##### Table of Contents



United States
Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q/A
 Amendment No. 1
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 001-05558
 Katy Industries, Inc.
  Delaware
(State or other jurisdiction of incorporation or 
organization)
    
    75-1277589
(I.R.S. Employer Identification No.)
 2461 South Clark Street, Suite 630, Arlington, Virginia 22202
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ
  Class
    
    Outstanding at April 30, 2007Common Stock, $1 Par Value
    
    7,951,177 Shares




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EXPLANATORY NOTE
       Impact of Error on Previously filed Financial Statements
  Internal Control Considerations
   2




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3




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##### 



INDEX
 PagePART I     FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets March 31, 2007 and December 31, 2006 (unaudited)
    
    
    5,6Condensed Consolidated Statements of Operations Three Months Ended March 31, 2007 and 2006 (unaudited)
    
    
    7Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2007 and 2006 (unaudited)
    
    
    8Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4.
    
    Controls and Procedures
    
    
    42PART II    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 1A.
    
    Risk Factors
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3.
    
    Defaults Upon Senior Securities
    
    
    46Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    46Item 5.
    
    Other Information
    
    
    46Item 6.
    
    Exhibits
    
    
    46Signatures
    
    
    
    
    47Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   4




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PART I FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 
 ASSETS
 As Restated,see Note 1March 31,
    
    
    December 31,2007
    
    
    2006CURRENT ASSETS:Cash and cash equivalents
    
    $
    2,919
    
    
    $
    7,392Accounts receivable, net
    
    
    47,811
    
    
    
    55,014Inventories, net
    
    
    60,717
    
    
    
    54,980Other current assets
    
    
    3,592
    
    
    
    2,991Asset held for sale
    
    
    
    
    
    
    4,483Total current assets
    
    
    115,039
    
    
    
    124,860OTHER ASSETS:Goodwill
    
    
    665
    
    
    
    665Intangibles, net
    
    
    6,358
    
    
    
    6,435Other
    
    
    8,576
    
    
    
    8,990Total other assets
    
    
    15,599
    
    
    
    16,090PROPERTY AND EQUIPMENT:Land and improvements
    
    
    336
    
    
    
    336Buildings and improvements
    
    
    9,710
    
    
    
    9,669Machinery and equipment
    
    
    120,701
    
    
    
    119,703130,747
    
    
    
    129,708Less  Accumulated depreciation
    
    
    (89,780
    )
    
    
    (87,964
    )Property and equipment, net
    
    
    40,967
    
    
    
    41,744Total assets
    
    $
    171,605
    
    
    $
    182,694
   5




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LIABILITIES AND STOCKHOLDERS EQUITY
 As Restated,see Note 1March 31,
    
    
    December 31,2007
    
    
    2006CURRENT LIABILITIES:Accounts payable
    
    $
    32,836
    
    
    $
    33,684Accrued compensation
    
    
    3,814
    
    
    
    3,518Accrued expenses
    
    
    33,624
    
    
    
    38,187Current maturities of long-term debt
    
    
    1,500
    
    
    
    1,125Revolving credit agreement
    
    
    41,491
    
    
    
    43,879Total current liabilities
    
    
    113,265
    
    
    
    120,393LONG-TERM DEBT, less current maturities
    
    
    11,468
    
    
    
    11,867OTHER LIABILITIES
    
    
    9,889
    
    
    
    8,402Total liabilities
    
    
    134,622
    
    
    
    140,662COMMITMENTS AND CONTINGENCIES (Note 10)
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:15% Convertible preferred stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 1,131,551 shares,
liquidation value $113,155
    
    
    108,256
    
    
    
    108,256Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,304 shares
    
    
    9,822
    
    
    
    9,822Additional paid-in capital
    
    
    27,196
    
    
    
    27,120Accumulated other comprehensive income
    
    
    1,862
    
    
    
    2,242Accumulated deficit
    
    
    (88,193
    )
    
    
    (83,434
    )Treasury stock, at cost, 1,871,127 shares and 1,869,827 shares, respectively
    
    
    (21,960
    )
    
    
    (21,974
    )Total stockholders equity
    
    
    36,983
    
    
    
    42,032Total liabilities and stockholders equity
    
    $
    171,605
    
    
    $
    182,694
   6




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As Restated, see Note 12007
    
    
    2006Net sales
    
    $
    94,803
    
    
    $
    75,818Cost of goods sold
    
    
    86,346
    
    
    
    65,553Gross profit
    
    
    8,457
    
    
    
    10,265Selling, general and administrative expenses
    
    
    11,440
    
    
    
    12,289Severance, restructuring and related charges
    
    
    244
    
    
    
    782(Gain) loss on sale of assets
    
    
    (120
    )
    
    
    102Operating loss
    
    
    (3,107
    )
    
    
    (2,908
    )Interest expense
    
    
    (1,949
    )
    
    
    (1,771
    )Other, net
    
    
    70
    
    
    
    341Loss from continuing operations before provision for income taxes
    
    
    (4,986
    )
    
    
    (4,338
    )Provision for income taxes from continuing operations
    
    
    (459
    )
    
    
    (262
    )Loss from continuing operations
    
    
    (5,445
    )
    
    
    (4,600
    )Loss from operations of discontinued businesses (net of tax)
    
    
    
    
    
    
    (389
    )Gain on sale of discontinued businesses (net of tax)
    
    
    1,666
    
    
    
    Loss before cumulative effect of a change in accounting principle
    
    
    (3,779
    )
    
    
    (4,989
    )Cumulative effect of a change in accounting principle (net of tax)
    
    
    
    
    
    
    (756
    )Net loss
    
    $
    (3,779
    )
    
    $
    (5,745
    )Loss per share of common stock  Basic and dilutedLoss from continuing operations
    
    $
    (0.69
    )
    
    $
    (0.57
    )Discontinued operations
    
    
    0.21
    
    
    
    (0.05
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (0.10
    )Net loss
    
    $
    (0.48
    )
    
