##### Table of Contents



United States
Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 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
    
    75-1277589(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 
   þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ
  Class
    
    Outstanding at July 31, 2007Common Stock, $1 Par Value
    
    7,951,176 Shares




---



##### 



INDEX
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance SheetsJune 30, 2007 and December 31, 2006 (unaudited)
    
    
    3,4Condensed Consolidated Statements of OperationsThree Months and Six Months Ended June 30, 2007 and 2006 (unaudited)
    
    
    5Condensed Consolidated Statement of Stockholders EquitySix Months Ended June 30, 2007 (unaudited)
    
    
    6Condensed Consolidated Statements of Cash FlowsSix Months Ended June 30, 2007 and 2006 (unaudited)
    
    
    7Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    8Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 4.
    
    Controls and Procedures
    
    
    42PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    44Item 1A.
    
    Risk Factors
    
    
    44Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3.
    
    Defaults Upon Senior Securities
    
    
    45Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 5.
    
    Other Information
    
    
    45Item 6.
    
    Exhibits
    
    
    45Signatures
    
    
    
    
    46Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 
 ASSETS
 June 30,
    
    
    December 31,2007
    
    
    2006CURRENT ASSETS:Cash and cash equivalents
    
    $
    2,483
    
    
    $
    7,392Accounts receivable, net
    
    
    40,272
    
    
    
    55,014Inventories, net
    
    
    63,976
    
    
    
    54,980Other current assets
    
    
    3,004
    
    
    
    2,991Asset held for sale
    
    
    
    
    
    
    4,483Total current assets
    
    
    109,735
    
    
    
    124,860OTHER ASSETS:Goodwill
    
    
    665
    
    
    
    665Intangibles, net
    
    
    5,237
    
    
    
    6,435Other
    
    
    8,067
    
    
    
    8,990Total other assets
    
    
    13,969
    
    
    
    16,090PROPERTY AND EQUIPMENTLand and improvements
    
    
    336
    
    
    
    336Buildings and improvements
    
    
    9,670
    
    
    
    9,669Machinery and equipment
    
    
    116,049
    
    
    
    119,703126,055
    
    
    
    129,708Less  Accumulated depreciation
    
    
    (88,610
    )
    
    
    (87,964
    )Property and equipment, net
    
    
    37,445
    
    
    
    41,744Total assets
    
    $
    161,149
    
    
    $
    182,694
   3




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##### Table of Contents



LIABILITIES AND STOCKHOLDERS EQUITY
 June 30,
    
    
    December 31,2007
    
    
    2006CURRENT LIABILITIES:Accounts payable
    
    $
    28,206
    
    
    $
    33,684Accrued compensation
    
    
    3,326
    
    
    
    3,518Accrued expenses
    
    
    32,610
    
    
    
    38,187Current maturities of long-term debt
    
    
    1,500
    
    
    
    1,125Revolving credit agreement
    
    
    37,597
    
    
    
    43,879Total current liabilities
    
    
    103,239
    
    
    
    120,393LONG-TERM DEBT, less current maturities
    
    
    9,792
    
    
    
    11,867OTHER LIABILITIES
    
    
    11,073
    
    
    
    8,402Total liabilities
    
    
    124,104
    
    
    
    140,662COMMITMENTS AND CONTINGENCIES (Note 9)
    
    
    
    
    
    
    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
    
    
    27,274
    
    
    
    27,120Accumulated other comprehensive income
    
    
    38
    
    
    
    2,242Accumulated deficit
    
    
    (86,385
    )
    
    
    (83,434
    )Treasury stock, at cost, 1,871,128 and 1,869,827 shares, respectively
    
    
    (21,960
    )
    
    
    (21,974
    )Total stockholders equity
    
    
    37,045
    
    
    
    42,032Total liabilities and stockholders equity
    
    $
    161,149
    
    
    $
    182,694
   4




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006As Restated,
    
    
    
    
    
    As Restated,see Note 1
    
    
    
    
    
    see Note 1Net sales
    
    $
    81,534
    
    
    $
    84,678
    
    
    $
    171,581
    
    
    $
    156,494Cost of goods sold
    
    
    71,597
    
    
    
    73,573
    
    
    
    154,355
    
    
    
    136,220Gross profit
    
    
    9,937
    
    
    
    11,105
    
    
    
    17,226
    
    
    
    20,274Selling, general and administrative expenses
    
    
    9,613
    
    
    
    11,047
    
    
    
    20,104
    
    
    
    22,544Severance, restructuring and related charges
    
    
    2,402
    
    
    
    71
    
    
    
    2,646
    
    
    
    853Loss (gain) on sale of assets
    
    
    1,691
    
    
    
    (48
    )
    
    
    1,571
    
    
    
    54Operating (loss) income
    
    
    (3,769
    )
    
    
    35
    
    
    
    (7,095
    )
    
    
    (3,177
    )Gain on SESCO joint venture transaction
    
    
    
    
    
    
    563
    
    
    
    
    
    
    
    563Interest expense
    
    
    (1,186
    )
    
    
    (1,775
    )
    
    
    (3,135
    )
    
    
    (3,546
    )Other, net
    
    
    200
    
    
    
    78
    
    
    
    268
    
    
    
    415Loss from continuing operations before provision for
income taxes
    
    
    (4,755
    )
    
    
    (1,099
    )
    
    
    (9,962
    )
    
    
    (5,745
    )Provision for income taxes from continuing operations
    
    
    (386
    )
    
    
    (300
    )
    
    
    (779
    )
    
    
    (464
    )Loss from continuing operations
    
    
    (5,141
    )
    
    
    (1,399
    )
    
    
    (10,741
    )
    
    
    (6,209
    )Loss from operations of discontinued businesses (net of tax)
    
    
    (202
    )
    
    
    (505
    )
    
    
    (47
    )
    
    
    (684
    )Gain (loss) on sale of discontinued businesses (net of tax)
    
    
    7,151
    
    
    
    (30
    )
    
    
    8,817
    
    
    
    (30
    )Income (loss) before cumulative effect of a change in
accounting principle
    
    
    1,808
    
    
    
    (1,934
    )
    
    
    (1,971
    )
    
    
    (6,923
    )Cumulative effect of a change in accounting principle (net of tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (756
    )Net income (loss)
    
    $
    1,808
    
    
    $
    (1,934
    )
    
    $
    (1,971
    )
    
