counsel and Secretary, Katy
2000 to 2001: Chairman of Timex Watches Limited (India), a publicly
held company headquartered in New Delhi, India
1997 to 2001: Treasurer, Timex Corporation
Wallace E. Carroll, Jr. and Daniel B. Carroll are first cousins. Except
where noted, no corporation or organization mentioned in the above table is a
parent, subsidiary or other affiliate of Katy.
Officers hold office until their successors are elected or appointed by
the Board of Directors and duly qualified. Officers elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors.
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PROPOSAL 2 - AMENDMENT OF LIQUIDATION PROVISIONS OF THE
CONVERTIBLE PREFERRED STOCK IN THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION
GENERAL
On June 28, 2001, we issued 700,000 shares of convertible preferred stock,
par value $100 per share ("Convertible Preferred Stock"), to KKTY Holding
Company, L.L.C. ("KKTY Holding Company") for $70,000,000. KKTY Holding Company
holds all of the outstanding shares of the Convertible Preferred Stock and is an
affiliate of an investment fund managed by Kohlberg Management IV, L.L.C., a
private investment firm. The proceeds of the sale of the Convertible Preferred
Stock were used to reduce our outstanding indebtedness.
The salient terms of the Convertible Preferred Stock include:
o The right of the holders of the Convertible Preferred Stock to
receive payment-in-kind dividends (meaning dividends in the
form of additional shares of Convertible Preferred Stock) at a
rate of 15% per annum (compounded annually) from August 1,
2001 until December 31, 2004; and
o Conversion into common stock at each holder's option at a
conversion price of $6.00 per share of common stock upon the
earlier of June 28, 2006 or the occurrence of certain
extraordinary events, including Board authorization of the
liquidation of the Company.
Information Regarding the Proposed Amendment
On April 9, 2002, the Board of Directors approved an amendment to Article
4 of our Restated Certificate of Incorporation, subject to the approval of the
amendment by our stockholders, to modify the treatment of the Convertible
Preferred Stock in the event of a liquidation of Katy. The Board and management
believe that a liquidation of Katy is unlikely in the foreseeable future. The
full text of the amendment is included as Annex A to this Proxy Statement. This
amendment was requested by KKTY Holding Company.
Currently, the Restated Certificate of Incorporation grants the holders of
the Convertible Preferred Stock the right to receive upon a liquidation of Katy
an amount per share equal to the par value per share of Convertible Preferred
Stock. In the alternative, the holders of the Convertible Preferred Stock may
elect, after Board authorization of a liquidation, to convert their shares into
common stock and instead receive an amount per share equal to the amount per
share that the other holders of common stock receive.
The proposed amendment would modify the liquidation provisions of the
Restated Certificate of Incorporation to provide that upon a liquidation of Katy
the holders of the Convertible Preferred Stock would automatically receive the
greater of (i) an amount equal to the par value of their Convertible Preferred
Stock or (ii) an amount that the holders of the Convertible Preferred Stock
would have received if their shares of Convertible Preferred Stock were
converted into common stock immediately prior to the distribution upon
liquidation.
8
The amendment would not change the economic relationship between Katy and
the holder of the Convertible Preferred Stock, since the holder currently has
the ability to convert its shares into common stock after Board authorization of
a liquidation. It is assumed that, in the event of a liquidation, the holder of
the Convertible Preferred Stock would always elect to receive the greater of the
par value or, by converting shares into common stock, the amount received as a
common stockholder. For that reason, and based on advice from legal counsel, the
Board of Directors believes that THE PROPOSED AMENDMENT HAS NO ECONOMIC IMPACT
ON THE COMPANY OR ON HOLDERS OF THE COMPANY'S COMMON STOCK.
Management has evaluated this proposal and, based on such evaluation, does
not believe that the rights of our common stockholders will be impacted in any
way by the proposed amendment.
REQUIRED VOTE
An amendment to Katy's Restated Certificate of Incorporation requires the
affirmative vote of the holders of a majority of Katy's outstanding common
stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT TO THE
RESTATED CERTIFICATE OF INCORPORATION SET FORTH IN THIS PROPOSAL 2 AND BELIEVES
THAT IS ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF KATY AND ITS
STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE APPROVAL OF
PROPOSAL 2.
9
PROPOSAL 3 - APPROVAL OF 2002 STOCK INCENTIVE PLAN
On April 9, 2002, the Board of Directors adopted the Katy Industries, Inc.
2002 Stock Incentive Plan (the "Plan"), subject to approval by our stockholders.
The Plan will have an effective date of April 9, 2002, if approved by the
stockholders at the annual meeting, and will terminate ten years after its
effective date. The Plan is intended to assist the Company and its subsidiaries
in recruiting and retaining individuals with ability and initiative by enabling
such persons to participate in the future success of the Company and to
associate their interests with those of the Company and its stockholders. The
Plan is intended to permit the grant of options and restricted stock. Any
proceeds Katy receives from the sale of common stock pursuant to any grant of
restricted stock or participant's exercise of an option will be used for general
corporate purposes.
Set forth below is a summary of certain important features of the Plan.
The summary is qualified in its entirety by reference to the full text of the
Plan attached as Annex B to this Proxy Statement.
Administration
The Plan will be administered by the Board of Directors or a committee of
the Board (the committee, or the Board acting in such capacity, is hereinafter
referred to as the "Committee").
The Committee shall have the complete authority to grant awards on such
terms that are consistent with the provisions of the Plan, as the Committee may
consider appropriate. Such terms may include conditions (in addition to those
contained in the Plan) on the exercisability of all or any part of an option or
on the vesting or other forfeiture conditions imposed on any shares of
restricted stock. The Committee also has complete authority to interpret all
provisions of the Plan; to prescribe the form of Option Agreements and
Restricted Stock Agreements; to accelerate the exercisability of an option or
the vesting of shares of restricted stock as a result of a change in control or
otherwise; 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 the Plan. Any decision or action of the
Committee in connection with the administration of the Plan shall be final,
conclusive and binding on all persons. Neither the Committee, nor any member of
the Committee, shall be liable for any act done or not done in good faith with
respect to the Plan, any Option Agreement or any Restricted Stock Agreement.
Katy will bear all expenses of administering the Plan.
Eligibility
Any employee, director, advisor or consultant of Katy or any of its
subsidiaries (including a subsidiary that becomes such after the adoption of the
Plan) is eligible to receive awards under the Plan if the Committee, in its sole
discretion, determines that such person has contributed significantly or can be
expected to contribute significantly to the profits or growth of Katy or any of
its subsidiaries.
Plan Features
The Plan authorizes the issuance of up to 1,000,000 shares of Katy's
common stock pursuant to the grant or exercise of stock options, including
incentive stock options ("ISOs") and
10
nonqualified stock options ("NQSOs"), and restricted stock. The maximum number
of shares of common stock that may be issued under the Plan pursuant to the
exercise of options is 1,000,000 shares of common stock. The maximum number of
shares is subject to adjustment under certain circumstances, as provided in the
Plan.
The shares of common stock subject to grant under the Plan are to be made
available from authorized but unissued shares, from treasury shares, reacquired
shares, or any combination thereof. Awards may be granted for such terms as the
Committee may determine, except that the term of an option may not exceed, and
the grant of restricted stock must vest if at all, ten years from its date of
grant. No individual may, in any calendar year, be granted options or aggregate
awards covering more than 100,000 shares of Katy's common stock. No awards
outstanding on the termination date of the Plan will be affected or impaired by
such termination. Awards generally will not be transferable, except by will and
the laws of descent and distribution. Options intended to be NQSOs may be
transferred to, or for the benefit of, the participant's family members provided
the participant does not receive any consideration for the transfer and fulfills
certain other criteria. The Committee has broad authority to fix the terms and
conditions of individual award agreements with participants.
Currently, it is anticipated that options to purchase 800,000 shares of
Katy's common stock will be issued under the Plan. If Katy issues all of these
options under the Plan, taken together with already outstanding but not
exercised options under other option plans previously approved by Katy
stockholders (1,878,650), the total number of shares represented by options
would be approximately 9% of total outstanding common shares. This assumes that
all of the outstanding Convertible Preferred Stock (plus expected payment in
kind dividends) has been converted to common stock. The reconciliation below
demonstrates in detail:
Options anticipated to be issued under 2002
Stock Incentive Plan 800,000
Options already outstanding (including non-
vested and out of the money options) 1,776,950
----------
Total 2,576,950
==========
Outstanding shares at April 5, 2002 8,361,252
Common stock as a result of conversion of
convertible preferred stock 11,666,666
Common stock as a result of conversion of
payment in kind dividends on convertible
preferred stock 7,192,598
Total options from above 2,576,950
----------
Total shares potentially outstanding 29,797,466
==========
Estimated percentage of total outstanding
common stock, after conversion of convertible
preferred, represented by stock options 8.7%
==========
As indicated above, stock-based grants can be made under the Plan in the
form of options and restricted stock. A summary of these grants is set forth
below.
Stock Options. The Plan authorizes the Committee to grant options to
purchase our common stock at an exercise price of not less than 75% of the fair
market value of such stock on the date of grant or with respect to options that
are intended to be ISOs, not less than 100% of the
11
fair market value of such stock on the date of grant. With respect to options
granted to certain named executive officers, if and to the extent deemed
necessary by the Committee, the price per share for common stock shall not be
less than 100% of the fair market value of a share of common stock on the date
of grant of the option unless the exercisability of the option with respect to
those shares of common stock with a lower exercise price, is subject to
performance objectives that enable such option to qualify as "performance-based
compensation" under the Treasury Regulations promulgated under Section 162(m) of
the Internal Revenue Code. The Plan permits optionees, with the approval of the
Committee, to pay the exercise price of options in cash, stock that has been
held for at least six months, by delivery of a full recourse, interest-bearing
promissory note, or a combination thereof, or by "cashless exercise" through a
broker or the Company. The term of options will be determined by the Committee
to the extent not inconsistent with the Plan as set forth in the Option
Agreement. The Committee will determine the conditions under which options will
become exercisable and the extent to which they will be exercisable after the
option holder's employment terminates. As noted above, options may be granted
either as ISOs or NQSOs. The principal difference between ISOs and NQSOs is
their tax treatment. See "Federal Tax Information" below.
Restricted Stock. The Plan authorizes the Committee to grant or sell
restricted stock to participants with such forfeiture and transfer restrictions
as the Committee may designate. During the period during which the restricted
stock may be forfeited, the stock certificates evidencing restricted shares will
be held by Katy. Restricted stock may not be sold, assigned, transferred,
pledged, or otherwise encumbered. Restricted stock may be subject to forfeiture
upon termination of employment, unless otherwise provided by the Committee in an
individual award agreement. Other than forfeiture provisions, restrictions on
transfer and any other restrictions the Committee may impose, the participant
will have all the rights of a holder of the common stock, including dividend and
voting rights, that are the subject of the restricted stock award. Shares of
restricted stock shall become vested in whole at any time or in part from time
to time at such times and in compliance with such requirements as the Committee
shall determine and as set forth in the Restricted Stock Agreement. If and to
the extent deemed necessary by the Committee, shares of restricted stock granted
to certain named executive officers shall become vested subject to performance
objectives that enable such restricted stock to qualify as "performance-based
compensation" under the Treasury Regulations promulgated under Section 162(m) of
the Internal Revenue Code. The grant of restricted stock can only become vested
during the participant's lifetime in the hands of the participant.
Amendment and Discontinuance
The Board may amend the Plan from time to time or terminate the Plan;
provided, however, that no amendment will become effective until stockholder
approval is obtained if the amendment (i) increases the aggregate number of
shares of common stock that may be issued pursuant to awards under the Plan,
(ii) changes the class of individuals eligible to receive awards or (iii)
changes the performance objectives to which the exercisability of options or the
vesting of restricted stock granted to named executive officers may be subject.
No amendment will, without a participant's consent, adversely affect any rights
of such participant under any outstanding award at the time such amendment is
made, except as otherwise set forth in the Plan.
Federal Tax Information
The following discussion is intended only as a brief summary of the
federal income tax rules that are generally relevant to stock options and
restricted stock. The following discussion is
12
based on federal income tax law and interpretational authorities as of the date
of this Proxy Statement, which are subject to change at any time.
Nonqualified Options. Upon the grant of a NQSO, the optionee will not
recognize any taxable income and Katy will not be entitled to a deduction. Upon
the exercise of such an option, the excess of the fair market value of the
shares acquired on the exercise of the option over the option price (the
"Spread") will constitute compensation taxable to the optionee as ordinary
income. In determining the amount of the Spread, the fair market value of the
common stock on the date of exercise is used. Katy, in computing its federal
income tax, will generally be entitled to a deduction in an amount equal to the
compensation taxable to the optionee. The optionee's tax basis in the stock
acquired on exercise of the option will equal the option price plus the amount
of ordinary income the option recognized, and the optionee's holding period for
the stock will begin at the time of purchase. The optionee then will recognize
capital gain (or loss) on a subsequent disposition of the shares of common stock
to the extent the amount realized on the disposition excess (or is less than)
the optionee's tax basis in the shares.