    $
    (0.72
    )Weighted average common shares outstanding (thousands):Basic and diluted
    
    
    7,951
    
    
    
    7,971
   7




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As Restated, see Note 12007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (3,779
    )
    
    $
    (5,745
    )(Income) loss from discontinued operations
    
    
    (1,666
    )
    
    
    389Loss from continuing operations
    
    
    (5,445
    )
    
    
    (5,356
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    756Depreciation and amortization
    
    
    2,072
    
    
    
    2,241Write-off and amortization of debt issuance costs
    
    
    619
    
    
    
    287Stock option expense
    
    
    94
    
    
    
    191(Gain) loss on sale of assets
    
    
    (120
    )
    
    
    102Deferred income taxes
    
    
    (94
    )
    
    
    (2,874
    )
    
    
    (1,779
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    7,115
    
    
    
    18,302Inventories
    
    
    (5,711
    )
    
    
    (6,305
    )Other assets
    
    
    (708
    )
    
    
    (76
    )Accounts payable
    
    
    1,301
    
    
    
    (14,470
    )Accrued expenses
    
    
    (4,478
    )
    
    
    (1,794
    )Other, net
    
    
    485
    
    
    
    (1,209
    )(1,996
    )
    
    
    (5,552
    )Net cash used in continuing operations
    
    
    (4,870
    )
    
    
    (7,331
    )Net cash (used in) provided by discontinued operations
    
    
    (165
    )
    
    
    389Net cash used in operating activities
    
    
    (5,035
    )
    
    
    (6,942
    )Cash flows from investing activities:Capital expenditures of continuing operations
    
    
    (1,130
    )
    
    
    (816
    )Proceeds from sale of assets, net
    
    
    120
    
    
    
    163Net cash used in continuing operations
    
    
    (1,010
    )
    
    
    (653
    )Net cash provided by discontinued operations
    
    
    6,609
    
    
    
    Net cash provided
by (used in)
investing
activities
    
    
    5,599
    
    
    
    (653
    )Cash flows from financing activities:Net (repayments) borrowings on revolving loans
    
    
    (2,454
    )
    
    
    8,578Decrease in book overdraft
    
    
    (2,153
    )
    
    
    (5,360
    )Repayments of term loans
    
    
    (24
    )
    
    
    (714
    )Direct costs associated with debt facilities
    
    
    (125
    )
    
    
    (165
    )Repurchases of common stock
    
    
    (3
    )
    
    
    (4
    )Proceeds from the exercise of stock options
    
    
    
    
    
    
    147Net cash (used in)
provided by
financing
activities
    
    
    (4,759
    )
    
    
    2,482Effect of exchange rate changes on cash and cash equivalents
    
    
    (278
    )
    
    
    (307
    )Net decrease in cash and cash equivalents
    
    
    (4,473
    )
    
    
    (5,420
    )Cash and cash equivalents, beginning of period
    
    
    7,392
    
    
    
    8,421Cash and cash equivalents, end of period
    
    $
    2,919
    
    
    $
    3,001
   8




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Restatement of Prior Financial Information
 Restatement
 (A) Impact of error on previously filed financial
 Other Out-of-Period Adjustments and Revisions
  (B) Deferred compensation
 (C) Inventory reserves
 (D) Revision of SESCO as a continuing operation
  9




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March 31, 2007PreviouslyAssets
    
    reported
    
    
    RestatedCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,919
    
    
    $
    2,919Trade accounts receivable, net
    
    
    47,811
    
    
    
    47,811Inventories, net (A)(C)
    
    
    61,484
    
    
    
    60,717Other current assets
    
    
    3,592
    
    
    
    3,592Asset held for sale
    
    
    
    
    
    
    Total current assets
    
    
    115,806
    
    
    
    115,039OTHER ASSETS:Goodwill
    
    
    665
    
    
    
    665Intangibles, net
    
    
    6,358
    
    
    
    6,358Other
    
    
    8,576
    
    
    
    8,576Total other assets
    
    
    15,599
    
    
    
    15,599Property and equipment, net
    
    
    40,967
    
    
    
    40,967Total assets
    
    $
    172,372
    
    
    $
    171,605Liabilities and Stockholders EquityCURRENT LIABILITIES:Accounts payable
    
    $
    32,836
    
    
    $
    32,836Accrued compensation
    
    
    3,814
    
    
    
    3,814Accrued expenses
    
    
    33,624
    
    
    
    33,624Current maturities, long-term debt
    
    
    1,500
    
    
    
    1,500Revolving credit agreement
    
    
    41,491
    
    
    
    41,491Total current liabilities
    
    
    113,265
    
    
    
    113,265LONG-TERM DEBT, less current maturities
    
    
    11,468
    
    
    
    11,468OTHER LIABILITIES
    
    
    9,889
    
    
    
    9,889Total liabilities
    
    
    134,622
    
    
    
    134,622COMMITMENTS AND CONTINGENCIES (Note 10)
    
    
    
    
    
    
    STOCKHOLDERS EQUITY15% Convertible preferred stock, $100 par value, authorized
1,200,000 shares, issued and outstanding 1,131,551
shares, liquidation value $113,155
    
    
    108,256
    
    
    
    108,256Common stock, $1 par value; authorized 35,000,000 shares;
issued 9,822,304 shares
    
    
    9,822
    
    
    
    9,822Additional paid-in capital
    
    
    27,145
    
    
    
    27,196Accumulated other comprehensive income
    
    
    1,862
    
    
    
    1,862Accumulated deficit
    
    
    (87,375
    )
    
    
    (88,193
    )Treasury stock, at cost
    
    
    (21,960
    )
    
    
    (21,960
    )Total stockholders equity
    
    
    37,750
    
    
    
    36,983Total liabilities and stockholders equity
    
    $
    172,372
    
    
    $
    171,605
  10




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For the three months ended
    
    
    For the three months endedMarch 31, 2007
    
    
    March 31, 2006Previously
    
    
    
    
    