    $
    (7,679
    )Income (loss) per share of common stock  Basic and diluted:Loss from continuing operations
    
    $
    (0.64
    )
    
    $
    (0.17
    )
    
    $
    (1.35
    )
    
    $
    (0.78
    )Discontinued operations
    
    
    0.87
    
    
    
    (0.07
    )
    
    
    1.10
    
    
    
    (0.09
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net income (loss)
    
    $
    0.23
    
    
    $
    (0.24
    )
    
    $
    (0.25
    )
    
    $
    (0.96
    )Weighted average common shares outstanding (thousands):Basic and diluted
    
    
    7,951
    
    
    
    7,979
    
    
    
    7,951
    
    
    
    7,975
   5




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##### Table of Contents



AccumulatedConvertible
    
    
    Common
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Stock
    
    
    Additional
    
    
    Compre-
    
    
    
    
    
    
    
    
    
    
    Compre-
    
    
    TotalNumber of
    
    
    Par
    
    
    Number of
    
    
    Par
    
    
    Paid-in
    
    
    hensive
    
    
    Accumulated
    
    
    Treasury
    
    
    hensive
    
    
    Stockholders'Shares
    
    
    Value
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Income
    
    
    Deficit
    
    
    Stock
    
    
    Loss
    
    
    EquityBalance, January 1, 2007
    
    
    1,131,551
    
    
    $
    108,256
    
    
    
    9,822,304
    
    
    $
    9,822
    
    
    $
    27,120
    
    
    $
    2,242
    
    
    $
    (83,434
    )
    
    $
    (21,974
    )
    
    
    
    
    
    $
    42,032Implementation of new accounting pronouncement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (980
    )
    
    
    
    
    
    
    
    
    
    
    (980
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,971
    )
    
    
    
    
    
    $
    (1,971
    )
    
    
    (1,971
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,144
    )
    
    
    
    
    
    
    
    
    
    
    (2,144
    )
    
    
    (2,144
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    (60
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,175
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    Balance, June 30, 2007
    
    
    1,131,551
    
    
    $
    108,256
    
    
    
    9,822,304
    
    
    $
    9,822
    
    
    $
    27,274
    
    
    $
    38
    
    
    $
    (86,385
    )
    
    $
    (21,960
    )
    
    
    
    
    
    $
    37,045
   6




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##### Table of Contents



As Restated,see Note 12007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (1,971
    )
    
    $
    (7,679
    )(Income) loss from operations of discontinued business
    
    
    (8,770
    )
    
    
    714Loss from continuing operations
    
    
    (10,741
    )
    
    
    (6,965
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    756Depreciation and amortization
    
    
    4,135
    
    
    
    4,327Write-off and amortization of debt issuance costs
    
    
    906
    
    
    
    582Write-off of assets due to lease termination
    
    
    751
    
    
    
    Stock option expense
    
    
    171
    
    
    
    371Loss on sale of assets
    
    
    1,571
    
    
    
    54Deferred income taxes
    
    
    (94
    )
    
    
    (3,301
    )
    
    
    (875
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    11,979
    
    
    
    9,678Inventories
    
    
    (11,045
    )
    
    
    3,199Other assets
    
    
    (25
    )
    
    
    697Accounts payable
    
    
    (2,014
    )
    
    
    (12,789
    )Accrued expenses
    
    
    (5,659
    )
    
    
    56Other, net
    
    
    1,390
    
    
    
    (4,374
    )(5,374
    )
    
    
    (3,533
    )Net cash used in continuing operations
    
    
    (8,675
    )
    
    
    (4,408
    )Net cash (used in) provided by discontinued operations
    
    
    (222
    )
    
    
    216Net cash used in operating activities
    
    
    (8,897
    )
    
    
    (4,192
    )Cash flows from investing activities:Capital expenditures of continuing operations
    
    
    (2,244
    )
    
    
    (1,688
    )Proceeds from sale of assets
    
    
    197
    
    
    
    338Net cash used in continuing operations
    
    
    (2,047
    )
    
    
    (1,350
    )Net cash provided by discontinued operations
    
    
    16,954
    
    
    
    2,273Net cash provided by investing activities
    
    
    14,907
    
    
    
    923Cash flows from financing activities:Net (repayments) borrowings on revolving loans
    
    
    (6,677
    )
    
    
    6,835Decrease in book overdraft
    
    
    (2,116
    )
    
    
    (4,315
    )Repayments of term loans
    
    
    (1,700
    )
    
    
    (2,609
    )Direct costs associated with debt facilities
    
    
    (127
    )
    
    
    (166
    )Repurchases of common stock
    
    
    (3
    )
    
    
    (75
    )Proceeds from the exercise of stock options
    
    
    
    
    
    
    147Net cash used in financing activities
    
    
    (10,623
    )
    
    
    (183
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (296
    )
    
    
    (404
    )Net decrease in cash and cash equivalents
    
    
    (4,909
    )
    
    
    (3,856
    )Cash and cash equivalents, beginning of period
    
    
    7,392
    
    
    
    8,421Cash and cash equivalents, end of period
    
    $
    2,483
    
    
    $
    4,565Supplemental disclosure of non-cash investing activities:Note receivable from sale of discontinued operations
    
    $
    
    
    
    $
    1,200
   7




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##### Table of Contents



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) Revision of SESCO as a continuing operation
   8




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##### Table of Contents



For the three months endedJune 30, 2006Previously
    
    
    UK
    
    
    Restatementreported
    
    
    Transactions
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    92,080
    
    
    $
    (7,402
    )
    
    $
    
    
    
    $
    84,678Cost of goods sold (A)
    
    
    79,786
    
    
    
    (6,456
    )
    
    
    243
    
    
    
    73,573Gross profit
    
    
    12,294
    
    
    
    (946
    )
    
    
    (243
    )
    
    
    11,105Selling, general and administrative expenses (B)
    
    
    12,702
    
    
    
    (1,464
    )
    
    
    (191
    )
    
    
    11,047Severance, restructuring and related charges
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71(Gain) loss on sale of assets
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    (48
    )Operating loss
    
    
    (431
    )
    
    
    518
    
    
    
    (52
    )
    
    
    35Gain on SESCO joint venture transaction (C)
    
    
    
    
    
    
    
    
    
    
    563
    
    
    
    563Interest expense (C)
    
    
    (1,743
    )
    
    
    
    
    
    
    (32
    )
    
    
    (1,775
    )Other, net
    
    
    83
    
    
    
