THIS
      DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON NOVEMBER 15, 2005 PURSUANT TO
      A
      RULE 201 TEMPORARY HARDSHIP EXEMPTION




United
      States


Securities
      and Exchange Commission


Washington,
      D.C. 20549





FORM
      10-Q





[
      x ]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      Quarterly period ended: September 30, 2005





OR


[
      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the transition period from_______________ to________________





Commission
      File Number 001-05558





Katy
      Industries, Inc.


(Exact
      name of registrant as specified in its charter)





Delaware
            
            75-1277589(State
                of Incorporation)
            
            (I.R.S.
                Employer Identification
                No.)





765
      Straits Turnpike, Suite 2000, Middlebury, Connecticut 06762


(Address
      of Principal Executive Offices) (Zip Code)








Registrant's
      telephone number, including area code: (203)598-0397





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yesx
            
            No****o








Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).








Yeso
            
            Nox








Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock
      as of the latest practicable date.





Class
            
            Outstanding
                at November 15, 2005Common
                Stock, $1 Par Value
            
            7,951,377







KATY
      INDUSTRIES, INC.


FORM
      10-Q


September
      30, 2005








INDEX





PagePART
                I
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements:Condensed
                Consolidated Balance SheetsSeptember
                30, 2005 and December 31, 2004
                (unaudited)
            3Condensed
                Consolidated Statements of
                OperationsThree
                Months and Nine Months EndedSeptember
                30, 2005 and 2004 (unaudited)
            5Condensed
                Consolidated Statements of Cash
                FlowsNine
                Months Ended September 30, 2005 and 2004
                (unaudited)
            6Notes
                to Condensed Consolidated Financial Statements
                (unaudited)
            7Item
                2.
            Management's
                Discussion and Analysis of FinancialCondition
                and Results of Operations
            25Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            42Item
                4.
            Controls
                and Procedures
            43PART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            45Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            45Item
                5.
            Other
                Information
            45Item
                6.
            Exhibits
            45Signatures
            46Certifications





-2-


PART
      I FINANCIAL INFORMATION





Item
      1. Financial Statements








KATY
      INDUSTRIES, INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEETS


(Amounts
      in Thousands)


(Unaudited)





ASSETS




September
                30,
            
            December
                31,2005
            
            2004CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            8,627
            
            $
            8,525Accounts
                receivable, net
            
            
            76,084
            
            
            66,689Inventories,
                net
            
            
            60,536
            
            
            65,674Other
                current assets
            
            
            4,534
            
            
            4,233Total
                current assets
            
            
            149,781
            
            
            145,121OTHER
                ASSETS:Goodwill
            
            
            2,239
            
            
            2,239Intangibles,
                net
            
            
            7,814
            
            
            7,428Other
            
            
            9,036
            
            
            9,946Total
                other assets
            
            
            19,089
            
            
            19,613PROPERTY
                AND EQUIPMENTLand
                and improvements
            
            
            1,766
            
            
            1,897Buildings
                and improvements
            
            
            14,353
            
            
            13,537Machinery
                and equipment
            
            
            138,056
            
            
            132,825154,175
            
            
            148,259Less
                - Accumulated depreciation
            
            
            (97,009
            )
            
            (88,529
            )Property
                and equipment, net
            
            
            57,166
            
            
            59,730Total
                assets
            
            $
            226,036
            
            $
            224,464See
                Notes to Condensed Consolidated Financial Statements.


-3-


KATY
      INDUSTRIES, INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEETS


(Amounts
      in Thousands, Except Share Data)


(Unaudited)





LIABILITIES
      AND STOCKHOLDERS’ EQUITY




September
                  30,
              
              December
                  31,2005
              
              
              2004CURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              51,284
              
              $
              39,079Accrued
                  compensation
              
              
              4,438
              
              
              5,269Accrued
                  expenses
              
              
              41,441
              
              
              39,939Current
                  maturities of long-term debt
              
              
              3,472
              
              
              2,857Revolving
                  credit agreement
              
              
              41,085
              
              
              40,166Total
                  current liabilities
              
              
              141,720
              
              
              127,310LONG-TERM
                  DEBT, less current maturities
              
              
              13,571
              
              
              15,714OTHER
                  LIABILITIES
              
              
              10,772
              
              
              12,855Total
                  liabilities
              
              
              166,063
              
              
              155,879COMMITMENTS
                  AND CONTINGENCIES (Note 9)
              