    
    Previouslyreported
    
    
    Restated
    
    
    reported
    
    
    RestatedNet sales
    
    $
    94,803
    
    
    
    94,803
    
    
    $
    75,818
    
    
    
    75,818Cost of goods sold (A)(C)
    
    
    86,559
    
    
    
    86,346
    
    
    
    65,407
    
    
    
    65,553Gross profit
    
    
    8,244
    
    
    
    8,457
    
    
    
    10,411
    
    
    
    10,265Selling, general and administrative expenses (B)
    
    
    11,440
    
    
    
    11,440
    
    
    
    12,481
    
    
    
    12,289Severance, restructuring and related charges
    
    
    244
    
    
    
    244
    
    
    
    782
    
    
    
    782(Gain) loss on sale of assets
    
    
    (120
    )
    
    
    (120
    )
    
    
    102
    
    
    
    102Operating loss
    
    
    (3,320
    )
    
    
    (3,107
    )
    
    
    (2,954
    )
    
    
    (2,908
    )Interest expense (D)
    
    
    (1,949
    )
    
    
    (1,949
    )
    
    
    (1,740
    )
    
    
    (1,771
    )Other, net
    
    
    70
    
    
    
    70
    
    
    
    341
    
    
    
    341Loss from continuing operations before provision for income taxes
    
    
    (5,199
    )
    
    
    (4,986
    )
    
    
    (4,353
    )
    
    
    (4,338
    )Provision for income taxes from continuing operations
    
    
    (459
    )
    
    
    (459
    )
    
    
    (262
    )
    
    
    (262
    )Loss from continuing operations
    
    
    (5,658
    )
    
    
    (5,445
    )
    
    
    (4,615
    )
    
    
    (4,600
    )Loss from operations of discontinued businesses (net of tax) (D)
    
    
    
    
    
    
    
    
    
    
    (420
    )
    
    
    (389
    )Gain on sale of discontinued businesses (net of tax)
    
    
    1,666
    
    
    
    1,666
    
    
    
    
    
    
    
    Loss before cumulative effect of a change in accounting principle
    
    
    (3,992
    )
    
    
    (3,779
    )
    
    
    (5,035
    )
    
    
    (4,989
    )Cumulative effect of a change in accounting principle (net of tax)
    
    
    
    
    
    
    
    
    
    
    (756
    )
    
    
    (756
    )Net loss
    
    $
    (3,992
    )
    
    $
    (3,779
    )
    
    $
    (5,791
    )
    
    $
    (5,745
    )Loss per share of common stock  Basic and dilutedLoss from continuing operations
    
    $
    (0.71
    )
    
    $
    (0.69
    )
    
    $
    (0.58
    )
    
    $
    (0.57
    )Discontinued operations
    
    
    0.21
    
    
    
    0.21
    
    
    
    (0.05
    )
    
    
    (0.05
    )Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.10
    )
    
    
    (0.10
    )Net loss
    
    $
    (0.50
    )
    
    $
    (0.48
    )
    
    $
    (0.73
    )
    
    $
    (0.72
    )
  11




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For the three months ended
    
    
    For the three months endedMarch 31, 2007
    
    
    March 31, 2006Previously
    
    
    
    
    
    
    Previouslyreported
    
    
    Restated
    
    
    reported
    
    
    RestatedCash flows from operating activities:Net loss
    
    $
    (3,992
    )
    
    $
    (3,779
    )
    
    $
    (5,791
    )
    
    $
    (5,745
    )(Income) loss from discontinued operations (D)
    
    
    (1,666
    )
    
    
    (1,666
    )
    
    
    420
    
    
    
    389Loss from continuing operations
    
    
    (5,658
    )
    
    
    (5,445
    )
    
    
    (5,371
    )
    
    
    (5,356
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    756
    
    
    
    756Depreciation and amortization
    
    
    2,072
    
    
    
    2,072
    
    
    
    2,241
    
    
    
    2,241Write-off and amortization of debt issuance costs
    
    
    619
    
    
    
    619
    
    
    
    287
    
    
    
    287Stock option expense
    
    
    94
    
    
    
    94
    
    
    
    191
    
    
    
    191(Gain) loss on sale of assets
    
    
    (120
    )
    
    
    (120
    )
    
    
    102
    
    
    
    102Deferred income taxes
    
    
    (94
    )
    
    
    (94
    )
    
    
    
    
    
    
    (3,087
    )
    
    
    (2,874
    )
    
    
    (1,794
    )
    
    
    (1,779
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    7,115
    
    
    
    7,115
    
    
    
    18,302
    
    
    
    18,302Inventories (A)(C)
    
    
    (5,498
    )
    
    
    (5,711
    )
    
    
    (6,451
    )
    
    
    (6,305
    )Other assets
    
    
    (708
    )
    
    
    (708
    )
    
    
    (76
    )
    
    
    (76
    )Accounts payable
    
    
    1,301
    
    
    
    1,301
    
    
    
    (14,470
    )
    
    
    (14,470
    )Accrued expenses (D)
    
    
    (4,078
    )
    
    
    (4,478
    )
    
    
    (1,794
    )
    
    
    (1,794
    )Other, net (B)(D)
    
    
    485
    
    
    
    485
    
    
    
    (1,048
    )
    
    
    (1,209
    )(1,383
    )
    
    
    (1,996
    )
    
    
    (5,537
    )
    
    
    (5,552
    )Net cash used in continuing operations
    
    
    (4,470
    )
    
    
    (4,870
    )
    
    
    (7,331
    )
    
    
    (7,331
    )Net cash (used in) provided by discontinued operations (D)
    
    
    (565
    )
    
    
    (165
    )
    
    
    389
    
    
    
    389Net cash used in operating activities
    
    
    (5,035
    )
    
    
    (5,035
    )
    
    
    (6,942
    )
    
    
    (6,942
    )Cash flows from investing activities:Capital expenditures of continuing operations
    
    
    (1,130
    )
    
    
    (1,130
    )
    
    
    (816
    )
    