ISOs. An optionee will not recognize taxable income on the grant or
exercise of an ISO. However, the Spread at exercise will constitute an item
includible in alternative minimum taxable income, and thereby may subject the
optionee to the alternative minimum tax. Such alternative minimum tax may be
payable even though the optionee receives no cash upon the exercise of the ISO
with which to pay such tax. Upon the disposition of shares of stock acquired
pursuant to the exercise of an ISO after the later of (a) two years from the
date of grant of the ISO or (b) one year after the exercise date (the "ISO
Holding Period"), the optionee will recognize long-term capital gain or loss, as
the case may be, to the extent the amount realized on disposition exceeds (or is
less than) the exercise price the optionee paid for the shares. Katy is not
entitled to any tax deduction by reason of the grant or by reason of a
disposition of stock received upon exercise of an ISO if the ISO Holding Period
is satisfied. If the ISO Holding Period is not met (i.e., the optionee makes a
"disqualifying disposition"), the optionee will recognize compensation income at
the time of disposition equal to the difference between the exercise price and
the lower of (i) the fair market value of the stock at the date of the option
exercise or (ii) the sale price of the stock, and Katy will be entitled to a
deduction in the same amount. Any additional gain or loss recognized on a
disqualifying disposition of the shares will be characterized as capital gain or
loss.
Restricted Stock. A participant who is granted restricted stock may elect,
pursuant to Internal Revenue Code ("Code") Section 83(b) (a "Section 83(b)
election"), to have the grant taxed as compensation income at the date of
receipt, with the result that any future appreciation (or depreciation) in the
value of the shares of stock granted will be taxed as a capital gain (or loss)
upon a subsequent sale of the shares. However, if the participant does not make
a Section 83(b) election, then the grant will be taxed as compensation income at
the full fair market value on the date that the restrictions imposed on the
shares expire. Unless a participant makes a Section 83(b) election, any
dividends paid on stock subject to the restrictions are compensation income to
the participant and compensation expense to Katy until the restrictions imposed
on the shares expire. Subject to applicable provisions of the Internal Revenue
Code and regulations thereunder, Katy will generally be entitled to an income
tax deduction for any compensation income taxed to the participant.
Miscellaneous. The foregoing tax consequences will be different to the
extent the optionee pays the exercise price of an option with shares of stock he
or she already owns. Additionally, participants subject to the short-swing
profit rules of Section 16(b) may have different tax consequences than those
described above.
13
REQUIRED VOTE
In order for the Katy Industries, Inc. 2002 Stock Incentive Plan to be
approved, the affirmative vote of the holders of a majority of Katy's
outstanding common stock present, in person or by proxy, at the annual meeting,
is required.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE 2002 STOCK INCENTIVE
PLAN SET FORTH IN PROPOSAL 3 AND BELIEVES THAT IS ADVISABLE, FAIR TO AND IN THE
BEST INTERESTS OF KATY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF PROPOSAL 3.
14
INFORMATION ABOUT KATY STOCK OWNERSHIP
OUTSTANDING SHARES
The shares of common stock are the only outstanding class of Katy voting
securities. As of April 5, 2002, there were 8,361,252 shares of Katy common
stock outstanding and 76,500 options to acquire shares of common stock
exercisable within the next 60 days.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table and notes show, as of April 5, 2002, information on
the beneficial ownership of those persons or entities (including certain members
of the family of Wallace E. Carroll, former Chairman of the Board, since
deceased (the "Carroll Family")), and related persons and entities, who are
known to Katy to be the beneficial owners of more than 5% of the shares of
common stock. The notes below the table describe the nature of that beneficial
ownership. Unless otherwise indicated, the nature of beneficial ownership is
that of sole voting power and sole investment power. In calculating percentages
for a given person, shares for which such person has the right to acquire
beneficial ownership within 60 days (e.g. through exercising options) are deemed
to be outstanding.
Name and Address Amount and Nature of Percent of
Of Beneficial Owner Beneficial Ownership Notes Class
-------------------------------------- -------------------- ----- ------------
Wallace E. Carroll, Jr. and 3,118,493 (1) 37.0%
the WEC Jr. Trusts
c/o CRL, Inc.
7505 Village Square Drive, Suite 200
Castle Rock, CO 80104
Amelia M. Carroll and 3,144,493 (2) 37.3%
the WEC Jr. Trusts
c/o CRL, Inc.
7505 Village Square Drive, Suite 200
Castle Rock, CO 80104
Dimensional Fund Advisors, Inc. 583,500 (3) 6.9%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
GAMCO Investors, Inc. 1,232,300 (4)(6) 14.6%
One Corporate Center
Rye, NY 10580-1434
Gabelli Funds, LLC 536,300 (5)(6) 6.4%
One Corporate Center
Rye, NY 10580-1434
Supplemental Disclosure Regarding
Convertible Preferred Stock
KKTY Holding Company, L.L.C. * (7) *
111 Radio Circle
Mt. Kisco, NY 10549
15
(1) Wallace E. Carroll, Jr. directly holds 180,739 shares and options to
acquire 14,000 shares. He is a trustee of trusts for his and his descendants'
benefit (the "WEC Jr. Trusts") which collectively hold 804,453 shares. He and
certain of the WEC Jr. Trusts own all the outstanding shares of CRL, Inc. which
holds 2,073,436 shares. He is also a trustee of the Wallace Foundation which
holds 32,910 shares. Wallace E. Carroll, Jr. also beneficially owns 8,729 shares
directly owned by his wife, Amelia M. Carroll, and 4,226 shares held by a "rabbi
trust" for his wife and him in connection with the Katy Industries, Inc.
Directors' Deferred Compensation Plan. Amounts shown for Wallace E. Carroll, Jr.
and Amelia M. Carroll reflect multiple counting of shares where more than one of
them is a trustee of a particular trust and is required to report beneficial
ownership of shares that these trusts hold.
(2) Amelia M. Carroll holds 8,729 shares directly. She is a trustee of the
WEC Jr. Trusts which collectively own 804,453 shares, and the Wallace Foundation
which holds 32,910 shares. Wallace E. Carroll, Jr. and certain of the WEC Jr.
Trusts own all the outstanding shares of CRL, Inc., which holds 2,073,436
shares. Amelia M. Carroll is also trustee of trusts for Lelia Carroll and her
descendants' benefit holding 26,000 shares in the aggregate. Amelia M. Carroll
also beneficially owns 180,739 shares and options to acquire 14,000 shares
directly owned by her husband, Wallace E. Carroll, Jr., and 4,226 shares held by
a "rabbi" trust for her and her husband in connection with the Katy Industries,
Inc. Directors' Deferred Compensation Plan. Amounts shown for Amelia M Carroll
and Wallace E. Carroll, Jr. reflect multiple counting of shares where more than
one of them is a trustee of a particular trust and is required to report
beneficial ownership of shares that these trusts hold.
(3) Information obtained from Schedule 13G dated January 30, 2002 filed by
Dimensional Fund Advisors, Inc. for the calendar year 2001.
(4) Information obtained from Schedule 13D/A dated March 15, 2002 filed by
Gabelli Asset Management, Inc. ("GAMI"). According to that Schedule 13D/A, GAMCO
Purchasers, Inc. ("GAMCO") holds these shares as agent, and Mario Gabelli,
Gabelli Group Capital Partners, Inc. ("Gabelli Partners") and GAMI are deemed to
beneficially own these shares. Also according to that Schedule 13D/A, GAMCO has
the sole power to vote (or direct the vote) and sole power to dispose (or to
direct the disposition) of these shares except that (i) it does not have
authority to vote 15,000 of the shares, and (ii) the power of Mario Gabelli,
GAMI and Gabelli Partners is indirect with respect to these shares.
(5) Information obtained from Schedule 13D/A dated March 15, 2002 filed by
GAMI. According to that Schedule 13D/A, Gabelli Funds, LLC ("Gabelli Funds")
holds these shares as agent, and Mario Gabelli, Gabelli Partners and GAMI are
deemed to beneficially own these shares. Also according to that Schedule 13D/A,
Gabelli Funds has the sole power to vote (or direct the vote) and sole power to
dispose (or to direct the disposition) of these shares, except that (i) Gabelli
Funds has sole dispositive and voting power with respect to shares held by the
Funds so long as the aggregate voting interest of all joint filers does not
exceed 25% of their total voting interest in Katy and, in that event, each
Fund's Proxy Voting Committee is to vote that Fund's shares, (ii) under special
circumstances, each Fund's Proxy Voting Committee may take and exercise in its
sole discretion the entire voting power with respect to the shares held by that
Fund, and (iii) the power of Mario Gabelli, GAMI and Gabelli Partners is
indirect with respect to these shares.
(6) Per information obtained from Schedule 13D/A dated March 15, 2002,
filed by GAMI, Katy stock is held by certain other funds which lead to
beneficial ownership by Mario
16
Gabelli, Gabelli Partners and GAMI. These include 94,000 shares held by Gabelli
Performance Partnership L.P., 39,400 shares held by Gabelli International, Ltd.,
and 6,500 shares held by Gabelli Advisers, Inc. These combined holdings
represent an additional 1.7% beneficial ownership of Katy common stock.
(7) KKTY Holding Company, L.L.C., a Delaware limited liability company,
currently owns 700,000 shares of our convertible preferred stock, which is
presently convertible into 11,666,666 shares of our common stock upon the
earlier of June 28, 2006 or the occurrence of certain fundamental changes in
Katy. Through April 5, 2002, the accrued and unpaid paid-in-kind (PIK) stock
dividends on the shares of convertible preferred stock held by KKTY Holding
Company equal 71,342 shares of convertible preferred stock, which when paid will
be convertible into 1,189,043 shares of common stock. KKTY Holding Company is
controlled by several entities, which have Kohlberg Management IV, L.L.C., a
Delaware limited liability company ("KMIV"), as their general partner.
Christopher Lacovara, Samuel P. Frieder, Christopher Anderson, James A. Kohlberg
and C. Michael Jacobi all of whom are members of the Board of Directors of Katy,
are members of KMIV. Each of Messrs. Lacovara, Frieder, Anderson, Kohlberg and
Jacobi disclaim beneficial ownership of these securities for purposes of Section
16 of the Exchange Act and any other purpose. It is not expected that the
preferred shares will be converted into common stock in the next sixty days.
However, if a conversion did occur, the other disclosed percentage ownerships on
the above table would change as follows:
Revised
Ownership
Name of Beneficial Owner Percentage
------------------------ ----------
Wallace E. Carroll, Jr. 14.6%
Amelia M. Carroll 14.8%
Dimensional Fund Advisors, Inc 2.7%
GAMCO Investors, Inc 5.8%
Gabelli Funds, LLC 2.5%
KKTY Holding Company, L.L.C. 60.4%
17
SECURITY OWNERSHIP OF MANAGEMENT
The following tables show, as of April 5, 2002, 1) the number of shares of
common stock (first table) and 2) the number of shares of Convertible Preferred
Stock (second table) that directors and certain executive officers (or former
executive officers) beneficially own, and that directors and executive officers
as a group own. Unless otherwise indicated, the nature of beneficial ownership
is that of sole voting power and sole investment power. In calculating
percentages, shares for which a person has the right to acquire beneficial
ownership within 60 days (e.g., through exercising options) are deemed to be
outstanding.
Common Stock
Amount and Nature
of Beneficial Percent of
Name Ownership Notes Class
--------------------------------------- ------------------ --------------- ----------
William F. Andrews 17,000 (1) *
Robert M. Baratta 56,482 (4)(5) *
Daniel B. Carroll 21,500 (1) *
Wallace E. Carroll, Jr 3,118,493 (1)(2) 37.0%
C. Michael Jacobi -- -- *
David C. Cooksey 400 -- *
Roger G. Engle 5,690 (5) *
Larry D. Hudson 4,001 (5) *
Amir Rosenthal -- -- *
John R. Prann, Jr 60,000 (6) *
Arthur R. Miller 49,470 (3)(5)(6) *
Stephen P. Nicholson 26,679 (5)(6) *
All directors and executive officers of
Katy as a group (12 persons) 3,359,714 (1)(2)(3)(4)(5) 39.8%
* Indicates 1% or less
Convertible Preferred Stock
Amount and Nature
of Beneficial Percent of
Name Ownership Notes Class
--------------------------------------- ------------------ --------------- ----------
Christopher Anderson -- (7) *
Samuel P. Frieder -- (7) *
James A. Kohlberg -- (7) *
Christopher Lacovara -- (7) *
C. Michael Jacobi -- (7) *
All directors and executive officers of
Katy as a group (5 persons) -- (7) *
* Indicates 1% or less
(1) Includes currently exercisable nonqualified stock options to acquire
shares granted to each non-employee director under the Katy Industries, Inc.