    (5
    )
    
    
    
    
    
    
    78Loss from continuing operations before provision for income taxes
    
    
    (2,091
    )
    
    
    513
    
    
    
    479
    
    
    
    (1,099
    )Provision for income taxes from continuing operations
    
    
    (406
    )
    
    
    106
    
    
    
    
    
    
    
    (300
    )Loss from continuing operations
    
    
    (2,497
    )
    
    
    619
    
    
    
    479
    
    
    
    (1,399
    )Loss from operations of discontinued businesses (net of tax) (C)
    
    
    545
    
    
    
    (619
    )
    
    
    (431
    )
    
    
    (505
    )Gain on sale of discontinued businesses (net of tax)(C)
    
    
    70
    
    
    
    
    
    
    
    (100
    )
    
    
    (30
    )Loss before cumulative effect of a change in accounting principle
    
    
    (1,882
    )
    
    
    
    
    
    
    (52
    )
    
    
    (1,934
    )Cumulative effect of a change in accounting principle (net of tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (1,882
    )
    
    $
    
    
    
    $
    (52
    )
    
    $
    (1,934
    )Loss per share of common stock  Basic and dilutedLoss from continuing operations
    
    $
    (0.31
    )
    
    
    
    
    
    
    
    
    
    $
    (0.17
    )Discontinued operations
    
    
    0.07
    
    
    
    
    
    
    
    
    
    
    
    (0.07
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (0.24
    )
    
    
    
    
    
    
    
    
    
    $
    (0.24
    )
  9




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##### Table of Contents



For the six months endedJune 30, 2006Previously
    
    
    UK
    
    
    Restatementreported
    
    
    Transactions
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    172,335
    
    
    $
    (15,841
    )
    
    $
    
    
    
    $
    156,494Cost of goods sold (A)
    
    
    149,222
    
    
    
    (13,391
    )
    
    
    389
    
    
    
    136,220Gross profit
    
    
    23,113
    
    
    
    (2,450
    )
    
    
    (389
    )
    
    
    20,274Selling, general and administrative expenses (B)
    
    
    25,809
    
    
    
    (2,882
    )
    
    
    (383
    )
    
    
    22,544Severance, restructuring and related charges
    
    
    853
    
    
    
    
    
    
    
    
    
    
    
    853(Gain) loss on sale of assets
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    54Operating loss
    
    
    (3,603
    )
    
    
    432
    
    
    
    (6
    )
    
    
    (3,177
    )Gain on SESCO joint venture transaction (C)
    
    
    
    
    
    
    
    
    
    
    563
    
    
    
    563Interest expense (C)
    
    
    (3,483
    )
    
    
    
    
    
    
    (63
    )
    
    
    (3,546
    )Other, net
    
    
    420
    
    
    
    (5
    )
    
    
    
    
    
    
    415Loss from continuing operations before provision for income taxes
    
    
    (6,666
    )
    
    
    427
    
    
    
    494
    
    
    
    (5,745
    )Provision for income taxes from continuing operations
    
    
    (658
    )
    
    
    194
    
    
    
    
    
    
    
    (464
    )Loss from continuing operations
    
    
    (7,324
    )
    
    
    621
    
    
    
    494
    
    
    
    (6,209
    )Loss from operations of discontinued businesses (net of tax) (C)
    
    
    337
    
    
    
    (621
    )
    
    
    (400
    )
    
    
    (684
    )Gain on sale of discontinued businesses (net of tax) (C)
    
    
    70
    
    
    
    
    
    
    
    (100
    )
    
    
    (30
    )Loss before cumulative effect of a change in accounting principle
    
    
    (6,917
    )
    
    
    
    
    
    
    (6
    )
    
    
    (6,923
    )Cumulative effect of a change in accounting principle (net of tax)
    
    
    (756
    )
    
    
    
    
    
    
    
    
    
    
    (756
    )Net loss
    
    $
    (7,673
    )
    
    $
    
    
    
    $
    (6
    )
    
    $
    (7,679
    )Loss per share of common stock  Basic and dilutedLoss from continuing operations
    
    $
    (0.92
    )
    
    
    
    
    
    
    
    
    
    $
    (0.78
    )Discontinued operations
    
    
    0.05
    
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Cumulative effect of a change in accounting principle
    
    
    (0.09
    )
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net loss
    
    $
    (0.96
    )
    
    
    
    
    
    
    
    
    
    $
    (0.96
    )
  10




---



##### Table of Contents



For the six months endedJune 30, 2006Previously
    
    
    UK
    
    
    Restatementreported
    
    
    Transactions
    
    
    Adjustments
    
    
    RestatedCash flows from operating activities:Net loss
    
    $
    (7,673
    )
    
    
    
    
    
    
    (6
    )
    
    
    (7,679
    )(Income) loss from operations of discontinued business (C)
    
    
    (407
    )
    
    
    621
    
    
    
    500
    
    
    
    714Loss from continuing operations
    
    
    (8,080
    )
    
    
    621
    
    
    
    494
    
    
    
    (6,965
    )Cumulative effect of a change in accounting principle
    
    
    756
    
    
    
    
    
    
    
    
    
    
    
    756Depreciation and amortization
    
    
    5,191
    
    
    
    (864
    )
    
    
    
    
    
    
    4,327Write-off and amortization of debt issuance costs
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    582Stock option expense
    
    
    371
    
    
    
    
    
    
    
    
    
    
    
    371Loss on sale of assets
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    54(1,126
    )
    
    
    (243
    )
    
    
    494
    
    
    
    (875
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    10,640
    
    
    
    (962
    )
    
    
    
    
    
    
    9,678Inventories (A)
    
    
    2,545
    
    
    
    265
    
    
    
    389
    
    
    
    3,199Other assets
    
    
    19
    
    
    
    678
    
    
    
    
    
    
    
    697Accounts payable
    
    
    (13,576
    )
    
    
    787
    
    
    
    
    
    
    
    (12,789
    )Accrued expenses (C)
    
    
    559
    
    
    
    197
    
    
    
    (700
    )
    
    
    56Other, net (B)(C)
    
    
    (2,733
    )
    
    
    (1,158
    )
    
    
    (483
    )
    
    
    (4,374
    )(2,546
    )
    
    
    (193
    )
    
    
    (794
    )
    
    
    (3,533
    )Net cash used in continuing operations
    
    
    (3,672
    )
    
    
    (436
    )
    