    
    (816
    )Proceeds from sale of assets, net
    
    
    120
    
    
    
    120
    
    
    
    163
    
    
    
    163Net cash used in continuing operations
    
    
    (1,010
    )
    
    
    (1,010
    )
    
    
    (653
    )
    
    
    (653
    )Net cash provided by discontinued operations
    
    
    6,609
    
    
    
    6,609
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    5,599
    
    
    
    5,599
    
    
    
    (653
    )
    
    
    (653
    )Cash flows from financing activities:Net (repayments) borrowings on revolving loans
    
    
    (2,454
    )
    
    
    (2,454
    )
    
    
    8,578
    
    
    
    8,578Decrease in book overdraft
    
    
    (2,153
    )
    
    
    (2,153
    )
    
    
    (5,360
    )
    
    
    (5,360
    )Repayments of term loans
    
    
    (24
    )
    
    
    (24
    )
    
    
    (714
    )
    
    
    (714
    )Direct costs associated with debt facilities
    
    
    (125
    )
    
    
    (125
    )
    
    
    (165
    )
    
    
    (165
    )Repurchases of common stock
    
    
    (3
    )
    
    
    (3
    )
    
    
    (4
    )
    
    
    (4
    )Proceeds from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    147Net cash (used in) provided by financing activities
    
    
    (4,759
    )
    
    
    (4,759
    )
    
    
    2,482
    
    
    
    2,482Effect of exchange rate changes on cash and cash equivalents
    
    
    (278
    )
    
    
    (278
    )
    
    
    (307
    )
    
    
    (307
    )Net decrease in cash and cash equivalents
    
    
    (4,473
    )
    
    
    (4,473
    )
    
    
    (5,420
    )
    
    
    (5,420
    )Cash and cash equivalents, beginning of period
    
    
    7,392
    
    
    
    7,392
    
    
    
    8,421
    
    
    
    8,421Cash and cash equivalents, end of period
    
    $
    2,919
    
    
    $
    2,919
    
    
    $
    3,001
    
    
    $
    3,001
  12




---



##### Table of Contents



Significant Accounting Policies
 Consolidation Policy and Basis of Presentation
  Use of Estimates and Reclassifications
   Inventories
  As Restated,see Note 1March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    15,788
    
    
    $
    14,777Work in process
    
    
    1,279
    
    
    
    613Finished goods
    
    
    54,012
    
    
    
    47,230Inventory reserves
    
    
    (6,833
    )
    
    
    (3,905
    )LIFO reserve
    
    
    (3,529
    )
    
    
    (3,735
    )$
    60,717
    
    
    $
    54,980
  13




---



##### Table of Contents



Property and Equipment
  Stock Options and Other Stock Awards
 Share-Based Payment
  Three Months Ended March 31,2007
    
    
    2006Selling, general and administrative expense
    
    $
    (85
    )
    
    $
    489Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    756$
    (85
    )
    
    $
    1,245
 Share-Based
Payment
 Expected term (years)
    
    
    5.3 - 6.5Volatility
    
    
    53.8% - 57.6%Risk-free rate
    
    
    3.98% - 4.48%
  14




---



##### Table of Contents



March 31,
    
    
    March 31,2007
    
    
    2006Expected term (years)
    
    
    0.1 - 5.3
    
    
    
    3.0 - 5.3Volatility
    
    
    53.7% - 80.6%
    
    
    
    48.2% - 55.0%Risk-free rate
    
    
    4.54% - 5.07%
    
    
    
    4.37% - 4.83%
 Derivative Financial Instruments
 Accounting
for Derivative Financial Instruments and Hedging Activities
    Notional Amount
    
    Maturity
    
    Rate Paid
    
    
    Rate Received
    
    
    Fair Value (2)$15,000
    
    August 17, 2007
    
    
    4.49
    %
    
    LIBOR (1)
    
    $
    58
 (1)
    
    LIBOR rate is determined on the 23rd of each month and continues up to and including the
maturity date.(2)
    
    The fair value is the mark-to-market value.
  15




---



##### Table of Contents



Comprehensive Loss
  As Restated, see Note 1Three Months EndedMarch 31,2007
    
    
    2006Net loss
    
    $
    (3,779
    )
    
    $
    (5,745
    )Foreign currency translation losses
    
    
    (334
    )
    
    
    (417
    )Unrealized (losses) gains on
interest rate swap
    
    
    (29
    )
    
    
    93Other
    
    
    (17
    )
    
    
    (380
    )
    
    
    (324
    )Comprehensive loss
    
    $
    (4,159
    )
    
    $
    (6,069
    )
 New Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
  16




---



##### Table of Contents



Intangible Assets
  March 31,
    
    
    December 31,2007
    
    
    2006Gross
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Gross
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountPatents
    
    $
    1,583
    
    
    $
    (1,093
    )
    
    $
    490
    
    
    $
    1,511
    
    
    $
    (1,065
    )
    
    $
    446Customer lists
    
    
    10,454
    
    
    
    (8,157
    )
    
    
    2,297
    
    
    
    10,454
    
    
    
    (8,111
    )
    
    
    2,343Tradenames
    
    
    5,613
    
    
    
    (2,410
    )
    
    
    3,203
    
    
    
    5,612
    
    
    
    (2,345
    )
    
    
    3,267Other
    
    
    441
    
    
    
    (73
    )
    
    
    368
    
    
    
    441
    
    
    
    (62
    )
    
    
    379Total
    
    $
    18,091
    
    
    $
    (11,733
    )
    
    $
    6,358
    
    
    $
    18,018
    
    
    $
    (11,583
    )
    
    $
    6,435
  2007 (remainder)
    
    $
    6392008
    
    
    6352009
    
    
    6002010
    
    
    5472011
    
    
    5072012
    
    
    505Thereafter
    
    
    2,925$
    6,358
 Savannah Energy Systems Company Partnership
      17




---



##### Table of Contents



Indebtedness
  March 31,
    
    
    December 31,2007
    
    
    2006Term loan payable under Bank of America Credit Agreement, interest based
on LIBOR and Prime Rates (8.38% - 9.50%), due through 2009
    