Non-employee Director Stock Option Plan:
William F. Andrews 12,000
Daniel B. Carroll 14,000
Wallace E. Carroll, Jr. 14,000
18
(2) Includes shares deemed beneficially owned by Wallace E. Carroll, Jr.
and Amelia M. Carroll in their capacity as trustees of certain trusts for the
benefit of members of the Wallace E. Carroll, Jr. family (see notes (1) and (2)
under "Security Ownership of Certain Beneficial Owners.").
(3) Per information from his most recent Form 5 filing, Arthur R. Miller
holds 30,724 shares directly, and has 17,850 shares held in a "rabbi trust" in
connection with the Katy Industries, Inc. Supplemental Retirement and Deferral
Plan. Arthur R. Miller is a trustee of trusts for the benefit of Denis H.
Carroll and his descendants holding 251,620 shares in the aggregate. He
disclaims beneficial ownership of the shares that the trusts own.
(4) Includes options to acquire the following number of shares within 60
days:
Robert M. Baratta 36,500
(5) Includes shares held by a "rabbi trust" in connection with either the
Katy Industries, Inc. Supplemental Retirement and Deferral Plan or the
Directors' Deferred Compensation Plan:
Robert M. Baratta 3,948
Roger G. Engle 1,690
Larry D. Hudson 1,001
Arthur R. Miller 17,850
Stephen P. Nicholson 8,640
(6) John Prann, Arthur Miller and Stephen Nicholson are former executive
officers of the Company. Each terminated employment with Katy during 2001.
Information on their direct stock holdings was taken from their most recently
filed Form 4 or Form 5.
(7) Christopher Lacovara, Samuel P. Frieder, Christopher Anderson, James
A. Kohlberg and C. Michael Jacobi have membership interests in Kohlberg
Management IV, L.L.C., a Delaware limited liability company ("KMIV"). KMIV is
the general partner of several entities with ownership interests in KKTY Holding
Company, which purchased 700,000 shares of convertible preferred stock during
2001 as a part of the recapitalization of Katy. The 700,000 shares are
convertible to 11,666,666 shares of common stock upon the occurrence of certain
events. Through April 5, 2002, the accrued and unpaid paid-in-kind (PIK) stock
dividends on the shares of convertible preferred stock held by KKTY Holding
Company equal 71,342 shares of convertible preferred stock, which would be
convertible into 1,189,043 shares of common stock. Each of these persons
disclaims beneficial ownership of these securities.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16 of the Exchange Act, Katy's directors, executive officers
and persons beneficially owning more than 10% of the shares must file reports of
ownership and changes in ownership with the SEC, and copies of these reports
with the New York Stock Exchange and Katy. Based solely on reviewing copies of
the Section 16 reports, Katy believes that, during its fiscal year ended
December 31, 2001, its directors, executive officers and greater than 10%
beneficial owners complied with their Section 16 filing requirements, with the
following exceptions. Roger G. Engle reported in 2002 that he surrendered 54,200
options during 2001, and Larry D. Hudson reported in 2002 that he surrendered
49,000 options during 2001 (see note (8) under Executive Compensation). Also,
Robert M. Baratta, Wallace E. Carroll, Jr., Roger G.
19
Engle and Larry Hudson reported during 2002 that during 2001 they acquired 24,
26, 10 and 6 shares, respectively. These small acquisitions were the net
increase (primarily as a result of dividend reinvestments) in shares held for
their benefit in a "rabbi trust" in connection with either the Katy Industries,
Inc. Supplemental Retirement and Deferral Plan or the Directors' Deferred
Compensation Plan.
20
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the years ending December 31, 2001, 2000,
and 1999, the cash compensation paid by Katy and its subsidiaries (and certain
other compensation paid or accrued for those years) to three individuals who
served as Katy's Chief Executive Officer ("CEO") during 2001, the four other
most highly compensated executive officers for the year ended December 31, 2001,
and two former executive officers whose employment terminated prior to December
31, 2001, and would have been included in the group of four had they been
employees at December 31, 2001 (the "Named Executive Officers").
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation(5) Award(6) Options Compensation
------------------ ---- ------ ----- --------------- ----------- ----------- ------------
C. Michael Jacobi 2001 $250,061 $ -- $ 7,398 $ -- 1,050,000 $ --
President, Chief 2000 -- -- -- -- -- --
Executive Officer(1) 1999 -- -- -- -- -- --
Robert M. Baratta 2001 $240,866 $ -- $ 12,108 $ -- -- $ --
Former President and 2000 212,500 -- 17,368 -- 8,000 --
Chief Executive 1999 167,500 -- 28,765 -- 2,000 --
Officer(1)
John R. Prann, Jr
Former President 2001 $ 70,756 $ -- $ 1,560 $ -- -- $1,366,315
and Chief 2000 525,000 -- 15,234 -- -- --
Executive Officer 1999 525,000 -- 51,411 162,000 -- --
(1)(7)(8)
Roger G. Engle 2001 $283,173 $ -- $ 4,568 $ -- -- $ 213,750
Chief Information 2000 285,000 -- 136,421 -- -- --
Officer and Vice 1999 285,000 -- 21,969 54,000 -- --
President
Larry D. Hudson 2001 $232,034 $ -- $ 9,244 $ -- -- $ 153,750
Vice President, 2000 173,133 -- 8,795 -- -- --
Operations(2) 1999 175,000 -- 21,834 -- -- --
Amir Rosenthal 2001 $ 81,731 $ 75,000 $ 3,322 $ -- 200,000 $ --
Vice President, 2000 -- -- -- -- -- --
Chief Financial 1999 -- -- -- -- -- --
Officer, General
Counsel and
Secretary(4)
21
Other Restricted Securities
Name and Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation(5) Award(6) Options Compensation
------------------ ---- ------ ----- --------------- ----------- ----------- ------------
David C. Cooksey
Corporate Director 2001 $142,611 $ -- $ 4,351 $ -- 30,000 $ 26,120
- Internal Financial 2000 130,492 -- 838 -- -- --
Reporting and 1999 124,654 29,735 1,054 -- -- --
Assistant Treasurer
Arthur R. Miller 2001 $284,870 $ -- $ 4,612 $ -- -- $1,244,544
Former Executive 2000 360,000 -- 8,424 -- -- --
Vice President, 1999 360,000 -- 35,497 108,000 -- --
Corporate
Development,
Secretary and
General Counsel(3)(7)
Stephen P. Nicholson 2001 $265,926 $ -- $ 8,064 $ -- -- $ 804,067
Former Vice 2000 230,000 -- 8,890 -- 15,000 --
President, Finance 1999 230,000 -- 25,085 54,000 10,000 --
and Chief Financial
Officer(3)(7)
(1) John R. Prann, Jr. resigned as President and Chief Executive Officer of Katy
effective February 19, 2001. Effective February 19, 2001, Robert M. Baratta was
appointed to this role by the Board of Directors. With the consummation of the
recapitalization on June 28, 2001, Mr. Baratta resigned the position, and C.
Michael Jacobi became President and Chief Executive Officer.
(2) Larry D. Hudson resigned as Vice President of Operations effective March 31,
2002. Mr. Hudson is still an employee of Katy, working primarily on special
projects at the direction of senior management.
(3) Arthur Miller terminated his employment with Katy on September 28, 2001, and
Stephen Nicholson terminated his employment with Katy on November 30, 2001.
(4) Amir Rosenthal received a $75,000 sign-on bonus upon the commencement of his
employment with Katy on September 1, 2001.
(5) The 2001, 2000 and 1999 figures include employer contributions to the Named
Executive Officers' 401(k) retirement accounts, and non-cash compensation
consisting of personal use of corporate automobiles and group term life
insurance. The 1999 figures also include the dollar value set aside for each
Named Executive Officer under the Katy Industries, Inc. Supplemental Retirement
and Deferred Plan. The 2000 figures include reimbursements to Roger G. Engle for
the expenses incurred during 2000 in connection with his move to Chicago,
Illinois. The 2001 figures include reimbursements to Larry D. Hudson for
expenses incurred during 2001 in connection with his move to St. Louis,
Missouri.
The 2001 figures include the following amounts:
22
Group Term Life
Auto Allowance Insurance 401(k) Match
-------------- --------- ------------
C. Michael Jacobi $ 6,000 $1,398 $ --
Robert M. Baratta 10,264 -- 1,844
John R. Prann, Jr 779 135 646
Roger G. Engle 3,326 1,242 --
Larry D. Hudson -- 810 2,625
Amir Rosenthal 3,200 122 481
David C. Cooksey 3,000 651 700
Arthur R. Miller 1,389 608 2,625
Stephen P. Nicholson 4,696 743 2,625
(6) The number and value of the Named Executive Officers' aggregated restricted
stock holdings at the end of the fiscal year, priced at Katy's closing stock
price at December 31, 2001, were:
Robert M. Baratta 2,000 non-vested shares valued at $5,840
Roger G. Engle 1,500 non-vested shares valued at $5,130
Larry D. Hudson 1,125 non-vested shares valued at $3,848
David C. Cooksey 150 non-vested shares valued at $513
Arthur R. Miller 3,000 non-vested shares valued at $10,260
Stephen P. Nicholson 1,500 non-vested shares valued at $5,130
The values of awards of restricted stock granted during 1999 were calculated at
Katy's closing stock price on the dates of grant as set forth in the following
table:
Number of Shares Katy's Stock Price on
Granted the Grant Date Grant Date
------- -------------- ----------
Robert M. Baratta 1,000 $9.875 12/10/99
3,000 9.672 02/26/00
Roger G. Engle 2,000 $17.125 01/08/99
2,000 9.875 12/10/99
Larry D. Hudson 1,500 $17.125 01/08/99
1,500 9.875 12/10/99
David C. Cooksey 200 $17.125 01/08/99
200 9.875 12/10/99
Arthur R. Miller 4,000 $17.125 01/08/99
4,000 9.875 12/10/99
Stephen P. Nicholson 2,000 $17.125 01/08/99
2,000 9.875 12/10/99
Awards of restricted stock granted on January 8, 1999 generally vest in
25% increments on January 8 of 1999, 2000, 2001 and 2002. Awards of restricted
stock granted on December 10, 1999 generally vest in 25% increments on January 3
in each of 2000, 2001, 2002 and 2003. Awards of restricted stock granted on
February 26, 2000 generally vest in 25% increments on
23
February 26 in each of 2000, 2001, 2002 and 2003. Dividends will be paid on the
restricted stock granted during 1999.
(7) As a result of their terminations of employment, options previously held by
John R. Prann, Jr. and Arthur R. Miller were canceled during 2001. Options held
by Stephen P. Nicholson were still outstanding at December 31, 2001 (as a result
of a 30 business day waiting period after termination before cancellation), but
have since been canceled without exercise.
(8) John R. Prann, Jr. received separation payments as a result of his
termination of employment during 2001. These payments were equal to two years
salary plus accrued vacation. In addition, Katy agreed to pay Mr. Prann's
account balances in 1) the Prior Service Retirement Plan (Frozen Plan) portion
of the Supplemental Retirement Plan, which was $46,475; and 2) his balance in
the basic Supplemental Retirement Plan (excluding amounts deferred under Katy's
Prior Service Retirement Plan (Frozen Plan)), which was $234,158. The second
amount was invested solely in Katy stock, and the payment to Mr. Prann was
calculated based on the price of Katy's common stock at the close of business on
February 16, 2001, and was made in a single lump sum cash payment on January 2,
2002.
Roger G. Engle and Larry D. Hudson received payments related to the
completion of the recapitalization, which were made through a special agreement
with Katy. Those payments were based on 75% of base salary levels in December,
2000. Mr. Engle and Mr. Hudson surrendered their outstanding stock options as a
result of the payment. David C. Cooksey received a success bonus related to the
completion of the recapitalization, equal to 25% of his base salary in December,
2000.
Arthur R. Miller and Stephen P. Nicholson received separation payments as
a result of their terminations from Katy through employment agreements which
reflected many of the features outlined in the Compensation and Benefits
Assurance Program in the event a change in control occurred. Mr. Miller received
payments equaling three years salary, a prorated 50% bonus, payments equal to
three years of 401(k) match, accrued vacation, and outplacement services. Mr.
Nicholson received payments equaling two years salary, a prorated 40% bonus,
payments equal to two years of 401(k) match, accrued vacation and outplacement
services.
24
Option Grant Table
The following table shows information on grants of stock options during
2001 to the Named Executive Officers.
Number of % of Total
Securities Options Potential Realized Value
Underlying Granted to Exercise at Assumed Annual
Options Employees Or Base Expiration Rates Stock of Price
Name Granted(1) During 2000 Price Date Appreciation(2)
-------------------- --------- ------------ -------- ---------- -------------------------
5% 10%
-- ---
C. Michael Jacobi 1,050,000 73.7% $4.20 06/28/11 $699,160 $1,477,490
Amir Rosenthal 200,000 14.0% $3.90 09/01/11 $123,672 $ 261,327
David C. Cooksey 30,000 2.1% $3.40 10/01/11 $ 16,171 $ 34,173
(1) Options that were granted vest nine years from the date of grant (assuming
continued employment). However, options may vest earlier if certain performance
measures are met, at a rate of one-third each calendar year.