    
    (300
    )
    
    
    (4,408
    )Net cash (used in) provided by discontinued operations (C)
    
    
    (520
    )
    
    
    436
    
    
    
    300
    
    
    
    216Net cash used in operating activities
    
    
    (4,192
    )
    
    
    
    
    
    
    
    
    
    
    (4,192
    )Cash flows from investing activities:Capital expenditures of continuing operations
    
    
    (1,857
    )
    
    
    169
    
    
    
    
    
    
    
    (1,688
    )Proceeds from sale of assets (C)
    
    
    238
    
    
    
    
    
    
    
    100
    
    
    
    338Net cash used in continuing operations
    
    
    (1,619
    )
    
    
    169
    
    
    
    100
    
    
    
    (1,350
    )Net cash provided by discontinued operations (C)
    
    
    2,542
    
    
    
    (169
    )
    
    
    (100
    )
    
    
    2,273Net cash provided by investing activities
    
    
    923
    
    
    
    
    
    
    
    
    
    
    
    923Cash flows from financing activities:Net (repayments) borrowings on revolving loans
    
    
    6,835
    
    
    
    
    
    
    
    
    
    
    
    6,835Decrease in book overdraft
    
    
    (4,315
    )
    
    
    
    
    
    
    
    
    
    
    (4,315
    )Repayments of term loans
    
    
    (2,609
    )
    
    
    
    
    
    
    
    
    
    
    (2,609
    )Direct costs associated with debt facilities
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    (166
    )Repurchases of common stock
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    (75
    )Proceeds from the exercise of stock options
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    147Net cash used in financing activities
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    (183
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    (404
    )Net decrease in cash and cash equivalents
    
    
    (3,856
    )
    
    
    
    
    
    
    
    
    
    
    (3,856
    )Cash and cash equivalents, beginning of period
    
    
    8,421
    
    
    
    
    
    
    
    
    
    
    
    8,421Cash and cash equivalents, end of period
    
    $
    4,565
    
    
    $
    
    
    
    $
    
    
    
    $
    4,565Supplemental disclosure of non-cash investing activities:Note receivable from sale of discontinued operations
    
    $
    1,200
    
    
    
    
    
    
    
    
    
    
    $
    1,200
  11




---



##### Table of Contents



Significant Accounting Policies
 Consolidation Policy and Basis of Presentation
  Use of Estimates and Reclassifications
   Inventories
  June 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    16,209
    
    
    $
    14,777Work in process
    
    
    766
    
    
    
    613Finished goods
    
    
    55,702
    
    
    
    47,230Inventory reserves
    
    
    (4,942
    )
    
    
    (3,905
    )LIFO reserve
    
    
    (3,759
    )
    
    
    (3,735
    )$
    63,976
    
    
    $
    54,980
  Property, Plant and Equipment
   12




---



##### Table of Contents



Stock Options and Other Stock Awards
 Share-Based Payment
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Selling, general and administrative expense
    
    $
    (142
    )
    
    $
    (462
    )
    
    $
    (227
    )
    
    $
    27Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756$
    (142
    )
    
    $
    (462
    )
    
    $
    (227
    )
    
    $
    783
 Share-Based Payment
 Expected term (years)
    
    5.3  6.5Volatility
    
    53.8%  57.6%Risk-free interest rate
    
    3.98%  4.48%
  June 30,
    
    June 30,2007
    
    2006Expected term (years)
    
    0.1  5.0
    
    0.2  6.0Volatility
    
    58.4%  66.4%
    
    49.8%  63.4%Risk-free interest rate
    
    4.28%  4.92%
    
    4.54%  5.13%
  13




---



##### Table of Contents



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)
    
    $
    30
 (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.
 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
  14




---



##### Table of Contents



Intangible Assets
  June 30,
    
    
    December 31,2007
    
    
    2006Gross
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Gross
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountPatents
    
    $
    1,623
    
    
    $
    (1,145
    )
    
    $
    478
    
    
    $
    1,511
    
    
    $
    (1,065
    )
    
    $
    446Customer lists
    
    
    10,231
    
    
    
    (8,155
    )
    
    
    2,076
    
    
    
    10,454
    
    
    
    (8,111
    )
    
    
    2,343Tradenames
    
    
    5,054
    
    
    
    (2,371
    )
    
    
    2,683
    
    
    
    5,612
    
    
    
    (2,345
    )
    
    
    3,267Other
    
    
    441
    
    
    
    (441
    )
    
    
    
    
    
    
    441
    
    
    
    (62
    )
    
    
    379Total
    
    $
    17,349
    
    
    $
    (12,112
    )
    
    $
    5,237
    
    
    $
    18,018
    
    
    $
    (11,583
    )
    
    $
    6,435
  2007 (remainder)
    
    $
    2782008
    
    
    5522009
    
    
    5172010
    
    
    4692011
    
    
    4342012
    
    
    405Thereafter
    
    
    2,582$
    5,237
 Savannah Energy Systems Company Partnership
      15




---



##### Table of Contents



Indebtedness
  June 30,
    
    
    December 31,2007
    
    
    2006Term loan payable under Bank of America Credit Agreement, interest based
on LIBOR and Prime Rates (8.13% - 9.25%), due through 2009
    
    $
    11,292
    
    
    $
    12,992Revolving loans payable under the Bank of America Credit Agreement,
interest based on LIBOR and Prime Rates (7.88% - 9.00%)
    
    
    37,597
    
    
    
    43,879Total debt
    
    
    48,889
    
    
    
    56,871Less revolving loans, classified as current (see below)
    
    
    (37,597
    )
    
    
    (43,879
    )Less current maturities
    
    
    (1,500
    )
    
    
    (1,125
    )Long-term debt
    
    $
    9,792
    
    
    $
    11,867
  2007
    
    $
    7502008
    
    
    1,5002009
    
    
    9,042$
    11,292
      16




---



##### 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
   17




---



##### Table of Contents



Pension BenefitsThree Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic
benefit cost:Service cost
    
    $
    1
    
    
    $
    2
    
    
    $
    3
    
    
    $
    4Interest cost
    
    
    23
    
    
    
    22
    
    
    
    46
    
    
    
    44Expected return on plan assets
    
    
    (24
    )
    
    
    (22
    )
    
    
    (48
    )
    
    
    (44
    )Amortization of net loss
    
    
    15
    
    
    
    14
    
    
    
    28
    
    
    