    $
    12,968
    
    
    $
    12,992Revolving loans payable under the Bank of America Credit Agreement,
interest based on LIBOR and Prime Rates (8.13% - 9.25%)
    
    
    41,491
    
    
    
    43,879Total debt
    
    
    54,459
    
    
    
    56,871Less revolving loans, classified as current (see below)
    
    
    (41,491
    )
    
    
    (43,879
    )Less current maturities
    
    
    (1,500
    )
    
    
    (1,125
    )Long-term debt
    
    $
    11,468
    
    
    $
    11,867
  2007
    
    $
    1,1252008
    
    
    1,5002009
    
    
    10,343$
    12,968
      18




---



##### Table of Contents



Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement
 Retirement Benefit Plans
   19




---



##### Table of Contents



Pension Benefits
    
    
    Other BenefitsMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic
benefit cost:Service cost
    
    $
    2
    
    
    $
    2
    
    
    $
    
    
    
    $
    Interest cost
    
    
    23
    
    
    
    22
    
    
    
    51
    
    
    
    36Expected return on plan assets
    
    
    (24
    )
    
    
    (22
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    14Amortization of net loss
    
    
    13
    
    
    
    14
    
    
    
    4
    
    
    
    10Net periodic benefit cost
    
    $
    14
    
    
    $
    16
    
    
    $
    77
    
    
    $
    60
  Stock Incentive Plans
 Stock Options
  WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicExercise
    
    
    Contractual
    
    
    ValueOptions
    
    
    Price
    
    
    Life
    
    
    (in thousands)Outstanding at December 31, 2006
    
    
    1,718,000
    
    
    $
    3.66Granted
    
    
    
    
    
    $
    0.00Exercised
    
    
    
    
    
    $
    0.00Cancelled
    
    
    
    
    
    $
    0.00Outstanding at March 31, 2007
    
    
    1,718,000
    
    
    $
    3.66
    
    
    6.45 years
    
    $
    Vested and Exercisable at March
31, 2007
    
    
    1,098,000
    
    
    $
    4.20
    
    
    5.44 years
    
    $
    
   20




---



##### Table of Contents



Stock Appreciation Rights
  Non-Vested at December 31, 2006
    
    
    53,434Granted
    
    
    Vested
    
    
    (26,667
    )Non-Vested at March 31, 2007
    
    
    26,767Total Outstanding at March 31, 2007
    
    
    798,281
  Income Taxes
       21




---



##### Table of Contents



Commitments and Contingencies
 General Environmental Claims
  W.J. Smith Wood Preserving Company (W.J. Smith)
    22




---



##### Table of Contents



Asbestos Claims
       Non-Environmental Litigation  Banco del Atlantico, S.A.
 Banco del Atlantico, S.A. v. Woods Industries, Inc., et al. Civil Action No. L-96-139 (now 1:03-CV-1342-LJM-VSS, U.S. District Court, Southern District of Indiana).
   23




---



##### Table of Contents



with prejudice with prejudice
 with
prejudice
   Other Claims
    24




---



##### Table of Contents



Industry Segment Information
  As Restated, see Note 1Three months ended March 31,2007
    
    
    2006Maintenance Products GroupNet external sales
    
    
    
    
    
    $
    50,308
    
    
    $
    49,973Operating income
    
    
    
    
    
    
    907
    
    
    
    800Operating margin
    
    
    
    
    
    
    1.8
    %
    
    
    1.6
    %Depreciation and amortization
    
    
    
    
    
    
    1,873
    
    
    
    1,968Capital expenditures
    
    
    
    
    
    
    1,017
    
    
    
    653Electrical Products GroupNet external sales
    
    
    
    
    
    $
    44,495
    
    
    $
    25,845Operating (loss) income
    
    
    
    
    
    
    (1,224
    )
    
    
    59Operating (deficit) margin
    
    
    
    
    
    
    (2.8
    %)
    
    
    0.2
    %Depreciation and amortization
    
    
    
    
    
    
    165
    
    
    
    239Capital expenditures
    
    
    
    
    
    
    113
    
    
    
    163TotalNet external sales
    
    
    
    Operating segments
    
    $
    94,803
    
    
    $
    75,818Total
    
    $
    94,803
    
    
    $
    75,818Operating loss
    
    
    
    Operating segments
    
    $
    (317
    )
    
    $
    859
    
    Unallocated corporate
    
    
    (2,666
    )
    
    
    (2,883
    )
    
    Severance, restructuring and related charges
    
    
    (244
    )
    
    
    (782
    )
    
    Gain (loss) on sale of assets
    
    
    120
    
    
    
    (102
    )Total
    
    $
    (3,107
    )
    
    $
    (2,908
    )Depreciation and amortization
    
    
    
    Operating segments
    
    $
    2,038
    
    
    $
    2,207
    
    Unallocated corporate
    
    
    34
    
    
    
    34Total
    
    $
    2,072
    
    
    $
    2,241Capital expenditures
    
    
    
    Operating segments
    
    $
    1,130
    
    
    $
    816Total
    
    $
    1,130
    
    
    $
    816March 31,
    
    
    December 31,2007
    
    
    2006Total
assets
    
    
    
    Maintenance Products Group
    
    $
    98,454
    
    
    $
    95,119
    
    Electrical Products Group
    
    
    66,253
    
    
    
    74,025
    
    Other [a]
    
    
    2,217
    
    
    
    6,700
    
    Unallocated corporate
    
    
    4,681
    
    
    
    6,850Total
    
    $
    171,605
    
    
    $
    182,694
 [a]
    
    Amounts shown as Other represent items associated with Sahlman Holding Company,
Inc., the Companys equity method investment in both periods. For December 31, 2006, amount also
includes the real assets of the United Kingdom consumer plastics business unit, which is classified
as an asset held for sale at December 31, 2006.
 Severance, Restructuring and Related Charges
   25