(2) These columns show the hypothetical value of the options granted at the end
of the option term if the price of the Katy common stock were to appreciate
annually by 5% and 10%, respectively, based on the grant date value of the Katy
common stock.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table shows the value of in-the-money options at December
31, 2001. No options were exercised in 2001.
Aggregate Fiscal Year-End Option Value
----------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of In-the-Money Options
Options at Year End at Year End
---------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Name
C. Michael Jacobi -- 1,050,000 $ 0 $ 0
Robert M. Baratta 34,500 7,000 0 0
Amir Rosenthal -- 200,000 0 0
David C. Cooksey -- 30,000 0 0
Stephen P. Nicholson 18,500 16,250 0 0
25
TERMINATION OF EMPLOYMENT, CHANGE OF CONTROL AND OTHER ARRANGEMENTS
Chief Executive Officer
On June 28, 2001, C. Michael Jacobi entered into an employment agreement
with Katy. The contract states that if Mr. Jacobi is terminated other than for
cause, Katy will continue to pay his base salary for (i) one year, if such
termination occurs other than as a result of a Change in Control, or (ii) two
years, if such termination is a result of or within the six month period
following a Change in Control.
For purposes of this agreement, "Change in Control" means (i) a sale of
100% of Katy's outstanding capital stock, (ii) a sale of all or substantially
all of Katy's operating subsidiaries or assets or (iii) a transaction or
transactions in which any third party acquires Katy stock in an amount greater
than that held by KKTY Holding Company and in which KKTY Holding Company
relinquishes its right to nominate a majority of the candidates for election to
the Board.
Compensation and Benefits Assurance Program
On January 17, 1996, the Board of Directors adopted and approved a
compensation and benefits assurance program (the "Program") for Katy's key
officers to ensure that Katy retains personnel having particular experience with
and knowledge of Katy's business and affairs. As of December 31, 2001, Roger G.
Engle and Larry D. Hudson were participants in this program. The program
provides for certain severance benefits following: (a) an involuntary
termination without "cause" (as defined under the Program) in the two years
after a "Change in Control" (as defined below) of Katy; or (b) a deemed
constructive termination in the two years after a "Change in Control" of Katy.
Severance benefits include: (i) two years of base salary, (ii) a lump sum
payment of annual bonuses; (iii) continuation of health care benefits; (iv)
matching contributions under Katy's 401(k) savings plan (two years); (v)
advancement of legal fees incurred in enforcing rights under the Program; (vi)
out-placement assistance; and (vii) a "gross-up" payment for any excise tax
payments due by the officer as a result of receiving these severance benefits.
In the event of a "Change of Control," Katy is required to establish and fund a
"rabbi trust" in an amount equal to the sum of the above severance benefits (not
including health care benefit costs and outplacement assistance).
A "Change in Control" is generally defined as: (i) any person (except
persons in control on the effective date) becoming the beneficial owner of Katy
securities with at least 30% of the combined voting power of Katy's then
outstanding shares; (ii) during any period of two consecutive years, individuals
who, at the beginning of that period constitute the Board (including any new
director, whose election by Katy's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office at the beginning of
the period or whose election or nomination for election was so approved),
ceasing to constitute a majority of the Board; or (iii) Katy's stockholders
approving a plan of liquidation, an agreement to dispose of substantially all
Katy's assets, or a merger, consolidation, or reorganization of Katy, other than
a merger, consolidation, or reorganization that would result in the voting
securities of Katy outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the combined voting power
of the voting securities of Katy (or such surviving entity) outstanding
immediately after such merger, consolidation, or reorganization.
26
DIRECTORS' COMPENSATION
For 2001, directors who were not employed by Katy or its subsidiaries
received: (i) an annual retainer of $9,000 ($15,000 for the Chairman of the
Board); (ii) options to acquire 2,000 shares under the Directors Stock Option
Plan (see below); (iii) a stock grant of 500 shares for service on the Board of
Directors; and (iv) up to $2,000 for attending each meeting of the Board or a
Board committee. Class II directors (those directors appointed by KKTY Holding
Company) and those directors that are also officers do not receive compensation
for their service on the Board of Directors. For 2002, it is expected that
directors will receive the same compensation.
Under the Katy Industries, Inc. Non-Employee Director Stock Option Plan
(the "Directors' Stock Option Plan"), each non-employee director receives on the
date immediately following the annual meeting an annual grant of options to
acquire 2,000 shares of Katy common stock. The exercise price is the fair market
value on the date of grant. The director may exercise these options at any time
during the ten years from the date of grant.
Directors may also participate in the Directors' Deferred Compensation
Plan which became effective June 1, 1995 (the "Directors' Deferred Compensation
Plan"). Under this Plan, a director may defer directors' fees, retainers and
other compensation paid for services as a director until the later of the
director's attainment of age 62 or ceasing to be a director. Each director has
30 days before the beginning of a Plan Year (as defined in the Directors'
Deferred Compensation Plan) in which to elect to participate in the Directors'
Deferred Compensation Plan. Directors may invest these amounts in one or more
investment alternatives offered by Katy. Directors may elect to receive
distributions of deferred amounts in a lump sum or five annual installments.
COMPENSATION COMMITTEE'S REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Compensation
Committee") presents the following executive compensation report for fiscal
2001:
The Compensation Committee consists of Christopher Lacovara (Chairman) and
Christopher Anderson. The Committee makes decisions on executive officer
compensation and reports its decisions to the Board. It also seeks the Board's
approval on the Chief Executive Officer's compensation. The following summarizes
the compensation practice and philosophy that was in effect at Katy for the
fiscal year ended December 31, 2001. Modifications to such philosophy have been,
and may continue to be, made.
Compensation Philosophy
Katy's compensation program aims to align executive officers' economic
interests with those of stockholders (including Katy's financial objectives and
market performance). The Compensation Committee seeks to adjust compensation
levels (through competitive base salaries and bonus payments) based on
individual and Katy performance. It reviews the executive compensation program
annually in view of Katy's annual strategic and financial objectives and
performance.
Compensation Program Components
Annual compensation for Katy's Chief Executive Officer and other executive
officers (including the Named Executive Officers) consists of two cash
compensation components: base salary and annual cash bonuses. A third component,
stock options, is used for executive
27
retention, to attract new key people, and to align the long-term interests of
eligible executives with those of stockholders.
Salary and bonus levels reflect job responsibility, Compensation Committee
judgments of individual effort and performance, and Katy's financial and market
performance (in light of the competitive environment in which Katy operates).
Annual cash compensation is also influenced by comparable companies'
compensation practices so that Katy remains reasonably competitive in the
market. While competitive pay practices are important, the Compensation
Committee believes that the most important considerations are individual merit
and Katy's financial and market performance. In considering Katy's financial and
market performance, the Compensation Committee reviews, among other things, net
income, cash flow, working capital and revenues and share price performance
relative to comparable companies and historical performance.
The annual bonus plan compensates employees based on target bonus
opportunities established by the Compensation Committee stated as a percentage
of annual base salary for recommended key employees each year (including the
Chief Executive Officer and the other Named Executive Officers). An employee
achieves the target bonus opportunity if he or she meets 100% of pre-established
performance goals. A higher or lower bonus is earned if performance exceeds or
falls short of the target levels. For 2001, the performance goals were not
satisfied and, therefore, no bonuses were earned by the Chief Executive Officer
of any of the Named Executive Officers. However, employees at certain
subsidiaries received bonuses based on the operating performance at their
divisions. It should be noted that various components of the annual bonus plan
have been re-examined and re-worked given that both the Chief Executive Officer
and Compensation Committee members were new to Katy as of 2001.
The Supplemental Retirement and Deferral Plan (the "Supplemental Deferral
Plan"), among other things, allows participants to voluntarily defer up to 100%
of their annual bonus and up to 50% of their base salary until retirement or
termination of his or her employment. The Supplemental Deferral Plan allows Katy
to make a profit sharing allocation to participants' accounts of, in aggregate,
2% of adjusted pre-tax income, as determined by the Compensation Committee. For
2001, Katy did not make an allocation under the Supplemental Deferral Plan. Katy
invests voluntary deferrals and profit sharing allocations at the employee's
election in several investment alternatives offered by Katy. The profit-sharing
allocation has been discontinued as of January 1, 2002.
The third compensation component is a stock option program. Under Katy's
current stock option program, the Board may provide compensation in the form of
incentive stock options, non-qualified stock options, stock appreciation rights,
restricted stock, performance units or shares, and other incentive awards
including cash bonuses, contingent on Katy's share price reaching certain goals
specified under the stock option program. The Compensation Committee believes
that the stock option program optimizes Katy's growth and profitability through
incentives to employees which are consistent with Katy's goals and which link
employees' personal interests to those of the stockholders. The stock option
program is also intended to give Katy flexibility to attract, motivate, and
retain the services of employees and other individuals who contribute to its
success. During 2001, 1,425,000 stock options were granted.
Chief Executive Officer Compensation
C. Michael Jacobi became President and Chief Executive Officer in June
2001. Mr. Jacobi's salary for 2001, which is $500,000 on an annual basis, was
based upon his experience,
28
qualifications and responsibilities. During 2001, Mr. Jacobi also received a
grant of 1,050,000 stock options.
Summary
The Compensation Committee believes that the total compensation program
for executive officers is appropriately related to individual performance and
Katy's performance (including Katy's financial results and stockholder value).
The Compensation Committee monitors the executive compensation of comparable
companies and believes that Katy's compensation program is competitive and
provides appropriate incentives for Katy's executive officers to work towards
continued improvement in Katy's overall performance.
Compensation Committee of the Board of Directors
Christopher Lacovara, Chairman
Christopher Anderson
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2001, Katy paid Kohlberg & Co. $250,000 for ongoing management
advisory services. Katy expects to pay $500,000 per year for these services, as
outlined in the Recapitalization Agreement of June 2, 2001. William F. Andrews,
Chairman of the Board, is a consultant, or "Operating Principal," with Kohlberg
& Co.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors met 28 times during 2001. With the exception of
William Andrews, each director in office at the time of such meeting attended at
least 75% of the Board meetings and the meetings of the Board committees of
which he is a member. Mr. Andrews did not attend a majority of the Board
meetings during 2001 because the primary subject of these Board meetings was the
evaluation of the proposed (at that time) recapitalization negotiated by certain
affiliates of Kohlberg & Co. Since Mr. Andrews is an Operating Principal of
Kohlberg & Co., he did not attend those meetings as a result of the potential
conflict of interest. Since the recapitalization was completed on June 28, 2001,
Mr. Andrews has attended all Board meetings.
Katy's bylaws provide for an Executive Committee to which the Board of
Directors has assigned all powers delegable by law. The Executive Committee met
informally through numerous telephone conferences at intervals between meetings
of the full Board of Directors, and acted by unanimous consent without formal
meetings. The Executive Committee consists of Christopher Lacovara, Christopher
Anderson and C. Michael Jacobi. Prior to June 28, 2001, the Executive Committee
consisted of Wallace Carroll, Jr., Arthur R. Miller, Robert M. Baratta, Charles
Sahlman, and Jacob Saliba. John R. Prann, Jr. was a member of the Executive
Committee prior to his resignation as Chief Executive Officer and director in
February 2001.
The Board of Directors also has an Audit Committee and a Compensation
Committee. The Audit Committee consists of Daniel B. Carroll (Chairman),
Christopher Lacovara and William F. Andrews. Prior to June 28, 2001, the Audit
Committee consisted of Daniel B. Carroll (Chairman), Wallace E. Carroll, Jr.,
and Jacob Saliba. This Committee met four times during 2001, and held several
telephone conferences during 2001. The Audit Committee reviews the results of
the annual audit with Katy's independent auditors, reviews the scope and
adequacy of
29
Katy's internal auditing procedures and its system of internal controls, reviews
Katy's financial statements and related financial issues with management and the
independent auditors, and reports its findings and recommendations to the Board
of Directors.
The Compensation Committee consists of Christopher Lacovara (Chairman) and
Christopher Anderson. Prior to June 28, 2001, the Compensation Committee
consisted of Charles Sahlman (Chairman), Jacob Saliba and Daniel B. Carroll.
This Committee, which reviews current and deferred compensation for Katy
officers and for some officers and key employees of its subsidiaries, held two
meetings, and met informally throughout the year. It makes decisions on
executive officer compensation and reports its decisions to the Board of
Directors. It also seeks the Board's approval on the Chief Executive Officer's
compensation.
The entire Board of Directors considers and selects nominees for
directors. It does not have a separate nominating committee. On January 17,
1996, the Board adopted an advance notice bylaw provision requiring stockholder
nominations for directors to be received by Katy not less than 50 days or more
than 90 days before the annual meeting.
AUDIT COMMITTEE REPORT
The following report of the Audit Committee does not constitute soliciting
materials and should not be deemed filed or incorporated by reference into any
of our other filings under the Securities Act of 1933, as amended, or the
Exchange Act of 1934, except to the extent that we specifically incorporate this
report by reference therein.