              
              -
              
              
              -STOCKHOLDERS’
                  EQUITY15%
                  Convertible Preferred Stock, $100 par value,
                  authorized1,200,000
                  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
                  9,822,204 shares
              
              
              9,822
              
              
              9,822Additional
                  paid-in capital
              
              
              27,016
              
              
              25,111Accumulated
                  other comprehensive income
              
              
              3,338
              
              
              4,564Accumulated
                  deficit
              
              
              (66,619
              )
              
              (57,258
              )Treasury
                  stock, at cost, 1,870,827 and 1,876,827 shares,
                  respectively
              
              
              (21,840
              )
              
              (21,910
              )Total
                  stockholders' equity
              
              
              59,973
              
              
              68,585Total
                  liabilities and stockholders' equity
              
              $
              226,036
              
              $
              224,464See
                  Notes to Condensed Consolidated Financial Statements.


-4-


KATY
      INDUSTRIES, INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


FOR
      THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
      2004


(Thousands
      of Dollars, Except Share and Per Share Data)


(Unaudited)





Three
                  Months
              
              Nine
                  MonthsEnded
                  September 30,
              
              Ended
                  September 30,2005
              
              
              2004
              
              
              2005
              
              
              2004Net
                  sales
              
              $
              140,557
              
              $
              135,426
              
              $
              334,280
              
              $
              335,843Cost
                  of goods sold
              
              
              122,896
              
              
              117,569
              
              
              295,310
              
              
              288,095Gross
                  profit
              
              
              17,661
              
              
              17,857
              
              
              38,970
              
              
              47,748Selling,
                  general and administrative expenses
              
              
              13,861
              
              
              14,846
              
              
              40,100
              
              
              43,834Stock
                  option expense
              
              
              -
              
              
              -
              
              
              1,953
              
              
              -Severance,
                  restructuring and related charges
              
              
              662
              
              
              167
              
              
              1,975
              
              
              1,956(Gain)
                  loss on sale of assets
              
              
              (187
              )
              
              3
              
              
              (353
              )
              
              (546
              )Operating
                  income (loss)
              
              
              3,325
              
              
              2,841
              
              
              (4,705
              )
              
              2,504Interest
                  expense
              
              
              (1,487
              )
              
              (1,017
              )
              
              (4,143
              )
              
              (2,814
              )Other,
                  net
              
              
              219
              
              
              (30
              )
              
              209
              
              
              (261
              )Income
                  (loss) before provision for income taxes
              
              
              2,057
              
              
              1,794
              
              
              (8,639
              )
              
              (571
              )Provision
                  for income taxes
              
              
              724
              
              
              918
              
              
              722
              
              
              1,617Net
                  income (loss)
              
              
              1,333
              
              
              876
              
              
              (9,361
              )
              
              (2,188
              )Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              (3,822
              )
              
              -
              
              
              (10,746
              )Net
                  income (loss) attributable to common stockholders
              
              $
              1,333
              
              $
              (2,946
              )
              $
              (9,361
              )
              $
              (12,934
              )Income
                  (loss) per share of common stock - Basic:Net
                  income (loss)
              
              $
              0.17
              
              $
              0.11
              
              $
              (1.18
              )
              $
              (0.28
              )Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              (0.48
              )
              
              -
              
              
              (1.36
              )Net
                  income (loss) attributable to common stockholders
              
              $
              0.17
              
              $
              (0.37
              )
              $
              (1.18
              )
              $
              (1.64
              )Income
                  (loss) per share of common stock - Diluted:Net
                  income (loss)
              
              $
              0.05
              
              $
              0.11
              
              $
              (1.18
              )
              $
              (0.28
              )Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              (0.48
              )
              
              -
              
              
              (1.36
              )Net
                  income (loss) attributable to common stockholders
              
              $
              0.05
              
              $
              (0.37
              )
              $
              (1.18
              )
              $
              (1.64
              )Weighted
                  average common shares outstanding (thousands):Basic
              
              
              7,951
              
              
              7,870
              
              
              7,948
              
              
              7,875Diluted
              
              
              26,880
              
              
              7,870
              
              
              7,948
              
              
              7,875See
                  Notes to Condensed Consolidated Financial Statements.