---



##### Table of Contents



Three Months Ended March 31,2007
    
    
    2006Consolidation of St. Louis
manufacturing/distribution facilities
    
    $
    189
    
    
    $
    699Consolidation of Glit facilities
    
    
    19
    
    
    
    Shutdown of Woods Canada manufacturing
    
    
    36
    
    
    
    Corporate office relocation
    
    
    
    
    
    
    83Total severance, restructuring and related charges
    
    $
    244
    
    
    $
    782
 Consolidation of St. Louis manufacturing/distribution facilities
 ContractTerminationCosts [b]Restructuring liabilities at December 31, 2006
    
    $
    465Additions
    
    
    189Payments
    
    
    (223
    )Restructuring liabilities at March 31, 2007
    
    $
    431
 Consolidation of Glit facilities
 One-time
    
    
    ContractTermination
    
    
    TerminationTotal
    
    
    Benefits [a]
    
    
    Costs [b]Restructuring liabilities at December 31, 2006
    
    $
    5
    
    
    $
    
    
    
    $
    5Additions
    
    
    19
    
    
    
    19
    
    
    
    Payments
    
    
    (24
    )
    
    
    (19
    )
    
    
    (5
    )Restructuring liabilities at March 31, 2007
    
    $
    
    
    
    $
    
    
    
    $
    
  26




---



##### Table of Contents



Shutdown of Woods Canada manufacturing
 ContractTerminationCosts [b]Restructuring liabilities at December 31, 2006
    
    $
    491Additions
    
    
    36Payments
    
    
    (67
    )Restructuring liabilities at March 31, 2007
    
    $
    460
 Corporate office relocation
  One-time
    
    
    ContractTermination
    
    
    TerminationTotal
    
    
    Benefits [a]
    
    
    Costs [b]Restructuring liabilities at December 31, 2006
    
    $
    961
    
    
    $
    
    
    
    $
    961Additions
    
    
    244
    
    
    
    19
    
    
    
    225Payments
    
    
    (314
    )
    
    
    (19
    )
    
    
    (295
    )Restructuring liabilities at March 31, 2007 [c]
    
    $
    891
    
    
    $
    
    
    
    $
    891
 [a]
    
    Includes severance, benefits, and other employee-related costs associated with employee
terminations.[b]
    
    Includes charges related to non-cancelable lease liabilities for abandoned facilities, net of
potential sub-lease revenue. Total maximum potential amount of lease loss, excluding any sublease
rentals, is $1.7 million as of March 31, 2007. The Company has included $0.8 million as an offset
for sublease rentals.[c]
    
    Katy expects to substantially complete its current restructuring programs in 2007. The
remaining severance, restructuring and related costs for these initiatives are expected to be
approximately $0.3 million.
  27




---



##### Table of Contents



Maintenance
    
    
    ElectricalProducts
    
    
    ProductsTotal
    
    
    Group
    
    
    GroupRestructuring liabilities at December 31, 2006
    
    $
    961
    
    
    $
    470
    
    
    $
    491Additions
    
    
    244
    
    
    
    208
    
    
    
    36Payments
    
    
    (314
    )
    
    
    (247
    )
    
    
    (67
    )Restructuring liabilities at March 31, 2007
    
    $
    891
    
    
    $
    431
    
    
    $
    460
  Maintenance
    
    
    ElectricalProducts
    
    
    ProductsTotal
    
    
    Group
    
    
    Group2007
    
    $
    325
    
    
    $
    148
    
    
    $
    1772008
    
    
    341
    
    
    
    99
    
    
    
    2422009
    
    
    98
    
    
    
    57
    
    
    
    412010
    
    
    61
    
    
    
    61
    
    
    
    2011
    
    
    66
    
    
    
    66
    
    
    
    Thereafter
    
    
    
    
    
    
    
    
    
    
    Total Payments
    
    $
    891
    
    
    $
    431
    
    
    $
    460
 Discontinued Operations
 Accounting for the Impairments or
Disposal of Long Lived Assets
    28




---



##### Table of Contents



As Restated,see Note 1March 31,
    
    
    December 31,2007
    
    
    2006Current assets:Accounts receivable, net
    
    $
    
    
    
    $
    83$
    
    
    
    $
    83Current liabilities:Accrued expenses
    
    
    492
    
    
    
    743$
    492
    
    
    $
    743
   As Restated, see Note 1Three months endedMarch 31,2007
    
    
    2006Net sales
    
    $
    
    
    
    $
    8,078Pre-tax operating loss
    
    $
    
    
    
    $
    (399
    )Pre-tax gain on sale of discontinued businesses
    
    $
    1,666
    
    
    $
    
  29




---



##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Restatement of Prior Financial Information
     30




---



##### Table of Contents



RESULTS OF OPERATIONS
 Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
 As Restated, see Note 12007
    
    
    2006(Amounts in Millions, Except Per Share Data)$
    
    
    % to Sales
    
    
    $
    
    
    % to SalesNet sales
    
    $
    94.8
    
    
    
    100.0
    
    
    $
    75.8
    
    
    
    100.0Cost of goods sold
    
    
    86.4
    
    
    
    91.1
    
    
    
    65.5
    
    
    
    86.5Gross profit
    
    
    8.4
    
    
    
    8.9
    
    
    
    10.3
    
    
    
    13.5Selling, general and administrative expenses
    
    
    11.4
    
    
    
    12.1
    
    
    
    12.3
    
    
    
    16.2Severance, restructuring and related charges
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.8
    
    
    
    1.0(Gain) loss on sale of assets
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    0.1Operating loss
    
    
    (3.1
    )
    
    
    (3.3
    )
    
    
    (2.9
    )
    
    
    (3.8
    )Interest expense
    
    
    (2.0
    )
    
    
    
    
    
    
    (1.8
    )Other, net
    
    
    0.1
    
    
    
    
    
    
    
    0.3Loss from continuing operations before provision for income taxes
    
    
    (5.0
    )
    