The Audit Committee acts pursuant to a charter adopted by the Board of
Directors. As set forth in more detail in the charter, the Audit Committee's
primary responsibilities are focused in four broad categories:
1. Recommend to the Board of Directors the appointment of independent
auditors;
2. Consult with management or independent auditors regarding the audit
scope and the audit plan;
3. Review and approve company financial statements; and
4. Review with management and independent auditors the adequacy of
internal controls.
Each of the Audit Committee members qualifies as an "independent" director
under the current listing standards of the New York Stock Exchange (referred to
as the NYSE), except that Mr. Lacovara may not be considered independent because
he is on the Board of Managers of KKTY Holding Company, which owns all of our
outstanding Convertible Preferred Stock and he therefore may be deemed to have a
"business relationship" under NYSE listing standards. The Board of Directors has
determined that it is nevertheless in the best interest of the Company and its
stockholders for Mr. Lacovara to serve on the Audit Committee notwithstanding
his relationship, as permitted by NYSE rules, because of his extensive knowledge
of financial matters generally, his significant experience with Katy and his
past service on the board of directors and audit committees of other companies.
The Audit Committee has reviewed and discussed the audited financial
statements for the year ending 2001 with management and our independent
auditors, and has discussed with the independent auditors the matters required
to be discussed by Statement on Auditing Standards 61
30
(Communications with Audit Committees). The Audit Committee has received the
written disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees), and has discussed with the independent auditors the independent
auditors' independence from Katy and our management. Based on these reviews and
discussions, the Audit Committee recommended to the Board of Directors, and the
Board approved, that the audited financial statements be included in Katy's
Annual Report on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission.
Audit Committee of the Board of Directors
Daniel B. Carroll (Chairman)
Christopher Lacovara
William F. Andrews
ADDITIONAL INFORMATION REGARDING INDEPENDENT AUDITORS
Arthur Andersen LLP, independent public accountants, audited the accounts
of the Company for 2001 and has audited the accounts of the Company since 1998.
As of the date of this Proxy Statement, an independent auditor has not been
appointed for 2002 as the Audit Committee continues to monitor events regarding
the future of Arthur Andersen LLP. A representative from of Arthur Andersen LLP
will be present at the annual meeting with the opportunity to make a statement
and respond to appropriate questions.
Audit Fees
Fees billed to the Company by Arthur Andersen LLP for the year 2001 for
professional services rendered for the audit of the Company's annual financial
statements for 2001 and the review of the financial statements included in its
quarterly reports during 2001 were $444,000.
All Other Fees
Fees billed to the Company by Arthur Andersen LLP for professional
services rendered during 2001 for all other services were $116,000, including
employee benefit plan audits of $99,000 and tax advisory services of $17,000. In
addition, the Company paid a fee of $132,000 to Arthur Andersen LLP for work
they performed on behalf of KKTY Holding Company during the due diligence
process leading up to the recapitalization. This work was performed by an office
of Arthur Andersen LLP separate and distinct from the office performing the
audit of the annual financial statements. There were no fees billed for work
related to financial systems design and implementation.
STOCK PRICE PERFORMANCE GRAPH
The graph below compares the yearly percentage change in the cumulative
total stockholder return on the shares of Katy common stock with the cumulative
total return of the Russell 2000 and the cumulative total return of the S&P
Manufacturing Diversified for the fiscal years ending December 31, 1996 through
2001. The graph below assumes $100 invested, including reinvestment of
dividends, on December 31, 1996.
31
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG KATY INDUSTRIES, INC., THE RUSSELL 2000 INDEX
AND THE S&P MANUFACTURING (DIVERSIFIED) INDEX
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Cumulative Total Return
--------------------------------------------------------------
12/96 12/97 12/98 12/99 12/00 12/01
Katy Industries, Inc. 100.00 143.07 125.42 63.61 45.45 25.91
Russell 2000 100.00 122.36 119.25 144.60 140.23 143.71
S&P Manufacturing (Diversified) 100.00 119.08 138.02 169.97 201.98 198.95
* $100 invested on 12/31/96 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.
32
PROPOSALS OF STOCKHOLDERS FOR 2003 ANNUAL MEETING
In order to be considered for inclusion in Katy's proxy materials for the
2003 annual meeting of stockholders, any stockholder proposal must be addressed
to Katy Industries, Inc., 765 Straits Turnpike, Middlebury, Connecticut 06762,
Attention: Secretary, and must be received no later than December 21, 2002.
If proposals are not received in time to be included in the proxy
materials, Katy's bylaws set forth additional requirements and procedures
regarding the submission of stockholder proposals for consideration at an annual
meeting of stockholders. A stockholder proposal or nomination intended to be
brought before the 2003 annual meeting must be received by the Secretary in
writing not less than 50 days or more than 90 days prior to the 2003 annual
meeting. A nomination or proposal that does not comply with such requirements
and procedures will be disregarded.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not
know of any matters to be presented at the meeting other than the proposals
noted in the Proxy Statement. However, if other matters come before the meeting,
it is the intention of the persons named on the accompanying proxy to vote on
such matters in accordance with their best judgment. On January 17, 1996, Katy's
Board of Directors adopted an advance notice bylaw provision requiring that
stockholder proposals to be made at any annual meeting be received by Katy not
less than 50 days nor more than 90 days prior to the annual meeting. No such
stockholder proposals were received for the 2002 annual meeting.
FORM 10-K
Upon written request to our corporate office at 765 Straits Turnpike,
Middlebury, Connecticut 06762, stockholders will be furnished without charge a
copy of our Annual Report on Form 10-K required to be filed with the Securities
and Exchange Commission, including the financial statements and the schedules
thereto for the most recent fiscal year.
Middlebury, Connecticut
April 30, 2002
33
ANNEX A
PROPOSED CERTIFICATE OF AMENDMENT TO
THE RESTATED CERTIFICATE OF INCORPORATION
OF KATY INDUSTRIES, INC.
KATY INDUSTRIES, INC., a corporation organized and existing under and by
virtue of the General Laws of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation at a meeting on
April 9, 2002 adopted a resolution setting forth a proposed amendment to the
Restated Certificate of Incorporation of the Corporation, as amended (the
"Restated Certificate of Incorporation") declaring said amendment to be
advisable and directing that said amendment be submitted to the stockholders of
the Corporation for consideration thereof at the next annual meeting of
stockholders. The resolution setting forth the proposed amendment to the
Restated Certificate of Incorporation is as follows:
RESOLVED, that Article Fourth, Section 4, of the Restated Certificate of
Incorporation shall be deleted and amended in its entirety to read as follows:
4. Liquidation Preference.
(a) In the event of any Liquidation, holders of Preferred Stock shall be
entitled to receive out of the assets of the Corporation, prior to and in
preference of any distribution or payment upon the Common Stock, an amount in
cash per share of Preferred Stock equal to the greater of (i) the par value
thereof or (ii) the amount that would be payable on the Common Stock into which
such share of Preferred Stock (together with any unpaid dividends) is
convertible if such share of Preferred Stock (together with any unpaid
dividends) were converted in accordance with this Article 4, Section 6
immediately prior to such distribution. If, upon the occurrence of a
Liquidation, the assets and funds thus distributed among the holders of the
Preferred Stock shall be insufficient to permit the payment in full of the par
value thereof for each share of Preferred Stock, then the entire assets and
funds of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Preferred Stock in proportion to their
respective ownership of shares of Preferred Stock.
(b) Written notice of such Liquidation stating a payment date and the
place where payment in respect of Liquidation shall be payable, shall be given
by mail, postage prepaid, not less than twenty (20) days prior to the payment
date stated therein, to the holders of record of Preferred Stock, such notice to
be addressed to each such holder at its address as shown by the records of the
Corporation.
SECOND: That thereafter, pursuant to resolutions of the Board of Directors
of the Corporation, an annual meeting of the stockholders of the Corporation was
duly called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the number of shares
necessary to authorize said amendment were voted in favor of said amendment.
A-1
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its officer thereunto duly authorized this 30th day of May, 2002.
By: ________________________
Name:
Title:
Attest:
By: ________________________
Name:
Title:
A-2
ANNEX B
KATY INDUSTRIES, INC.
2002 STOCK INCENTIVE PLAN
B-1
KATY INDUSTRIES, INC.
2002 STOCK INCENTIVE PLAN
ARTICLE I. - DEFINITIONS
1.01 - ACCELERATION DATE
means the earlier of (i) the date that the Board approves a transaction or
series of transactions that, if consummated, would result in a Change in Control
or (ii) the date that an agreement is entered into with respect to a transaction
or series of transactions that, if consummated, would result in a Change in
Control.
1.02 - ADMINISTRATOR
means the Committee and any delegate of the Committee that is appointed in
accordance with Article III.
1.03 - AWARD
means an Option or Restricted Stock awarded under the Plan.
1.04 - BOARD
means the Board of Directors of the Company.
1.05 - CAUSE
has the same definition as under any employment or service agreement
between the Company or any Subsidiary and the Participant or, if no such
employment or service agreement exists or if such employment or service
agreement does not contain any such definition, Cause means (i) the
Participant's willful and repeated failure to comply with the lawful directives
of the Board, the Board of Directors of any Subsidiary or any supervisory
personnel of the Participant, (ii) any criminal act or act of dishonesty or
willful or gross misconduct by the Participant that has a material adverse
affect on the property, operations, business or reputation of the Company or any
Subsidiary, (iii) the material breach by the Participant of the terms of any
confidentiality, noncompetition, nonsolicitation, employment or service
agreement that the Participant has with the Company or any Subsidiary, (iv) acts
by the Participant of willful malfeasance or gross negligence in a matter of
material importance to the Company or any Subsidiary or a deliberate breach of
any fiduciary duty the Participant owes the Company or any Subsidiary, or (v)
the continued failure of the Participant to perform substantially his or her
duties with the Company or any Subsidiary, but only if such non-performance can
be cured, the Company or any Subsidiary delivers to the Participant a written
demand for substantial performance that specifically identifies the manner in
which the Company or Subsidiary believes that the Participant has not
substantially performed his or her duties and the Participant then fails to
substantially cure such non-performance within thirty (30) days of such written
demand. For purposes of the Plan, in no event shall any termination of
employment or service be deemed for Cause unless the Company's Chief Executive
Officer concludes that the situation warrants a determination that the
Participant's employment or service terminated for Cause; in the case of the
Chief Executive Officer, any determination that the Chief Executive Officer's
employment terminated for Cause shall be made by the Board acting without the
Chief Executive Officer.
B-2
1.06 - CHANGE IN CONTROL
means, except as described below, the occurrence of any of the following:
(i)(a) the Company consolidates with, or merges with or into, another Person,
(b) there is a merger, reorganization, consolidation, share exchange or other
transaction involving the Voting Stock of the Company, (c) the Company sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of the assets of the Company to any Person, (d) any Person
consolidates with, or merges with or into, the Company, or (e) any similar
event, where with respect to each of the events described in (a) through (e) the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property or continues as the Voting Stock of the surviving
or transferee Person, except that none of the foregoing events will constitute a
Change in Control unless any Person or Persons acting in concert (and their
Related Entities), other than KKTY Holding Company, L.L.C. and its Related
Entities, beneficially own Voting Stock of the Company representing, directly or
indirectly, more Voting Stock than KKTY Holding Company, L.L.C. and its Related
Entities collectively own and have the right to acquire on conversion of any
Preferred Stock, or (ii) any transaction that results in any Person or Persons
acting in concert (and their Related Entities), other than KKTY Holding Company,
L.L.C. and its Related Entities, beneficially owning Voting Stock of the Company
representing, directly or indirectly, more Voting Stock than KKTY Holding
Company, L.L.C. and its Related Entities own and have the right to acquire on
conversion of any Preferred Stock, or (iii) any transaction or other event that
results in KKTY Holding Company, L.L.C. and its Related Entities collectively
owning and having the right to acquire on conversion of any Preferred Stock less
than 51 percent of the voting power of the Voting Stock of the Company, or (iv)
the approval by the holders of Voting Stock of the Company of any plan or
proposal for liquidation or dissolution of the Company or (v) the consummation
of any other transaction that a majority of the Board, in its sole and absolute
discretion, determines constitutes a Change in Control for purposes of this
Plan. Notwithstanding any other provision of this Plan, the conversion of the
Preferred Stock KKTY Holding Company, L.L.C. or any of its Related Entities own
into shares of the Voting Stock of the Company shall not constitute a Change of
Control.
1.07 - CODE
means the Internal Revenue Code of 1986, as amended.
1.08 - COMMITTEE
means the Compensation Committee of the Board, if the Board appoints one
to administer the Plan, or the Board itself if no such Compensation Committee is
appointed to administer the Plan. If such Compensation Committee is appointed,
if and to the extent deemed necessary by the Board, such Compensation Committee
shall consist of two or more non-employee outside directors all of whom are
"non-employee directors" within the meaning of Rule 16b-3 under the Exchange Act
and "outside directors" within the meaning of Section 162(m) of the Code.