    28Net periodic benefit cost
    
    $
    15
    
    
    $
    16
    
    
    $
    29
    
    
    $
    32
 Other BenefitsThree Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Components of net periodic
benefit cost:Interest cost
    
    $
    50
    
    
    $
    36
    
    
    $
    101
    
    
    $
    72Amortization of prior service cost
    
    
    22
    
    
    
    14
    
    
    
    44
    
    
    
    28Amortization of net loss
    
    
    4
    
    
    
    10
    
    
    
    8
    
    
    
    20Net periodic benefit cost
    
    $
    76
    
    
    $
    60
    
    
    $
    153
    
    
    $
    120
  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
    
    
    
    
    
    $
    0.00Expired
    
    
    (6,000
    )
    
    $
    16.13Cancelled
    
    
    (76,600
    )
    
    $
    3.51Outstanding at June 30, 2007
    
    
    1,635,400
    
    
    $
    3.62
    
    
    6.30 years
    
    $
    Vested and Exercisable at June 30, 2007
    
    
    1,265,400
    
    
    $
    3.90
    
    
    5.80 years
    
    $
    
   18




---



##### Table of Contents



Stock Appreciation Rights
  Non-Vested at December 31, 2006
    
    
    53,434Granted
    
    
    6,000Vested
    
    
    (42,768
    )Cancelled
    
    
    (3,333
    )Non-Vested at June 30, 2007
    
    
    13,333Total Outstanding at June 30, 2007
    
    
    740,081
  Income Taxes
        19




---



##### Table of Contents



Commitments and Contingencies
 General Environmental Claims
  W.J. Smith Wood Preserving Company (W.J. Smith)
    Asbestos Claims
   20




---



##### Table of Contents



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, appeal docketed,
United States Court of Appeals for the Seventh Circuit, Appeal No. 07-2238)
   with prejudice with prejudice
  21




---



##### Table of Contents



with
prejudice
   Other Claims
   Industry Segment Information
   22




---



##### Table of Contents



Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006As Restated,
    
    
    
    
    
    As Restated,see Note 1
    
    
    
    
    
    see Note 1Maintenance Products GroupNet external sales
    
    
    
    
    
    $
    49,972
    
    
    $
    50,932
    
    
    $
    95,524
    
    
    $
    96,903Operating income
    
    
    
    
    
    
    1,369
    
    
    
    94
    
    
    
    2,193
    
    
    
    782Operating margin
    
    
    
    
    
    
    2.7
    %
    
    
    0.2
    %
    
    
    2.3
    %
    
    
    0.8
    %Depreciation and amortization
    
    
    
    
    
    
    1,902
    
    
    
    1,893
    
    
    
    3,734
    
    
    
    3,793Capital expenditures
    
    
    
    
    
    
    1,060
    
    
    
    799
    
    
    
    2,039
    
    
    
    1,339Electrical Products GroupNet external sales
    
    
    
    
    
    $
    31,562
    
    
    $
    33,746
    
    
    $
    76,057
    
    
    $
    59,591Operating income (loss)
    
    
    
    
    
    
    617
    
    
    
    1,922
    
    
    
    (743
    )
    
    
    1,981Operating margin (deficit)
    
    
    
    
    
    
    2.0
    %
    
    
    5.7
    %
    
    
    (1.0
    %)
    
    
    3.3
    %Depreciation and amortization
    
    
    
    
    
    
    168
    
    
    
    223
    
    
    
    333
    
    
    
    462Capital expenditures
    
    
    
    
    
    
    92
    
    
    
    173
    
    
    
    205
    
    
    
    336TotalNet external sales
    
    
    
    Operating segments
    
    $
    81,534
    
    
    $
    84,678
    
    
    $
    171,581
    
    
    $
    156,494Total
    
    $
    81,534
    
    
    $
    84,678
    
    
    $
    171,581
    
    
    $
    156,494Operating income (loss)
    
    
    
    Operating segments
    
    $
    1,986
    
    
    $
    2,016
    
    
    $
    1,450
    
    
    $
    2,763
    
    Unallocated corporate
    
    
    (1,662
    )
    
    
    (1,958
    )
    
    
    (4,328
    )
    
    
    (5,033
    )
    
    Severance, restructuring,and related charges
    
    
    (2,402
    )
    
    
    (71
    )
    
    
    (2,646
    )
    
    
    (853
    )
    
    (Loss) gain on sale of assets
    
    
    (1,691
    )
    
    
    48
    
    
    
    (1,571
    )
    
    
    (54
    )Total
    
    $
    (3,769
    )
    
    $
    35
    
    
    $
    (7,095
    )
    
    $
    (3,177
    )Depreciation and amortization
    
    
    
    Operating segments
    
    $
    2,070
    
    
    $
    2,116
    
    
    $
    4,067
    
    
    $
    4,255
    
    Unallocated corporate
    
    
    34
    
    
    
    38
    
    
    
    68
    
    
    
    72Total
    
    $
    2,104
    
    
    $
    2,154
    
    
    $
    4,135
    
    
    $
    4,327Capital expenditures
    
    
    
    Operating segments
    
    $
    1,152
    
    
    $
    972
    
    
    $
    2,244
    
    
    $
    1,675
    
    Unallocated corporate
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13
    
    Discontinued operations
    
    
    52
    
    
    
    56
    
    
    
    90
    
    
    
    169Total
    
    $
    1,204
    
    
    $
    1,041
    
    
    $
    2,334
    
    
    $
    1,857June 30,
    
    
    December 31,2007
    
    
    2006Total assets
    
    
    
    Maintenance Products Group
    
    $
    88,986
    
    
    $
    87,430
    
    Electrical Products Group
    
    
    65,781
    
    
    
    74,025
    
    Other [a]
    
    
    2,217
    
    
    
    14,389
    
    Unallocated corporate
    
    
    4,165
    
    
    
    6,850Total
    
    $
    161,149
    
    
    $
    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, the amount also includes
the real estate holdings of the United Kingdom consumer plastics business unit, which is classified
as an asset held for sale at December 31, 2006, and the assets of the CML business unit.
  23




---



##### Table of Contents



Severance, Restructuring and Related Charges
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Consolidation of St. Louis
manufacturing/distribution facilities
    
    $
    693
    
    
    $
    
    
    
    $
    882
    
    
    $
    699Consolidation of Glit facilities
    
    
    1,709
    
    
    
    
    
    
    
    1,728
    
    
    