    
    
    
    
    
    (4.4
    )Provision for income taxes from continuing operations
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.2
    )Loss from continuing operations
    
    
    (5.5
    )
    
    
    
    
    
    
    (4.6
    )Loss from operations of discontinued businesses (net of tax)
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Gain on sale of discontinued businesses (net of tax)
    
    
    1.7
    
    
    
    
    
    
    
    Loss before cumulative effect of a change in accounting principle
    
    
    (3.8
    )
    
    
    
    
    
    
    (4.9
    )Cumulative effect of a change in accounting principle (net of tax)
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Net loss
    
    $
    (3.8
    )
    
    
    
    
    
    $
    (5.7
    )Loss per share of common stock  basic and diluted:Loss from continuing operations
    
    $
    (0.69
    )
    
    
    
    
    
    $
    (0.57
    )Discontinued operations
    
    
    0.21
    
    
    
    
    
    
    
    (0.05
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.10
    )Net loss
    
    $
    (0.48
    )
    
    
    
    
    
    $
    (0.72
    )
 Overview
    31




---



##### Table of Contents



Net Sales
 Maintenance Products Group
   Electrical Products Group
 
 Operating Income (Loss)
 As Restated, see Note 1Three months ended March 31,(Amounts in Millions)2007
    
    
    2006
    
    
    Change%
    
    
    
    
    
    
    %
    
    
    
    
    
    
    %$
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    $
    
    
    MarginMaintenance Products Group
    
    $
    0.9
    
    
    
    1.8
    
    
    $
    0.8
    
    
    
    1.6
    
    
    $
    0.1
    
    
    
    0.2Electrical Products Group
    
    
    (1.2
    )
    
    
    (2.8
    )
    
    
    0.1
    
    
    
    0.2
    
    
    
    (1.3
    )
    
    
    (3.0
    )Unallocated corporate expense
    
    
    (2.7
    )
    
    
    
    
    
    
    (2.9
    )
    
    
    
    
    
    
    0.2(3.0
    )
    
    
    (3.1
    )
    
    
    (2.0
    )
    
    
    (2.7
    )
    
    
    (1.0
    )
    
    
    (0.4
    )Severance, restructuring and
related charges
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    0.6Gain (loss) on sale of assets
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    0.2Operating loss
    
    $
    (3.1
    )
    
    
    (3.3
    )
    
    $
    (2.9
    )
    
    
    (3.8
    )
    
    $
    (0.2
    )
    
    
    0.5
 Maintenance Products Group
  Electrical Products Group
   32




---



##### Table of Contents



Corporate
  Severance, Restructuring and Related Charges
  Other Items
        33




---



##### Table of Contents



Bank of America Credit Agreement
       34




---



##### Table of Contents



Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that
Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement
  35




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##### Table of Contents



Contractual Obligations
  Due in less
    
    
    Due in
    
    
    Due in
    
    
    Due afterContractual Cash Obligations
    
    Total
    
    
    than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsRevolving Credit Facility [a]
    
    $
    41,491
    
    
    $
    41,491
    
    
    $
    
    
    
    $
    
    
    
    $
    Term Loan
    
    
    12,968
    
    
    
    1,500
    
    
    
    11,468
    
    
    
    
    
    
    
    Interest on debt [b]
    
    
    8,861
    
    
    
    4,379
    
    
    
    4,482
    
    
    
    
    
    
    
    Operating leases [c]
    
    
    20,366
    
    
    
    7,751
    
    
    
    9,423
    
    
    
    2,668
    
    
    
    524Severance and restructuring
[c]
    
    
    521
    
    
    
    148
    
    
    
    265
    
    
    
    108
    
    
    
    Postretirement benefits [d]
    
    
    5,807
    
    
    
    694
    
    
    
    1,498
    
    
    
    1,194
    
    
    
    2,421Total Contractual Obligations
    
    $
    90,014
    
    
    $
    55,963
    
    
    $
    27,136
    
    
    $
    3,970
    
    
    $
    2,945
 Due in less
    
    
    Due in
    
    
    Due in
    
    
    Due afterOther Commercial Commitments
    
    Total
    
    
    than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsCommercial letters of credit
    
    $
    664
    
    
    $
    664
    
    
    $
    
    
    
    $
    
    
    
    $
    Stand-by letters of credit
    
    
    5,949
    
    
    
    5,949
    
    
    
    
    
    
    
    
    
    
    
    Total Commercial Commitments
    
    $
    6,613
    
    
    $
    6,613
    
    
    $
    
    
    
    $
    
    
    
    $
    
 [a]
    
    As discussed in the Liquidity and Capital Resources section above and in Note 6 to the
Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form
10-Q, the entire Revolving Credit Facility under the Bank of America Credit Agreement is classified
as a current liability on the Condensed Consolidated Balance Sheets as a result of the combination
in the Bank of America Credit Agreement of (i) lockbox agreements on Katys depository bank
accounts, and (ii) a subjective Material Adverse Effect (MAE) clause. The Revolving Credit
Facility expires in April of 2009.[b]
    
    Represents interest on the Revolving Credit Facility and Term Loan of the Bank of America
Credit Agreement. Amounts assume interest accrues at the current rate in effect, including the
effect of the impact of the increased margins through the end of the first quarter of 2007 pursuant
to the Sixth Amendment. The amount also assumes the principal balance of the Revolving Credit
Facility remains constant through its expiration date of April 20, 2009 and the principal balance
of the Term Loan amortizes in accordance with the terms of the Bank of America Credit Agreement.
Due to the variable nature of the Bank of America Credit Agreement, actual interest rates could
differ from the assumptions above. In addition, actual borrowing levels could differ from the
assumptions above due to liquidity needs.[c]
    
    Future non-cancelable lease rentals are included in the line entitled Operating leases, which
also includes obligations associated with restructuring activities. The Condensed Consolidated
Balance Sheets at March 31, 2007 includes $0.9 million in discounted liabilities associated with
non-cancelable operating lease rentals, net of estimated sub-lease revenues, related to facilities
that have been abandoned as a result of restructuring and consolidation activities.[d]
    