1.09 - COMMON STOCK
means the common stock, $1.00 par value per share, of the Company.
1.10 - COMPANY
means Katy Industries, Inc.
B-3
1.11 - CONTROL CHANGE DATE
means the date on which a Change in Control occurs. If a Change in Control
occurs on account of a series of transactions, the "Control Change Date" is the
date of the last of such transactions.
1.12 - EMPLOYEE
means any person whom the Company or any Subsidiary employs under the
rules of Section 3401(c) of the Code and the regulations thereunder.
1.13 - EXCHANGE ACT
means the Securities Exchange Act of 1934, as amended.
1.14 - FAIR MARKET VALUE
means, on any given date, the fair market value of a share of Common Stock
as the Administrator in its discretion shall determine; provided, however, that
the Administrator shall determine Fair Market Value without regard to any
restriction other than a restriction which, by its terms, will never lapse and,
if the shares of Common Stock are traded on any stock exchange, the Fair Market
Value of a share of Common Stock shall be the closing price of a share of Common
Stock as reported on such stock exchange as of the immediately preceding date,
or if the shares of Common Stock are not traded on such stock exchange on such
immediately preceding date, then on the next preceding day that the shares of
Common Stock were traded on such stock exchange, all as reported by such source
as the Administrator shall select. The Fair Market Value that the Administrator
determines shall be final, binding and conclusive on the Company, each
Subsidiary and each Participant.
1.15 - INCENTIVE STOCK OPTION
means an Option that is subject to Section 422 of the Code.
1.16 - INSIDER
means an individual who is an officer, director or ten percent (10%)
beneficial owner of any class of the Company's equity securities that are
registered pursuant to Section 12 of the Exchange Act, as more fully described
under Section 16 of the Exchange Act.
1.17 - NAMED EXECUTIVE OFFICER
means a Participant who, as of the last day of a taxable year, is the
chief executive officer of the Company (or is acting in such capacity) or one of
the four highest compensated officers of the Company (other than the chief
executive officer) or is otherwise one of the group of "covered employees", as
defined in the Treasury Regulations promulgated under Section 162(m) of the
Code.
1.18 - NONQUALIFIED STOCK OPTION
means an Option that is not subject to Section 422 of the Code.
B-4
1.19 - 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 the Option
Agreement that specifies the terms and conditions of the Option.
1.20 - OPTION AGREEMENT
means a written agreement (including any amendment or supplement thereto)
between the Company and a Participant specifying the terms and conditions of an
Option granted to the Participant.
1.21 - PARENT
means any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company if, at the time of the granting of the
Award, each of the corporations other than the Company owns stock possessing 50
percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
1.22 - PARTICIPANT
means an Employee, director, advisor or consultant of the Company or any
Subsidiary who satisfies the requirements of Article IV and whom the
Administrator selects to receive an Award.
1.23 - PERSON
means any individual, corporation, partnership, limited liability company,
joint venture, incorporated or unincorporated association, joint-stock company,
trust, unincorporated organization or government or other agency or political
subdivision thereof or any other entity of any kind.
1.24 - PLAN
means this 2002 Katy Industries, Inc. Stock Incentive Plan.
1.25 - PREFERRED STOCK
has the same meaning as under the Certificate of Incorporation of the
Company.
1.26 - RELATED ENTITY
means with respect to any Person any Person or entity that, directly or
indirectly, through one or more intermediaries, controls such Person, is
controlled by such Person or is under common control with that Person.
1.27 - RESTRICTED STOCK
means Common Stock granted to a Participant under the Plan that is subject
to the restrictions set forth in the Plan and the Restricted Stock Agreement
that specifies the terms and conditions of the award of Restricted Stock.
B-5
1.28 - RESTRICTED STOCK AGREEMENT
means a written agreement (including any amendment or supplement thereto)
between the Company and a Participant specifying the terms and conditions of any
Restricted Stock granted to the Participant.
1.29 - SUBSIDIARY
means any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company, if at the time of the granting of the
Award, each of the corporations other than the last corporation in the unbroken
chain owns stock possessing 50 percent or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
1.30 - TEN PERCENT SHAREHOLDER
means any individual who (considering the stock attribution rules
described in Section 424(d) of the Code) owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, any Parent or any Subsidiary.
1.31 - VESTED
means nonforfeitable and transferable within the meaning of Section 83 of
the Code.
1.32 - VOTING STOCK
with respect to any specified Person means any class or classes of stock
of the specified Person pursuant to which the holders thereof have the general
voting power under ordinary circumstances to elect at least a majority of the
board of directors, managers or trustees of the specified Person.
ARTICLE II - PURPOSES
This Plan is intended to assist the Company and its Subsidiaries in
recruiting and retaining individuals with ability and initiative by enabling
such persons to participate in the future success of the Company and to
associate their interests with those of the Company and its shareholders. The
Plan is intended to permit the grant of Options and Restricted Stock. The
proceeds the Company receives from the sale of Common Stock pursuant to any
Participant's exercise of an Option or the sale of Restricted Stock shall be
used for general corporate purposes.
ARTICLE III - ADMINISTRATION
The Administrator shall have the complete authority to grant Awards on
such terms (not inconsistent with the provisions of this Plan), as the
Administrator may consider appropriate. Such terms may include conditions (in
addition to those contained in this Plan) on the exercisability of all or any
part of an Option or on the Vesting or other forfeiture conditions imposed on
any shares of Restricted Stock. The Administrator also shall administer the
Plan. The Administrator shall have the complete authority to interpret all
provisions of this Plan; to prescribe the form of Option Agreements and
Restricted Stock Agreements; to accelerate the exercisability of an Option or
the Vesting of shares of Restricted Stock as a result of a Change in Control or
otherwise; to adopt, amend and rescind rules and regulations pertaining to
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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 or action of the
Administrator in connection with the administration of this Plan shall be final,
conclusive and binding on all persons. Neither the Administrator nor any member
of the Committee shall be liable for any act done or not done in good faith with
respect to this Plan, any Option Agreement or any Restricted Stock Agreement.
The Company shall bear all expenses of administering this Plan. The
Administrator may act only by decision of a majority of its members, except that
the Administrator, in its discretion, may delegate to one or more officers of
the Company or another committee of the Board, all or part of the
Administrator's authority and duties with respect to grants of Awards to
Participants. The Administrator may revoke or amend the terms of such delegation
at any time but such action shall not invalidate any prior actions of the
Administrator's delegate or delegates that were consistent with the terms of the
Plan. Notwithstanding the two preceding sentences, the Administrator may not
delegate its authority and duties with respect to an Award to a Participant who
is an Insider or a Named Executive Officer. To the extent deemed necessary by
the Board, (i) all Awards to an Insider shall be approved by the Board or by a
Committee comprised of two or more non-employee directors within the meaning of
Rule 16b-3 of the Exchange Act, unless such Awards will be held by the
Participant at least six months after the date they are granted to such
Participant and (ii) all Awards to a Named Executive Officer shall be approved
by a Committee comprised solely of two or more outside directors within the
meaning of Section 162(m) of the Code.
Each person who is or shall have been a member of any Board or Committee
acting as the Administrator or any delegate of such, shall be indemnified and
held harmless by the Company against and from any loss, cost, liability, or
expense that may be imposed upon or reasonably incurred by such person in
connection with or resulting from any claim, action, suit, or proceeding to
which such person may be a party or in which such person may be involved by
reason of any action taken or not taken under the Plan and against and from any
and all amounts paid by such person in settlement thereof, with the Company's
approval, or paid by such person in satisfaction of any judgment in any such
action, suit, or proceeding against, provided he or she shall give the Company
an opportunity, at its own expense, to handle and defend the same before he or
she undertakes to handle and defend it on his or her own behalf. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Articles of Incorporation or Bylaws, as a matter of law or otherwise, or under
any other power that the Company may have to indemnify such person or hold him
or her harmless.
ARTICLE IV - ELIGIBILITY
Any Employee, director, advisor or consultant of the Company or any
Subsidiary (including a corporation that becomes a Subsidiary after the adoption
of this Plan) is eligible to receive Awards if the Administrator, in its sole
discretion, determines that such person has contributed significantly or can be
expected to contribute significantly to the profits or growth of the Company or
any Subsidiary.
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ARTICLE V - STOCK SUBJECT TO PLAN
5.01 - SHARES ISSUED.
On the exercise of an Option or on the grant of Restricted Stock, the
Company may deliver to the Participant (or the Participant's broker if the
Participant so directs) shares of Common Stock from its authorized but unissued
shares of Common Stock or from reacquired shares of Common Stock.
5.02 - AGGREGATE LIMITS.
The maximum number of shares of Common Stock that may be issued under this
Plan is 1,000,000 shares of Common Stock. The maximum number of shares of Common
Stock that may be issued under the Plan pursuant to the exercise of Options is
1,000,000 shares of Common Stock. The maximum number of shares in each instance
shall be subject to adjustments as provided in Article XI.
5.03 - INDIVIDUAL LIMITS.
Subject to the other limitations set forth in this Plan, no individual
may, in any calendar year, be granted Options covering more than 100,000 shares
of Common Stock or aggregate Awards covering more than 100,000 shares of Common
Stock. If an Award that a Participant holds is canceled, the canceled Award
shall continue to be counted against the maximum number of shares of Common
Stock for which similar Awards may be granted to the Participant in any calendar
year and any replacement Awards granted to such Participant in replacement of
the canceled Awards also shall count against such maximum limit. The maximum
number of shares that may be granted in any calendar year to any individual
shall be subject to adjustment as provided in Article XI.
5.04 - REALLOCATION OF SHARES.
If an Option is terminated, in whole or in part, for any reason other than
its exercise or if any Restricted Stock is canceled, expires or terminates
without the Restricted Stock becoming Vested, the number of shares of Common
Stock allocated to the Option or Restricted Stock or the terminated portion
thereof may be reallocated to other Awards to be granted under this Plan,
subject to the limits described above.
ARTICLE VI - TERMS AND CONDITIONS
OF ALL OPTIONS
6.01 - GRANTS.
In accordance with the provisions of Article IV, the Administrator will
designate each individual to whom an Option is to be granted and will specify
the number of shares of Common Stock covered by such grant and whether the
Option is an Incentive Stock Option or a Nonqualified Stock Option. Incentive
Stock Options also must comply with the provisions of Article VII. The date an
Option is granted shall be the date on which the Administrator has approved the
terms and conditions of the Option and has determined the recipient of the
Option and the number of shares of Common Stock covered by the Option and has
documented the grant of the Option in an Option Agreement. Each Option granted
under the Plan shall be evidenced by an Option Agreement in such form and
containing such terms, conditions and restrictions (not inconsistent with this
Plan) as the Administrator shall determine.
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6.02 - OPTION PRICE.
The Administrator on the date of grant shall determine the price per share
for Common Stock payable upon the exercise of an Option except that the price
per share for Common Stock shall not be less than 75 percent of the Fair Market
Value of a share of Common Stock on the date of grant of the Option. With
respect to Options granted to Named Executive Officers, if and to the extent
deemed necessary by the Administrator, the price per share for Common Stock
shall not be less than one hundred percent (100%) of the Fair Market Value of a
share of Common Stock on the date of grant of the Option unless the
exercisability of the Option with respect to shares of Common Stock for which
the option price is less than such amount is subject to performance objectives
that enable such Option to qualify as "performance-based compensation" under the
Treasury Regulations promulgated under Section 162(m) of the Code.
6.03 - MAXIMUM OPTION PERIOD.
The Administrator on the date of grant shall determine the maximum period
in which an Option may be exercised, except that no Option shall be exercisable
after the expiration of 10 years from the date such Option is granted. The terms
of any Option may provide that it is exercisable for a period less than such
maximum period.
6.04 - NONTRANSFERABILITY.
(a) Except as set forth in Section 6.04 (b) below, each Option granted under
this Plan shall be nontransferable except by will or by the laws of descent and
distribution. In the event of any such transfer of an Option, the Option must be
transferred in its entirety to the same person or persons or entity or entities.
Except as set forth in Section 00 below, during the lifetime of the Participant
to whom the Option is granted, only the Participant may exercise the Option. No
right or interest of a Participant in any Option shall be liable for, or subject
to, any lien, obligation or liability of such Participant.
(b) Notwithstanding Section (a) above, if the Option Agreement so provides, an
Option that is not an Incentive Stock Option may be transferred by the
Participant to the Participant's children, grandchildren, spouse, one or more
trusts for the benefit of such family members, a partnership in which such
family members are the only partners or a limited liability company (treated
like a partnership for tax purposes) in which such family members are the only
members on such terms and conditions as Rule 16b-3 of the Exchange Act as in
effect from time to time may permit. Any such transfer will be permitted only if
(i) the Participant does not receive any consideration for the transfer and (ii)
the transfer is expressly approved by the Administrator. The holder of such
Option shall be bound by the same terms and conditions that governed the Option
during the period the Participant held it; provided, however, that such
transferee may not transfer such Option except by will or the laws of descent
and distribution. Any such transfer shall be evidenced by an appropriate written
document executed by the Participant, and a copy thereof shall be delivered to
the Administrator on or prior to the effective date of the transfer.