-5-


KATY
        INDUSTRIES, INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


(Thousands
      of Dollars)


(Unaudited)





2005
            
            2004Cash
                flows from operating activities:Net
                loss
            
            $
            (9,361
            )
            $
            (2,188
            )Depreciation
                and amortization
            
            
            8,606
            
            
            11,102Amortization
                of debt issuance costs
            
            
            844
            
            
            804Stock
                option expense
            
            
            1,953
            
            
            -Gain
                on sale of assets
            
            
            (353
            )
            
            (546
            )1,689
            
            
            9,172Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (9,596
            )
            
            (10,637
            )Inventories
            
            
            5,019
            
            
            (19,072
            )Other
                assets
            
            
            (471
            )
            
            (1,136
            )Accounts
                payable
            
            
            12,456
            
            
            5,546Accrued
                expenses
            
            
            677
            
            
            (125
            )Other,
                net
            
            
            (2,090
            )
            
            (2,404
            )5,995
            
            
            (27,828
            )Net
                cash provided by (used in) operating activities
            
            
            7,684
            
            
            (18,656
            )Cash
                flows from investing activities:Capital
                expenditures
            
            
            (5,785
            )
            
            (10,838
            )Acquisition
                of business, net of cash acquired
            
            
            (1,658
            )
            
            -Collections
                of note receivable from sale of subsidiary
            
            
            106
            
            
            14Proceeds
                from sale of assets
            
            
            931
            
            
            5,545Net
                cash used in investing activities
            
            
            (6,406
            )
            
            (5,279
            )Cash
                flows from financing activities:Net
                borrowings on revolving loans
            
            
            1,045
            
            
            12,536Proceeds
                of term loans
            
            
            -
            
            
            18,152Repayments
                of term loans
            
            
            (2,143
            )
            
            (3,244
            )Direct
                costs associated with debt facilities
            
            
            (244
            )
            
            (1,439
            )Repurchases
                of common stock
            
            
            -
            
            
            (75
            )Net
                cash (used in) provided by financing activities
            
            
            (1,342
            )
            
            25,930Effect
                of exchange rate changes on cash and cash equivalents
            
            
            166
            
            
            (117
            )Net
                increase in cash and cash equivalents
            
            
            102
            
            
            1,878Cash
                and cash equivalents, beginning of period
            
            
            8,525
            
            
            6,748Cash
                and cash equivalents, end of period
            
            $
            8,627
            
            $
            8,626See
                Notes to Condensed Consolidated Financial Statements


-6-


KATY
      INDUSTRIES, INC.


NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
      30, 2005





(1) Significant
      Accounting Policies





Consolidation
      Policy and Basis of Presentation


The
      condensed consolidated financial statements include the accounts of Katy
      Industries, Inc. and subsidiaries in which it has a greater than 50% interest,
      collectively “Katy” or the Company. All significant intercompany accounts,
      profits and transactions have been eliminated in consolidation. Investments
      in
      affiliates that are not majority owned and where the Company exercises
      significant influence are reported using the equity method. The condensed
      consolidated financial statements at September 30, 2005 and December 31, 2004
      and for the three and nine month periods ended September 30, 2005 and 2004
      are
      unaudited and reflect all adjustments which are, in the opinion of management,
      necessary for a fair presentation of the financial condition and results of
      operations of the Company. Interim results may not be indicative of results
      to
      be realized for the entire year. The condensed consolidated financial statements
      should be read in conjunction with the consolidated financial statements and
      notes thereto, together with management’s discussion and analysis of financial
      condition and results of operations, contained in the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2004.





Use
      of
      Estimates


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.