    Shutdown of Woods Canada manufacturing
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    Corporate office relocation
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    154Total severance, restructuring and related charges
    
    $
    2,402
    
    
    $
    71
    
    
    $
    2,646
    
    
    $
    853
 Consolidation of St. Louis manufacturing/distribution facilities
 ContractTerminationCosts [b]Restructuring liabilities at December 31, 2006
    
    $
    465Additions
    
    
    882Payments
    
    
    (321
    )Restructuring liabilities at June 30, 2007
    
    $
    1,026
 Consolidation of Glit facilities
  24




---



##### Table of Contents



One-time
    
    
    ContractTermination
    
    
    TerminationTotal
    
    
    Benefits [a]
    
    
    Costs [b]
    
    
    Other [c]Restructuring liabilities at December 31, 2006
    
    $
    5
    
    
    $
    
    
    
    $
    5
    
    
    $
    Additions
    
    
    1,728
    
    
    
    69
    
    
    
    1,512
    
    
    
    147Payments
    
    
    (221
    )
    
    
    (69
    )
    
    
    (5
    )
    
    
    (147
    )Other
    
    
    (751
    )
    
    
    
    
    
    
    (751
    )
    
    
    Restructuring liabilities at June 30, 2007
    
    $
    761
    
    
    $
    
    
    
    $
    761
    
    
    $
    
 Shutdown of Woods Canada manufacturing
 ContractTerminationCosts [b]Restructuring liabilities at December 31, 2006
    
    $
    491Additions
    
    
    36Payments
    
    
    (122
    )Currency translation
    
    
    39Restructuring liabilities at June 30, 2007
    
    $
    444
 Corporate office relocation
  One-time
    
    
    ContractTermination
    
    
    TerminationTotal
    
    
    Benefits [a]
    
    
    Costs [b]
    
    
    Other [c]Restructuring liabilities at December 31, 2006
    
    $
    961
    
    
    $
    
    
    
    $
    961
    
    
    $
    Additions
    
    
    2,646
    
    
    
    69
    
    
    
    2,430
    
    
    
    147Payments
    
    
    (664
    )
    
    
    (69
    )
    
    
    (448
    )
    
    
    (147
    )Currency translation and other
    
    
    (712
    )
    
    
    
    
    
    
    (712
    )
    
    
    Restructuring liabilities at June 30, 2007 [d]
    
    $
    2,231
    
    
    $
    
    
    
    $
    2,231
    
    
    $
    
 [a]
    
    Includes severance, benefits, and other employee-related charges associated with the 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
sub-lease rentals, is $4.0 million as of June 30, 2007. The Company has included $1.8 million as
an offset for sub-lease rentals.[c]
    
    Includes charges associated with equipment removal and cleanup of abandoned facility.[d]
    
    Katy expects to substantially complete its current restructuring programs in 2007. The
remaining severance, restructuring and related charges for these initiatives are expected to be
approximately $0.3 million.
  25




---



##### Table of Contents



Maintenance
    
    
    ElectricalProducts
    
    
    ProductsTotal
    
    
    Group
    
    
    GroupRestructuring liabilities at December 31, 2006
    
    $
    961
    
    
    $
    470
    
    
    $
    491Additions
    
    
    2,646
    
    
    
    2,610
    
    
    
    36Payments
    
    
    (664
    )
    
    
    (542
    )
    
    
    (122
    )Currency translation and other
    
    
    (712
    )
    
    
    (751
    )
    
    
    39Restructuring liabilities at June 30, 2007
    
    $
    2,231
    
    
    $
    1,787
    
    
    $
    444
  Maintenance
    
    
    ElectricalProducts
    
    
    ProductsTotal
    
    
    Group
    
    
    Group2007
    
    
    319
    
    
    
    196
    
    
    
    1232008
    
    
    562
    
    
    
    311
    
    
    
    2512009
    
    
    343
    
    
    
    273
    
    
    
    702010
    
    
    298
    
    
    
    298
    
    
    
    2011
    
    
    323
    
    
    
    323
    
    
    
    Thereafter
    
    
    386
    
    
    
    386
    
    
    
    Total Payments
    
    $
    2,231
    
    
    $
    1,787
    
    
    $
    444
 Discontinued Operations
 Accounting for the
Impairments or Disposal of Long Lived Assets
     26




---



##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006Current assets:Accounts receivable, net
    
    $
    
    
    
    $
    3,364Inventories, net
    
    
    
    
    
    
    2,947Other current assets
    
    
    
    
    
    
    152$
    
    
    
    $
    6,463Non-current assets:Intangibles, net
    
    $
    
    
    
    $
    648Property and equipment, net
    
    
    
    
    
    
    661$
    
    
    
    $
    1,309Current liabilities:Accounts payable
    
    $
    
    
    
    $
    1,777Accrued expenses
    
    
    
    
    
    
    2,590$
    
    
    
    $
    4,367
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006As Restated, See Note 1
    
    
    
    
    
    
    As Restated, See Note 1Net sales
    
    $
    3,287
    
    
    $
    10,504
    
    
    $
    8,043
    
    
    $
    22,584Pre-tax profit (loss)
    
    $
    183
    
    
    $
    (399
    )
    
    $
    404
    
    
    $
    (490
    )Pre-tax gain (loss)
on sale of discontinued
operations
    
    $
    7,151
    
    
    $
    (30
    )
    
    $
    8,817
    
    
    $
    (30
    )
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Restatement of Prior Financial Information
   27




---



##### Table of Contents



Three Months Ended June 30, 2007 versus Three Months Ended June 30, 2006
 As Restated, see Note 12007
    
    
    2006(Amounts in Millions, Except Per Share Data)$
    
    
    % to Sales
    
    
    $
    
    
    % to SalesNet sales
    
    $
    81.5
    
    
    
    100.0
    
    
    $
    84.7
    
    
    
    100.0Cost of goods sold
    
    
    71.6
    
    
    
    87.8
    
    
    
    73.6
    
    
    
    86.9Gross profit
    
    
    9.9
    
    
    
    12.2
    
    
    
    11.1
    
    
    
    13.1Selling, general and administrative expenses
    
    
    9.6
    
    
    
    11.8
    
    
    
    11.0
    
    
    
    13.0Severance, restructuring and related charges
    
    
    2.4
    
    
    
    2.9
    
    
    
    0.1
    
    
    
    0.1Loss (gain) of sale of assets
    
    
    1.7
    
    
    