6.05 - CHANGE IN CONTROL.
Notwithstanding any provision of any Option Agreement, in the event of or
in anticipation of a Change in Control, the Administrator in its discretion (i)
may declare that some or all outstanding Options previously granted under the
Plan shall terminate as of a date on or after an Acceleration Date or before or
on the Control Change Date without any payment to the holder of the Option,
provided the Administrator gives prior written notice to the Participants of
such termination and gives such Participants the right to
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exercise their outstanding Options at least 15 days before such termination date
to the extent then exercisable or (ii) may terminate on or after an Acceleration
Date or before or on the Control Change Date some or all outstanding Options
previously granted under the Plan in consideration of payment to the holder of
the Option, with respect to each share of Common Stock to which the Option is
then exercisable, of the excess, if any, of the Fair Market Value on such date
of the Common Stock subject to the exercisable portion of the Option over the
Option price. The payment described in (ii) above may be made in any manner the
Administrator determines, including in cash, Voting Stock or other property. The
Administrator in its discretion may take the actions described in (i) or (ii)
above contingent on consummation of the Change in Control and with respect to
some or all outstanding Options or on an Option-by-Option basis, which actions
need not be uniform with respect to all outstanding Options. The preceding
sentences to the contrary notwithstanding, the Options shall not be terminated
to the extent that written provision is made for their continuance, assumption
or substitution by a successor employer or its parent or subsidiary in
connection with the Change in Control.
6.06 - EXERCISE.
An Option may be exercised in whole at any time or in part from time to
time at such times and in compliance with such requirements as the Administrator
shall determine and as set forth in this Plan and the Option Agreement. An
Option granted under this Plan may be exercised with respect to any number of
whole shares less than the full number of shares for which the Option could be
exercised. A partial exercise of an Option shall not affect the right to
exercise the Option from time to time in accordance with this Plan and the
applicable Option Agreement with respect to the remaining shares subject to the
Option.
6.07 - PAYMENT.
Unless the Option Agreement provides otherwise, payment of the Option
price shall be made in cash or a cash equivalent acceptable to the
Administrator. If the Option Agreement so provides, the Administrator in its
discretion may permit a Participant to pay all or part of the Option price (i)
by surrendering shares of Common Stock of the Company that the Participant has
held for at least six months, (ii) by delivery of the full recourse,
interest-bearing promissory note of the Participant, (iii) by a cashless
exercise through a broker, (iv) by such other medium of payment as the
Administrator, in its discretion shall authorize or (v) by any combination of
the aforementioned methods of payment. If Common Stock is used to pay all or
part of the Option price, the sum of the cash and cash equivalent and other
payments and the Fair Market Value of the Common Stock surrendered must not be
less than the Option price of the shares for which the Option is being
exercised.
6.08 - SHAREHOLDER RIGHTS.
No Participant shall have any rights as a shareholder with respect to
shares of Common Stock subject to an Option until the proper exercise of such
Option, the payment of any applicable withholding taxes and the issuance to the
Participant of the certificates representing the shares of Common Stock for
which the Option is exercised. The Company may include on any certificates
representing shares of Common Stock issued pursuant to an Option such legends
referring to any representations, restrictions or any other applicable
statements as the Company, in its discretion, shall deem appropriate.
6.09 - FORFEITURE PROVISIONS.
Notwithstanding any other provisions of the Plan or any Option Agreement,
all rights to any Common Stock that a Participant has regarding Options will be
immediately discontinued and forfeited, and the Company shall not have any
further obligation hereunder to the Participant with respect to any
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Option and the Option will not be exercisable for any number of shares of Common
Stock (whether or not previously exercisable), on and after the time the
Participant is discharged from employment or service with the Company or any
Subsidiary for Cause.
ARTICLE VII- ADDITIONAL TERMS AND CONDITIONS OF
INCENTIVE STOCK OPTIONS
7.01 - EMPLOYEE STATUS.
Notwithstanding any other provision of the Plan or any Option Agreement,
the Administrator may only grant an Incentive Stock Option to an Employee of the
Company or any Subsidiary.
7.02 - EXERCISE PRICE.
Notwithstanding any other provision contained in the Plan or any Option
Agreement, no Employee may receive an Incentive Stock Option under the Plan,
unless the Option price for such Incentive Stock Option is at least 100 percent
of the Fair Market Value on the date of grant of the Common Stock subject to
such Incentive Stock Option.
7.03 - AGGREGATE EXERCISE LIMITS.
The Administrator may not grant an Incentive Stock Option to the extent
the aggregate Fair Market Value, determined at the time the Administrator grants
the Incentive Stock Option, of shares of Common Stock with respect to which a
Participant may exercise Incentive Stock Options for the first time during any
calendar year under this Plan and any other plan of the Company (or any plan of
any Parent or Subsidiary of the Company) exceeds $100,000. If the limitation is
exceeded, the Incentive Stock Options that cause the limitation to be exceeded
shall be treated as Nonqualified Stock Options.
7.04 - RESTRICTIONS ON TEN-PERCENT SHAREHOLDERS.
No Employee may receive an Incentive Stock Option under the Plan if such
Employee, at the time of grant, is a Ten Percent Shareholder, unless the option
price for such Incentive Stock Option is at least 110 percent of the Fair Market
Value on the date of grant of the Common Stock subject to such Incentive Stock
Option and such Incentive Stock Option is not exercisable after the expiration
of five years from the date such Incentive Stock Option is granted.
7.05 - VALIDITY OF OPTIONS.
Options that are intended to be Incentive Stock Options but that do not
comply with this Article VII shall be treated as Nonqualified Stock Options.
7.06 - NOTIFICATION UPON SALE.
If the Participant sells or otherwise disposes of any shares of Common
Stock acquired under an Incentive Stock Option before the expiration of the
later of the two-year period beginning on the date of grant of the Incentive
Stock Option or the one-year period beginning on the date that the Participant
exercises the Incentive Stock Option with respect to such shares of Common
Stock, the Participant shall give written notice to the Company of the sale or
other disposition as soon as possible.
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7.07 - NO LIABILITY OF COMPANY.
The Company shall not be liable to any Participant or any other person if
the Internal Revenue Service or any court having jurisdiction over such matter
determines for any reason that an Option intended to be an Incentive Stock
Option and granted hereunder does not qualify as an Incentive Stock Option.
ARTICLE VIII - TERMS AND CONDITIONS
OF RESTRICTED STOCK
8.01 - GRANTS.
In accordance with the provisions of Article IV, the Administrator will
designate each individual to whom Restricted Stock is to be granted and will
specify the number of shares of Common Stock covered by such Award and the
purchase price, if any, the Participant must pay for such shares. The date
Restricted Stock is granted shall be the date on which the Administrator has
approved the terms and conditions of the Restricted Stock grant, has determined
the recipient of the Restricted Stock and the number of shares of Common Stock
to which the Restricted Stock grant pertains, and has documented the grant of
the Restricted Stock in a Restricted Stock Agreement. If the Participant must
pay for an Award of Restricted Stock, the date of grant shall not be earlier
than the date the Participant pays for the Award in accordance with Section
8.02. Restricted Stock acquired under the Plan shall be evidenced by a
Restricted Stock Agreement in such form and containing such terms, conditions
and restrictions (not inconsistent with this Plan) as the Administrator shall
determine.
8.02 - PAYMENT.
If the Participant must pay for an Award of Restricted Stock, unless the
Restricted Stock Agreement provides otherwise, payment of the purchase price
shall be made in cash or a cash equivalent acceptable to the Administrator. If
the Restricted Stock Agreement so provides, the Administrator in its discretion
may permit a Participant to pay all or part of the purchase price by delivery of
the full-recourse interest-bearing promissory note of the Participant.
8.03 - NONTRANSFERABILITY.
Restricted Stock granted under this Plan shall be nontransferable except
by will or by the laws of descent and distribution, until it has become Vested
in accordance with Section 8.04. No Restricted Stock grant or any right or
interest of a Participant in any shares of Restricted Stock shall be liable for,
or subject to, any lien, obligation or liability of such Participant.
8.04 - VESTING.
Shares of Restricted Stock shall become Vested in whole at any time or in
part from time to time at such times and in compliance with such requirements as
the Administrator shall determine and as set forth in the Restricted Stock
Agreement. The grant of Restricted Stock must become Vested, if at all, within
ten years from the date of grant. If and to the extent deemed necessary by the
Administrator, shares of Restricted Stock granted to Named Executive Officers
shall become Vested subject to performance objectives that enable such
Restricted Stock to qualify as "performance-based compensation" under the
Treasury Regulations promulgated under Section 162(m) of the Code. The grant of
Restricted Stock can only become Vested during the Participant's lifetime in the
hands of the Participant.
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8.05 - CHANGE IN CONTROL.
Notwithstanding any provision of any Restricted Stock Agreement, in the
event of or in anticipation of a Change in Control, the Administrator in its
discretion may terminate on or after an Acceleration Date or before or on the
Control Change Date some or all outstanding shares of Restricted Stock that are
not then Vested, with or without any payment therefor (as the Administrator in
its discretion may provide), provided the Administrator gives prior written
notice to the Participants of such termination. The Administrator in its
discretion may take such action contingent on consummation of the Change in
Control and with respect to some or all outstanding shares of Restricted Stock
that are not then Vested. The preceding sentences to the contrary
notwithstanding, the shares of Restricted Stock that are not then Vested shall
not be terminated to the extent that written provision is made for their
continuance, assumption or substitution by a successor employer or its parent or
subsidiary in connection with the Change in Control.
8.06 - SHAREHOLDER RIGHTS.
Prior to forfeiture in accordance with the applicable Restricted Stock
Agreement and before the shares of Restricted Stock become Vested, the
Participant will have all rights of a shareholder in the shares of Restricted
Stock as provided under the Articles of Incorporation of the Company and
applicable law, including without limitation the right to vote the shares and
receive dividends and distributions thereon; provided, however, that during such
period the Participant (i) may not sell, transfer, pledge, exchange, hypothecate
or otherwise dispose of shares of Restricted Stock, (ii) the Company shall
retain custody of the certificates evidencing the shares of Restricted Stock
until they become Vested and (iii) the Participant will deliver to the Company a
stock power, endorsed in blank, with respect to each share of Restricted Stock.
8.07 - FORFEITURE PROVISIONS.
Notwithstanding any other provision of the Plan or any Restricted Stock
Agreement to the contrary, all rights to any Restricted Stock that a Participant
has shall terminate as to shares of Restricted Stock that have not become Vested
on and after the time the Participant is discharged from employment or service
with the Company or any Subsidiary for Cause.
ARTICLE IX - ADDITIONAL TERMS AND CONDITIONS
APPLICABLE TO ALL AWARDS
9.1 - EMPLOYEE OR CONTRACTOR STATUS.
In the event that the terms of any Award provide that it may be exercised
or become Vested only during employment or service or within a specified period
of time after termination of employment or service, the Administrator may decide
to what extent leaves of absence for governmental or military service, illness,
temporary disability or other reasons shall not be deemed interruptions of
employment or service.
9.2 - PERFORMANCE OBJECTIVES.
The Administrator may prescribe that an Option is exercisable or that
Restricted Stock may become Vested only to the extent that certain performance
objectives are obtained. Such performance objectives may be based on one or more
of the Company's or any Subsidiary's or any division's (i) gross, operating or
net earnings before or after taxes, (ii) return on equity, (iii) return on
capital, (iv) return on
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sales, (v) return on assets or net assets, (vi) earnings per share, (vii) cash
flow per share, (viii) book value per share, (ix) earnings growth, (x) sales
growth, (xi) volume growth, (xii) cash flow (as the Administrator may define
such term), (xiii) Fair Market Value of the Company or any Subsidiary or shares
of Common Stock, (xiv) share price or total shareholder return, (xv) market
share, (xvi) economic value added, (xvii) market value added, (xviii)
productivity, (xix) level of expenses, (xx) quality, (xxi) safety, (xxii)
customer satisfaction, (xxiii) peer group comparisons of any of the
aforementioned performance objectives, (xxiv) earnings before interest, taxes,
depreciation and amortization ("EBITDA," whether normalized or not, including or
excluding unusual and extraordinary items and subject to such other variations
as the Company may report to shareholders or creditors)or (xxv) except for
Awards to Named Executive Officers, any other criteria that the Administrator
determines. If the Administrator, on the grant of the Option or Restricted
Stock, prescribes that the Option shall be exercisable or that the Restricted
Stock shall become Vested only upon the attainment of performance objectives
stated with respect to one or more of the foregoing criteria, the Option shall
become exercisable or that the Restricted Stock shall become Vested only to the
extent the Administrator certifies in writing that such performance objectives
have been obtained.
9.3 - OTHER CONDITIONS.