Inventories


The
      components of inventories are as follows (amounts in
      thousands):


September
                    30,
                
                December
                    31,2005
                
                2004Raw
                    materials
                
                $
                21,045
                
                $
                23,220Work
                    in process
                
                
                1,766
                
                
                1,826Finished
                    goods
                
                
                42,640
                
                
                45,299Inventory
                    reserves
                
                
                (4,915
                )
                
                (4,671
                )$
                60,536
                
                $
                65,674


At
      September 30, 2005 and December 31, 2004, approximately 34% and **** 39%,
      respectively, of Katy’s inventories were accounted for using the last-in,
      first-out (“LIFO”) method of costing, while the remaining inventories were
      accounted for using the first-in, first-out (“FIFO”) method. Current cost, as
      determined using the FIFO method, exceeded LIFO cost by $4.5 million and $4.7
      million at September 30, 2005 and December 31, 2004, respectively.





Property,
      Plant and Equipment


Property
      and equipment are stated at cost and depreciated over their estimated useful
      lives: buildings (10-40 years) generally using the straight-line method;
      machinery and equipment (3-20 years) using straight-line or composite methods;
      tooling (5 years) using the straight-line method; and leasehold improvements
      using the straight-line method over the remaining lease period or useful life,
      if shorter. Costs for repair and maintenance of machinery and equipment are
      expensed as incurred, unless the result significantly increases the useful
      life
      or functionality of the asset, in which case capitalization is considered.
      Depreciation expense from continuing operations was $2.6 million and $3.0
      million and $8.1 million and $9.8 million for the three and nine month periods
      ended September 30, 2005 and 2004, respectively.




-7-


Katy
      adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, *Accounting
      for Asset Retirement Obligations* ,
      on
      January 1, 2003. SFAS No. 143 requires that an asset retirement obligation
      associated with the retirement of a tangible long-lived asset be recognized
      as a
      liability in the period in which it is incurred or becomes determinable, with
      an
      associated increase in the carrying amount of the related long-term asset.
      The
      cost of the tangible asset, including the initially recognized asset retirement
      cost, is depreciated over the useful life of the asset. In accordance with
      SFAS
      No. 143, the Company has recorded as of September 30, 2005 an asset of $0.8
      million and related liability of $1.1 million for retirement obligations
      associated with returning certain leased properties to the respective lessors
      upon the termination of the lease arrangements. A summary of the changes in
      asset retirement obligation since December 31, 2004 is included in the table
      below (amounts in thousands):


SFAS
                    No. 143 Obligation at December 31, 2004
                
                $
                1,237Additions
                
                
                330Accretion
                    expense
                
                
                36Changes
                    in estimates, including timing
                
                
                32Payments
                
                
                (580
                )SFAS
                    No. 143 Obligation at September 30, 2005
                
                $
                1,055




Stock
      Options and Other Stock Awards


The
      Company follows the provisions of Accounting Principles Board (“APB”) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      regarding accounting for stock options and other stock awards. APB Opinion
      No.
      25 dictates a measurement date concept in the determination of compensation
      expense related to stock awards including stock options, restricted stock,
      and
      stock appreciation rights. The Company’s outstanding stock options historically
      have had established measurement dates and therefore, fixed plan accounting
      was
      applied, generally resulting in no compensation expense for these stock option
      awards. In March 2004, the Company’s Board of Directors approved the vesting of
      all previously outstanding and unvested stock options. The Company did not
      recognize any compensation expense upon this vesting of options because, based
      on the information available at that time, the Company did not have an
      expectation that the holders of the previously unvested options would terminate
      their employment with the Company prior to the original vesting period. In
      the
      second quarter of 2005, the Company's former President and Chief
      Executive Officer retired from the Company. Upon this event, the Company
      recognized $2.0 million of compensation expense related to his 1,050,000 options
      using the intrinsic method of accounting under APB 25, because he would not
      have
      otherwise vested in these options but for the March 2004 accelerated vesting.
      Upon his retirement, our former President and Chief Executive Officer
      immediately forfeited 750,000 options while 300,000 options remain unexercised.
      150,000 options and zero options were granted during the three months ended
      September 30, 2005 and 2004, respectively, while 906,000 options and 6,000
      options were granted during the nine months ended September 30, 2005 and 2004,
      respectively.