    2.1
    
    
    
    
    
    
    
    (0.0
    )Operating loss
    
    
    (3.8
    )
    
    
    (4.6
    )
    
    
    
    
    
    
    0.0Gain on SESCO joint venture transaction
    
    
    
    
    
    
    
    
    
    
    0.6Interest expense
    
    
    (1.2
    )
    
    
    
    
    
    
    (1.8
    )Other, net
    
    
    0.2
    
    
    
    
    
    
    
    0.1Loss from
continuing operations before provision for income taxes
    
    
    (4.8
    )
    
    
    
    
    
    
    (1.1
    )Provision for income taxes from
continuing operations
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.3
    )Loss from continuing operations
    
    
    (5.2
    )
    
    
    
    
    
    
    (1.4
    )Loss from operations of discontinued businesses (net of tax)
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.5
    )Gain on sale of discontinued businesses (net of tax)
    
    
    7.2
    
    
    
    
    
    
    
    Income (loss) before cumulative effect of a change in accounting principle
    
    
    1.8
    
    
    
    
    
    
    
    (1.9
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1.8
    
    
    
    
    
    
    $
    (1.9
    )Income (loss) per share of common stock  basic and diluted:Loss from continuing operations
    
    $
    (0.64
    )
    
    
    
    
    
    $
    (0.17
    )Discontinued operations
    
    
    0.87
    
    
    
    
    
    
    
    (0.07
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    0.23
    
    
    
    
    
    
    $
    (0.24
    )
 Overview
    28




---



##### Table of Contents



Net Sales
 Maintenance Products Group
   Electrical Products Group
  Operating Loss
 Three months ended June 30,(Amounts in Millions)2007
    
    
    2006
    
    
    ChangeAs Restated, seeNote 1%
    
    
    
    
    
    
    %
    
    
    
    
    
    
    %$
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    $
    
    
    MarginMaintenance Products Group
    
    $
    1.4
    
    
    
    2.7
    
    
    $
    0.1
    
    
    
    0.2
    
    
    $
    1.3
    
    
    
    2.5Electrical Products Group
    
    
    0.6
    
    
    
    2.0
    
    
    
    1.9
    
    
    
    5.7
    
    
    
    (1.3
    )
    
    
    (3.7
    )Unallocated corporate expense
    
    
    (1.7
    )
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    0.20.3
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3Severance, restructuring and related charges
    
    
    (2.4
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (2.3
    )(Loss) gain on sale of assets
    
    
    (1.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.7
    )Operating loss
    
    $
    (3.8
    )
    
    
    (4.6
    )
    
    $
    0.0
    
    
    
    0.0
    
    
    $
    (3.8
    )
    
    
    (4.6
    )
 Maintenance Products Group
  Electrical Products Group
   29




---



##### Table of Contents



Corporate
  Severance, Restructuring and Related Charges
  Other Items
      30




---



##### Table of Contents



Six Months Ended June 30, 2007 versus Six Months Ended June 30, 2006
 As Restated, see Note 12007
    
    
    2006(Amounts in Millions, Except Per Share Data)$
    
    
    % to Sales
    
    
    $
    
    
    % to SalesNet sales
    
    $
    171.6
    
    
    
    100.0
    
    
    $
    156.5
    
    
    
    100.0Cost of goods sold
    
    
    154.4
    
    
    
    90.0
    
    
    
    136.2
    
    
    
    87.0Gross profit
    
    
    17.2
    
    
    
    10.0
    
    
    
    20.3
    
    
    
    13.0Selling, general and administrative expenses
    
    
    20.1
    
    
    
    11.7
    
    
    
    22.5
    
    
    
    14.4Severance, restructuring and related charges
    
    
    2.6
    
    
    
    1.5
    
    
    
    0.9
    
    
    
    0.6Loss of sale of assets
    
    
    1.6
    
    
    
    0.9
    
    
    
    0.1
    
    
    
    0.0Operating loss
    
    
    (7.1
    )
    
    
    (4.1
    )
    
    
    (3.2
    )
    
    
    (2.0
    )Gain on SESCO joint venture transaction
    
    
    
    
    
    
    
    
    
    
    0.6Interest expense
    
    
    (3.1
    )
    
    
    
    
    
    
    (3.5
    )Other, net
    
    
    0.2
    
    
    
    
    
    
    
    0.4Loss from continuing operations before provision for income taxes
    
    
    (10.0
    )
    
    
    
    
    
    
    (5.7
    )Provision for income taxes from
continuing operations
    
    
    (0.8
    )
    
    
    
    
    
    
    (0.5
    )Loss from continuing operations
    
    
    (10.8
    )
    
    
    
    
    
    
    (6.2
    )Income (loss) from operations of discontinued businesses
(net of tax)
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Gain on sale of discontinued businesses (net of tax)
    
    
    8.8
    
    
    
    
    
    
    
    Loss before cumulative effect of a change in accounting principle
    
    
    (2.0
    )
    
    
    
    
    
    
    (6.9
    )Cumulative effect of a change in accounting principle (net of tax)
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Net loss
    
    $
    (2.0
    )
    
    
    
    
    
    $
    (7.7
    )Loss per share of common stock  basic and diluted:Loss from continuing operations
    
    $
    (1.35
    )
    
    
    
    
    
    $
    (0.78
    )Discontinued operations
    
    
    1.10
    
    
    
    
    
    
    
    (0.09
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net loss
    
    $
    (0.25
    )
    
    
    
    
    
    $
    (0.96
    )
 Overview
    31




---



##### Table of Contents



Net Sales
 Maintenance Products Group
   Electrical Products Group
  Operating Loss
 Six months ended June 30,(Amounts in Millions)2007
    
    
    2006
    
    
    ChangeAs Restated, seeNote 1%
    
    
    
    
    
    %
    
    
    
    
    
    %$
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    $
    
    
    MarginMaintenance Products Group
    
    $
    2.2
    
    
    
    2.3
    
    
    $
    0.8
    
    
    
    0.8
    
    
    $
    1.4
    
    
    
    1.5Electrical Products Group
    
    
    (0.8
    )
    
    
    (1.0
    )
    
    
    2.0
    
    
    
    3.3
    
    
    
    (2.8
    )
    
    
    (4.3
    )Unallocated corporate expense
    
    
    (4.3
    )
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    0.7(2.9
    )
    
    
    (1.7
    )
    
    
    (2.2
    )
    