The Administrator, in its discretion, may, as a condition to the grant of
an Award, require the Participant on or before the date of grant of the Award to
enter into (i) a covenant not to compete (including a confidentiality,
non-solicitation or other similar agreement) with the Company or any Subsidiary,
which shall become effective on the date of termination of employment or service
of a Participant with the Company or any Subsidiary or any other date the
Administrator may specify and shall contain such terms and conditions as the
Administrator shall otherwise specify, (ii) an agreement to cancel any other
employment agreement, service agreement, fringe benefit or compensation
arrangement in effect between the Company or any Subsidiary and such Participant
and (iii) a shareholders or other agreement covering the Common Stock acquired
or to be acquired pursuant to Awards granted under the Plan, which contains such
terms and conditions as the Administrator may require, including without
limitation any Company or other repurchase rights, rights of first refusal,
voting agreements or other provisions. If the Participant shall fail to enter
into any such agreement or agreements at the Administrator's request, then no
Award shall be granted to the Participant and the number of shares of Common
Stock that would have been subject to such Award shall be added to the remaining
shares of Common Stock available under the Plan.
9.4 - DEFERRALS.
The Administrator may permit a Participant to elect to defer the delivery
of shares of Common Stock that would otherwise be due to such Participant by
virtue of the exercise of an Option or the Vesting of Restricted Stock. If any
such deferral election is made, the Administrator shall, in its sole discretion,
establish rules and procedures for such deferrals.
ARTICLE X - LIMITATION ON BENEFITS
Despite any other provisions of this Plan to the contrary, if the receipt
of any payments or benefits under this Plan would subject a Participant to tax
under Code Section 4999, the Administrator may determine whether some amount of
payments would meet the definition of a "Reduced Amount." If the Administrator
determines that there is a Reduced Amount, the total payments to the Participant
hereunder must be reduced to such Reduced Amount, but not below zero. If the
Administrator determines that the benefits and payments must be reduced to the
Reduced Amount, the Company must promptly notify the Participant of that
determination, with a copy of the detailed calculations by the Administrator.
All
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determinations of the Administrator under this Article X are binding upon the
Company and the Participant. It is the intention of the Company and the
Participant to reduce the payments under this Plan only if the aggregate Net
After Tax Receipts to the Participant would thereby be increased. If as result
of the uncertainty in the application of Code Section 4999 at the time of the
initial determination by the Administrator under this Article X, however, it is
possible that amounts will have been paid under the Plan to or for the benefit
of a Participant which should not have been so paid ("Overpayment") or that
additional amounts which will not have been paid under the Plan to or for the
benefit of a Participant could have been so paid ("Underpayment") - in each
case, consistent with the calculation of the Reduced Amount. If the
Administrator, based either upon the assertion of a deficiency by the Internal
Revenue Service against the Company or the Participant which the Administrator
believes has a high probability of success or controlling precedent or other
substantial authority, determines that an Overpayment has been made, any such
Overpayment must be treated for all purposes as a loan which the Participant
must repay to the Company together with interest at the applicable federal rate
under Code Section 7872(f)(2); provided, however, that no such loan may be
deemed to have been made and no amount shall be payable by Participant to the
Company if and to the extent such deemed loan and payment would not either
reduce the amount on which the Participant is subject to tax under Code Section
1, 3101 or 4999 or generate a refund of such taxes. If the Administrator, based
upon controlling precedent or other substantial authority, determines that an
Underpayment has occurred, the Administrator must promptly notify the Company of
the amount of the Underpayment, which then shall be paid to the Participant. For
purposes of this section, (i) "Net After Tax Receipt" means the Present Value of
a payment under this Plan net of all taxes imposed on Participant with respect
thereto under Code Sections 1, 3101 and 4999, determined by applying the highest
marginal rate under Code Section 1 which applied to the Participant's taxable
income for the immediately preceding taxable year; (ii) "Present Value" means
the value determined in accordance with Code Section 280G(d)(4); and (iii)
"Reduced Amount" means the smallest aggregate amount of all payments under this
Plan which (a) is less than the sum of all payments under this Plan and (b)
results in aggregate Net After Tax Receipts which are equal to or greater than
the Net After Tax Receipts which would result if the aggregate payments under
this Plan were any other amount less than the sum of all payments to be made
under this Plan.
ARTICLE XI - ADJUSTMENT UPON CHANGE IN COMMON STOCK
The maximum number of shares as to which Awards may be granted under this
Plan, the terms of outstanding Awards, the per individual limitations on the
number of shares for which Awards may be granted, and any other limitations in
this Plan shall be adjusted as the Administrator 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 any similar
event or (b) there occurs any other event which, in the judgment of the
Administrator, necessitates such action. In addition, the Administrator may make
such other adjustments to the terms of outstanding Awards to the extent
equitable and necessary to prevent an enlargement or dilution of the
Participant's rights thereunder as a result of any similar transaction. Any
determination the Administrator makes under this Article XI shall be final and
conclusive. The issuance by the Company of either shares of stock of any class
or securities convertible into shares of stock of any class, for cash or
property, or for labor or services, either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other securities,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the maximum number of shares as to which Awards may be granted, the per
individual limitations on the number of shares for which Awards may be granted,
any other limitations in this Plan or the terms of outstanding Awards. The
Administrator may grant Awards in substitution for performance shares, stock
awards, stock options, stock appreciation rights, phantom shares, or similar
awards held by an individual
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who becomes an Employee, director, advisor or consultant of the Company in
connection with a transaction described in the first paragraph of this Article
XI. Notwithstanding any provision of the Plan (other than the limitations of
Section 5.02), the terms of such substituted Award shall be as the
Administrator, in its discretion, determines is appropriate.
ARTICLE XII - COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES
12.1 - COMPLIANCE.
No Option shall be exercisable, no Restricted Stock shall be granted or
become Vested, no Common Stock shall be issued (whether Restricted Stock or
not), no certificates for shares of Common Stock (whether Restricted Stock or
not) shall be delivered, and no payment shall be made except in compliance with
all applicable federal and state laws and regulations (including, without
limitation, withholding tax requirements), any listing agreement with any stock
exchange to which the Company is a party, and the rules of all domestic stock
exchanges on which the Company's shares may be listed. The Company shall have
the right to rely on an opinion of its counsel as to such compliance. Any
certificate for shares issued to evidence Common Stock for which an Option is
exercised or for which shares of Restricted Stock have been granted or become
Vested may bear such legends and statements as the Administrator may deem
advisable to assure compliance with federal and state laws and regulations. No
Option shall be exercisable, no Restricted Stock shall be granted or become
Vested, no Common Stock (whether Restricted Stock or not) shall be issued, no
certificate for shares of Common Stock (whether Restricted Stock or not) shall
be delivered, and no payment shall be made under this Plan until the Company has
obtained such consent or approval as the Administrator may deem advisable from
regulatory bodies having jurisdiction over such matters.
12.2 - POSTPONEMENT OF EXERCISE.
The Administrator may postpone any exercise of an Option or the grant or
Vesting of Restricted Stock for such time as the Administrator in its sole
discretion may deem necessary in order to permit the Company (i) to effect,
amend or maintain any necessary registration of the Plan or the shares of Common
Stock issuable upon the exercise of any Option or the grant or Vesting of
Restricted Stock under the securities laws, (ii) to permit any action to be
taken in order to (A) list such shares of Common Stock (whether Restricted Stock
or not) on a stock exchange if such shares of Common Stock are then listed on
such exchange or (B) comply with restrictions or regulations incident to the
maintenance of a public market for such shares of Common Stock, including any
rules or regulations of any stock exchange on which the shares of Common Stock
are listed, or (iii) to determine that such shares of Common Stock in the Plan
are exempt from such registration or that no action of the kind referred to in
(ii)(B) above needs to be taken; and the Company shall not be obligated by
virtue of any terms and conditions of any Option Agreement or Restricted Stock
Agreement or any provision of the Plan to recognize the exercise of an Option or
the grant or Vesting of Restricted Stock or to grant, sell or issue shares of
Common Stock in violation of the securities laws or the laws of any government
having jurisdiction thereof. Any such postponement shall not extend the term of
an Award and neither the Company nor its directors and officers shall have any
obligation or liability to any Participant or to any other person with respect
to shares of Common Stock as to which the Award shall lapse because of such
postponement.
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ARTICLE XIII - GENERAL PROVISIONS
13.1 - EFFECT ON EMPLOYMENT AND SERVICE.
Neither the adoption of this Plan, its operation, nor any Option Agreement
or Restricted Stock Agreement or other documents describing or referring to this
Plan shall confer upon any individual any right to continue in the employ or
service of the Company or any Subsidiary or in any way affect the right and
power of the Company or any Subsidiary to terminate the employment or service of
any individual at any time with or without assigning a reason therefor.
13.2 - UNFUNDED PLAN.
The Plan, insofar as it provides for grants of Options or Restricted
Stock, shall be unfunded, and the Company shall not be required to segregate any
assets that may at any time be represented by grants under this Plan. Any
liability of the Company to any person with respect to any grant under this Plan
shall be based solely upon any contractual obligations that may be created
pursuant to this Plan. No such obligation of the Company shall be deemed to be
secured by any pledge of, or other encumbrance on, any property of the Company.
13.3 - TAX WITHHOLDING AND REPORTING.
Unless an Option Agreement or Restricted Stock Agreement provides
otherwise, each Participant shall be responsible for satisfying in cash or cash
equivalent acceptable to the Administrator any income and employment tax
withholding obligations attributable to the grant or Vesting of Restricted
Stock, the making of a Code Section 83(b) election with respect to any shares of
Restricted Stock, the exercise of Options or any other event with respect to
participation in the Plan. In accordance with procedures that the Administrator
establishes, the Administrator may permit a Participant to pay such amounts (i)
by surrendering shares of Common Stock that the Participant has held for at
least six months, (ii) by delivery of the full recourse, interest-bearing
promissory note of the Participant, (iii) by a cashless exercise through a
broker, (iv) by such other medium of payment as the Administrator, in its
discretion, shall authorize, or (v) by any combination of the aforementioned
methods of payment. The Company shall comply with all such reporting and other
requirements relating to the administration of this Plan and the grant, exercise
of Options or the Vesting of Restricted Stock hereunder as applicable law
requires.
13.4 - RESERVATION OF SHARES.
The Company, during the term of this Plan, shall at all times reserve and
keep available such number of shares of Common Stock as shall be sufficient to
satisfy the requirements of the Plan. Additionally, the Company, during the term
of this Plan, shall use its best efforts to seek to obtain from appropriate
regulatory agencies any requisite authorizations needed in order to issue and to
sell such number of shares of Common Stock as shall be sufficient to satisfy the
requirements of the Plan. However, the inability of the Company to obtain from
any such regulatory agency the requisite authorizations the Company's counsel
deems to be necessary for the lawful issuance and sale of any shares of Common
Stock hereunder, or the inability of the Company to confirm to its satisfaction
that any issuance and sale of any shares of Common Stock hereunder will meet
applicable legal requirements, shall relieve the Company of any liability in
respect to the failure to issue or to sell such shares of Common Stock as to
which such requisite authority shall not have been obtained.
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13.5 - GOVERNING LAW.
This Plan and all Awards granted hereunder shall be governed by the laws
of the State of Delaware, except to the extent federal law applies.
13.6 - OTHER ACTIONS.
Nothing in the Plan shall be construed to limit the authority of the
Company to exercise its corporate rights and powers, including, by way of
illustration and not by way of limitation, the right to grant options or
restricted stock for proper corporate purposes otherwise than under the Plan to
any employee or to any other person, firm, corporation, association or other
entity, or to grant options to, or assume options of any person in connection
with, the acquisition, purchase, lease, merger, consolidation, reorganization or
otherwise, of all or any part of the business and assets of any person, firm,
corporation, association or other entity.
ARTICLE XIV - AMENDMENT AND TERMINATION
The Board may amend this Plan from time to time or terminate the Plan;
provided, however, that no amendment may become effective until shareholder
approval is obtained if the amendment (i) increases the aggregate number of
shares of Common Stock that may be issued pursuant to Awards under the Plan,
(ii) changes the class of individuals eligible to receive Awards or (iii)
changes the performance objectives to which the exercisability of Options or the
Vesting of Restricted Stock granted to Named Executive Officers may be subject.
No amendment shall, without a Participant's consent, adversely affect any rights
of such Participant under any outstanding Award at the time such amendment is
made.
ARTICLE XV - DURATION OF PLAN
No Awards may be granted under this Plan 10 years after the Board adopts
the Plan. Awards granted before that date shall remain valid in accordance with
their terms.
ARTICLE XVI - EFFECTIVE DATE OF PLAN
Awards may be granted under this Plan upon its adoption by the Board,
provided that no Awards shall be effective or exercisable or become Vested
unless the Company's shareholders approve this Plan within 12 months of the
Board's adoption of this Plan.
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ARTICLE XVII - RULES OF CONSTRUCTION
Headings are given to the articles and sections of this Plan solely as a
convenience to facilitate reference. The reference to any statute, regulation,
or other provision of law shall be construed to refer to any amendment to or
successor of such provision of law.
KATY INDUSTRIES, INC.
BY:
NAME:
TITLE:
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