The
      Company has also issued stock appreciation rights and restricted stock awards
      which are accounted for as variable stock compensation awards and compensation
      expense or income has been recorded for these awards. Compensation expense
      recorded relative to stock awards was $22.1 thousand and $9.0 thousand for
      the
      nine month periods ended September 30, 2005 and 2004, respectively. No
      compensation expense was recorded relative to stock awards for the three months
      ended September 30, 2005 and 2004, respectively. Compensation income (expense)
      recorded associated with the vesting of stock appreciation rights was $0.1
      million and ($0.1) million for the three month periods ended September 30,
      2005
      and 2004, respectively. Compensation income recorded associated with the vesting
      of stock appreciation rights was $0.9 million and $0.1 million for the nine
      month periods ended September 30, 2005 and 2004, respectively. No compensation
      expense was recorded relative to restricted stock awards during the three and
      nine months ended September 30, 2005 and 2004, respectively. Compensation
      expense or income for stock awards and stock appreciation rights is recorded
      in
      selling, general and administrative expenses in the Condensed Consolidated
      Statements of Operations.





-8-


SFAS
      No.
      123, *Accounting
      for Stock-Based Compensation,* changes
      the method for recognition of expense related to option grants to employees.
      Under SFAS No. 123, compensation cost would be recorded based upon the fair
      value of each option at the date of grant using an option-pricing model that
      takes into account as of the grant date the exercise price and expected life
      of
      the option, the current price of the underlying stock and its expected
      volatility, expected dividends on the stock and the risk-free interest rate
      for
      the expected term of the option. The fair value of each option grant is
      estimated on the date of grant using a Black-Scholes option-pricing model with
      an expected life of five to ten years for all grants. Had compensation cost
      been
      determined based on the fair value method of SFAS No. 123, the Company’s net
      loss and loss per share would have been adjusted to the pro forma amounts
      indicated below (amounts in thousands, except per share data).




Three
                  Months
              
              Nine
                  MonthsEnded
                  September 30,
              
              Ended
                  September 30,2005
              
              
              2004
              
              
              2005
              
              
              2004Net
                  income (loss) attributable to common stockholders,
              
              $
              1,333
              
              $
              (2,946
              )
              $
              (9,361
              )
              $
              (12,934
              )as
                  reportedAdd:
                  Stock-based employee compensation expenseincluded
                  in reported net income (loss), with no relatedtax
                  effects
              
              
              -
              
              
              -
              
              
              1,953
              
              
              -Deduct:
                  Total stock-based employeecompensation
                  expense determined under fairvalue
                  based method for all awards, with norelated
                  tax effects
              
              
              (120
              )
              
              -
              
              
              (134
              )
              
              (1,855
              )Pro
                  forma net income (loss)
              
              $
              1,213
              
              $
              (2,946
              )
              $
              (7,542
              )
              $
              (14,789
              )Income
                  (loss) per share - Basic:As
                  reported
              
              $
              0.17
              
              $
              (0.37
              )
              $
              (1.18
              )
              $
              (1.64
              )Pro
                  forma
              
              $
              0.15
              
              $
              (0.37
              )
              $
              (0.95
              )
              $
              (1.88
              )Income
                  (loss) per share - Diluted:As
                  reported
              
              $
              0.05
              
              $
              (0.37
              )
              $
              (1.18
              )
              $
              (1.64
              )Pro
                  forma
              
              $
              0.05
              
              $
              (0.37
              )
              $
              (0.95
              )
              $
              (1.88
              )





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 123 (revised 2004), *Share-Based
      Payment* (“SFAS
      123R”), which is a revision of SFAS No. 123. SFAS 123R supersedes APB Opinion
      No. 25, and amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      The
      approach to quantifying stock-based compensation expense in SFAS 123R is similar
      to SFAS No. 123. However, the revised statement requires all share-based
      payments to employees, including grants of employee stock options, to be
      recognized as an expense in the Consolidated Statements of Operations based
      on
      their fair values as they are earned by the employees under the vesting terms.
      Pro forma disclosure of stock-based compensation expense, as is the Company's
      practice under SFAS No. 123, will not be permitted after 2005, since SFAS 123R
      must be adopted no later than the first interim or annual period beginning
      after
      December 15, 2005. The Company expects to follow the "modified prospective"
      method of adoption of SFAS 123R in the first quarter of 2006, whereby earnings
      for prior periods will not be restated as though stock based compensation had
      been expensed. Although the Company has not yet fully evaluated the effect
      of
      SFAS 123R on its results of operations, the Company believes that the impact
      on
      the Consolidated Statements of Operations will be similar to the pro forma
      impact shown above for the quarter ended September 30, 2005.