    
    (1.5
    )
    
    
    (0.7
    )
    
    
    (0.2
    )Severance, restructuring and related charges
    
    
    (2.6
    )
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (1.7
    )Loss on sale of assets
    
    
    (1.6
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (1.5
    )Operating loss
    
    $
    (7.1
    )
    
    
    (4.1
    )
    
    $
    (3.2
    )
    
    
    (2.0
    )
    
    $
    (3.9
    )
    
    
    (2.1
    )
 Maintenance Products Group
   32




---



##### Table of Contents



Electrical Products Group
  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
 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]
    
    $
    37,597
    
    
    $
    37,597
    
    
    $
    
    
    
    $
    
    
    
    $
    Term loans
    
    
    11,292
    
    
    
    1,500
    
    
    
    9,792
    
    
    
    
    
    
    
    Interest on debt [b]
    
    
    6,776
    
    
    
    3,802
    
    
    
    2,974
    
    
    
    
    
    
    
    Operating leases [c]
    
    
    18,636
    
    
    
    7,714
    
    
    
    8,436
    
    
    
    2,042
    
    
    
    444Severance and restructuring [c]
    
    
    1,109
    
    
    
    306
    
    
    
    398
    
    
    
    252
    
    
    
    153Postretirement benefits [d]
    
    
    5,687
    
    
    
    747
    
    
    
    1,463
    
    
    
    1,157
    
    
    
    2,321Total Contractual Obligations
    
    $
    81,097
    
    
    $
    51,666
    
    
    $
    23,063
    
    
    $
    3,451
    
    
    $
    2,918
 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
    
    $
    542
    
    
    $
    542
    
    
    $
    
    
    
    $
    
    
    
    $
    Stand-by letters of credit
    
    
    5,682
    
    
    
    5,682
    
    
    
    
    
    
    
    
    
    
    
    Total Commercial Commitments
    
    $
    6,224
    
    
    $
    6,224
    
    
    $
    
    
    
    $
    
    
    
    $
    
  35




---



##### Table of Contents



[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. 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 June 30, 2007 includes $2.2 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 postretirement 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
  Operating Activities
  Investing Activities
  Financing Activities
   36




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Consolidation of St. Louis
manufacturing/distribution facilities
    
    $
    693
    
    
    $
    
    
    
    $
    882
    
    
    $
    699Consolidation of Glit facilities
    
    
    1,709
    
    
    
    
    
    
    
    1,728
    
    
    
    Shutdown of Woods Canada manufacturing
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    Corporate office relocation
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    154Total severance, restructuring and related charges
    
    $
    2,402
    
    
    $
    71
    
    
    $
    2,646
    
    
    $
    853
  Total Expected
    
    
    Total ProvisionCost
    
    
    to DateMaintenance Products Group
    
    $
    23,703
    
    
    $
    23,403Electrical Products Group
    
    
    12,683
    
    
    
    12,683Corporate
    
    
    12,290
    
    
    
    12,290$
    48,676
    
    
    $
    48,376
  One-time
    
    
    ContractTermination
    
    
    TerminationTotal
    
    
    Benefits [a]
    
    
    Costs [b]
    
    
    Other [c]Restructuring liabilities at December 31, 2006
    
    $
    961
    
    
    $
    
    
    
    $
    961
    
    
    $
    Additions
    
    
    2,646
    
    
    
    69
    
    
    
    2,430
    
    
    
    147Payments
    
    
    (664
    )
    
    
    (69
    )
    
    
    (448
    )
    
    
    (147
    )Currency translation and other
    
    
    (712
    )
    
    
    
    
    
    
    (712
    )
    
    
    Restructuring liabilities at June 30, 2007 [d]
    
    $
    2,231
    
    
    $
    
    
    
    $
    2,231
    
    
    $
    
 [a]
    
    Includes severance, benefits, and other employee-related charges associated with the employee
terminations.
  37




---



##### Table of Contents



[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
sub-lease rentals, is $4.0 million as of June 30, 2007. The Company has included $1.8 million as
an offset for sub-lease rentals.[c]
    
    Includes charges associated with equipment removal and cleanup of abandoned facility.[d]
    
    Katy expects to substantially complete its current restructuring programs in 2007. The
remaining severance, restructuring and related charges for these initiatives are expected to be
approximately $0.3 million.
        38




---



##### Table of Contents



Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
   39




---



##### Table of Contents




    
    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.
    
    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.
   40




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Exchange Risk
 
 Commodity Price Risk
   41




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Item 4. CONTROLS AND PROCEDURES
         
    
    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.
   42




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##### Table of Contents



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;
    
    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 performthese 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.
   Remediation of
Material Weaknesses
  43




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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
   44




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Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    Name
    
    Votes For
    
    Votes WithheldChristopher W. Anderson
    
    
    6,786,531
    
    
    
    495,884William F. Andrews
    
    
    6,785,531
    
    
    
    496,884Samuel P. Frieder
    
    
    6,786,531
    
    
    
    495,884Christopher Lacovara
    
    
    6,786,398
    
    
    
    496,017Shant Mardirossian
    
    
    6,796,287
    
    
    
    486,128
   Votes For
    
    Votes Against
    
    Votes Abstained6,973,026
    
    295,607
    
    13,783
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 ExhibitNumber
    
    Exhibit Title
    
    Page31.1
    
    
    CEO Certification pursuant to Securities Exchange Act
Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
    
    
    4631.2
    
    
    CFO Certification pursuant to Securities Exchange Act
Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    4732.1
    
    
    CEO Certification required by 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    
    48
    #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.
    
    
    49
    #
 #
    
    These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C.
1350, and are not being filed for purposes of Section 18 of the Securities and Exchange Act of
1934, as amended, and are not to be incorporated by reference into any filing of Katy Industries,
Inc. whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
  45




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Signatures
  KATY INDUSTRIES, INC.
 DATE: August 20, 2007
    By
    /s/ Anthony T. Castor IIIAnthony T. Castor IIIPresident and Chief Executive Officer By
    /s/ Amir RosenthalAmir RosenthalVice President, Chief Financial Officer,General Counsel and Secretary  46




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Exhibit Title31.1
    
    
    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
200232.1
    
    
    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.#
 #
    
    These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C.
1350, and are not being filed for purposes of Section 18 of the Securities and Exchange Act of
1934, as amended, and are not to be incorporated by reference into any filing of Katy Industries,
Inc. whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
  47