    Benefits consist of post-retirement medical obligations to retirees of former subsidiaries of
Katy, as well as deferred compensation plan liabilities to former officers of the Company.
 Off-balance Sheet Arrangements
  Cash Flow
   36




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##### Table of Contents



Operating Activities
  Investing Activities
  Financing Activities
       37




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##### Table of Contents



Three Months Ended March 31,2007
    
    
    2006Consolidation of St. Louis
manufacturing/distribution facilities
    
    $
    189
    
    
    $
    699Consolidation of Glit facilities
    
    
    19
    
    
    
    Shutdown of Woods Canada manufacturing
    
    
    36
    
    
    
    Corporate office relocation
    
    
    
    
    
    
    83Total severance, restructuring and related charges
    
    $
    244
    
    
    $
    782
  Total Expected
    
    
    Total ProvisionCost
    
    
    to DateMaintenance Products Group
    
    $
    21,301
    
    
    $
    21,001Electrical Products Group
    
    
    12,683
    
    
    
    12,683Corporate
    
    
    12,290
    
    
    
    12,290$
    46,274
    
    
    $
    45,974
  One-time
    
    
    ContractTermination
    
    
    TerminationTotal
    
    
    Benefits [a]
    
    
    Costs [b]Restructuring liabilities at December 31, 2006
    
    $
    961
    
    
    $
    
    
    
    $
    961Additions
    
    
    244
    
    
    
    19
    
    
    
    225Payments
    
    
    (314
    )
    
    
    (19
    )
    
    
    (295
    )Restructuring liabilities at March 31, 2007 [c]
    
    $
    891
    
    
    $
    
    
    
    $
    891
 [a]
    
    Includes severance, benefits, and other employee-related costs associated with the employee
terminations.[b]
    
    Includes charges related to non-cancelable lease liabilities for abandoned facilities, net of
estimated sub-lease revenue. Total maximum potential amount of lease loss, excluding any sublease
rentals, is $1.7 million as of March 31, 2007. We have included $0.8 million as an offset for
sublease rentals.[c]
    
    Katy expects to substantially complete its current restructuring programs in 2007. The
remaining severance, restructuring and related costs for these initiatives are expected to be
approximately $0.3 million.
   38




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##### Table of Contents



39




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##### Table of Contents



Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995
  
    
    Increases in the cost of, or in some cases continuation of, the current price levels
of plastic resins, copper, paper board packaging, and other raw materials.
    
    Our inability to reduce product costs, including manufacturing, sourcing, freight,
and other product costs.
    
    Greater reliance on third parties for our finished goods as we increase the portion
of our manufacturing that is outsourced.
  40




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##### Table of Contents




    
    Our inability to reduce administrative costs through consolidation of functions and
systems improvements.
    
    Our inability to execute our systems integration plan.
    
    Our inability to successfully integrate our operations as a result of the facility consolidations.
    
    Our inability to achieve product price increases, especially as they relate to
potentially higher raw material costs.
    
    The potential impact of losing lines of business at large mass merchant retailers in
the discount and do-it-yourself markets.
    
    Competition from foreign competitors.
    
    The potential impact of rising interest rates on our LIBOR-based Bank of America
Credit Agreement.
    
    Our inability to meet covenants associated with the Bank of America Credit
Agreement.
    
    Our failure to identify, and promptly and effectively remediate, any material
weaknesses or significant deficiencies in our internal control over financial
reporting.
    
    The potential impact of rising costs for insurance for properties and various forms
of liabilities.
    
    The potential impact of changes in foreign currency exchange rates related to our
foreign operations.
    
    Labor issues, including union activities that require an increase in production
costs or lead to a strike, thus impairing production and decreasing sales. We are also
subject to labor relations issues at entities involved in our supply chain, including
both suppliers and those involved in transportation and shipping.
    
    Changes in significant laws and government regulations affecting environmental
compliance and income taxes.
       41




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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Exchange Risk
  Commodity Price Risk
  
 Item 4. CONTROLS AND PROCEDURES
    42




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##### Table of Contents




    
    The Company did not maintain a proper level of segregation of duties, specifically the
verification process of physical raw material inventory on hand and the operational
handling of this inventory; and
    
    The Company did not maintain sufficient oversight of the raw material inventory counting
and reconciliation process.
  Remediation of Material Weaknesses
  
    
    Completed a full resin physical inventory by independent employees not involved in the
operational handling and reporting of resin inventory;
    
    Completed a full comparison of the physical resin inventory to the general ledger and
recorded the appropriate adjustment;
    
    Verified the automated measurement systems with third parties as well as the physical
observation of the resin inventory by independent employees;
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##### Table of Contents




    
    Initiated weekly physical counts of resin inventory and completed a comparison to the
perpetual inventory system for any differences with any significant differences
investigated by management. We will continue to perform these weekly physical counts until
management believes the process and related controls are operating as designed; and
    
    Reviewed and adjusted, as necessary, procedures and personnel involved in the physical
inventory counting of resin.
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##### Table of Contents



Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  If our internal controls over financial reporting are found not to be effective or if we make
disclosure of existing or potential significant deficiencies or material weaknesses in those
controls, Investors could lose confidence in our financial reports, and our stock price may be
adversely affected.
    
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   45




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##### Table of Contents



Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 31.1
    
    CEO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  46




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##### Table of Contents



Signatures
  KATY INDUSTRIES, INC.
RegistrantDATE: August 17, 2007
    By:
    /s/ Anthony T. Castor IIIAnthony T. Castor IIIPresident and Chief Executive OfficerBy:
    /s/ Amir RosenthalAmir RosenthalVice President, Chief Financial Officer,
General Counsel and Secretary  47




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##### Table of Contents



Exhibit Index
 ExhibitNo.
    
    Description31.1
    
    CEO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification pursuant to Securities Exchange Act Rule 13a-14, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification required by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  48