Derivative
      Financial Instruments





Effective August
      17, 2005, the Company entered into an interest rate swap agreement designed
      to
      limit exposure to increasing interest rates on its floating rate indebtedness.
      The differential to be paid or received is recognized as an adjustment of
      interest expense related to the debt upon settlement. In connection with the
      Company’s adoption of Statement of Financial Accounting Standards No. 133 (“FAS
      133”), *Accounting
      for Derivative Financial Instruments and Hedging Activities* ,
      the
      Company is required to recognize all derivatives on its balance sheet at fair
      value. As the derivative instrument held by the Company is classified as a
      hedge
      under FAS 133, changes in the fair value of the derivative will be offset
      against the change in fair value of the hedged liability through earnings,
      or
      recognized in other comprehensive income until the hedged item is recognized
      in
      earnings. Hedge ineffectiveness associated with the swap will be reported by
      the
      Company in interest expense.





The
      Company accounts for its interest rate swap in accordance with FAS 133. The
      agreement has an effective date of August 17, 2005 and a termination date of
      August 17, 2007 with a notional amount of $25.0 million in the first year
      declining to $15.0 million in the second year. The Company is hedging its
      variable LIBOR-based interest rate for a fixed interest rate of 4.49% for the
      term of the swap agreement to protect the Company from potential interest rate
      increases. The Company has designated its benchmark variable LIBOR-based
      interest rate on a portion of the Bank of America Credit Agreement as a hedged
      item under a cash flow hedge. In accordance with FAS 133, the Company recorded
      a
      liability of less than $0.1 million on its balance sheet at September 30, 2005,
      with changes in fair market value included in other comprehensive
      income.





-9-


The
      C ompany
      reported insignificant losses for the three and nine months ended September
      30,
      2005, as a result of hedge ineffectiveness. Future changes in this swap
      arrangement, including termination of the agreement, may result in a
      reclassification of any gain or loss reported in other comprehensive income
      into
      earnings as an adjustment to interest expense.





Details
      regarding the swap as of September 30, 2005 are as follows (amounts in
      thousands):


Notional
                    Amount
                
                Maturity
                
                Rate
                    Paid
                
                Rate
                    Received
                
                Fair
                    Value (2)$25,000
                
                August
                    17, 2007
                
                4.49%
                
                LIBOR
                    (1)
                
                $
                    (40)


(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.




Earnings
      Per Share


The
      condensed consolidated financial statements include basic and diluted earnings
      per share. Diluted per share information is calculated by also considering
      the
      impact of potential common stock on the weighted average shares outstanding.
      Potential common stock consists of (a) stock options “in the money” based on the
      average stock price for the respective period and (b) convertible preferred
      shares accounted for using the “if converted” basis, which assumes their
      conversion to common stock at a ratio of 16.6:1.





The
      following table sets forth the computation of diluted earnings per share for
      the
      three months ended September 30, 2005 (amounts in thousands):




For
                  the three months endedSeptember
                  30, 2005Basic
                  EPS
              
              Income
              
              Shares
              
              Per-share
                  amountNet
                  income attributable tocommon
                  stockholders
              
              $
              1,333
              
              
              7,951
              
              $
              0.17Effect
                  of Dilutive Securities [a]Stock
                  options
              
              
              
              
              
              70Convertible
                  preferred stock
              
              
              
              
              
              18,859Diluted
                  EPS
              
              $
              1,333
              
              
              26,880
              
              $
              0.05


[a]  For
      the
      nine months ended September 30, 2005 and 2004, respectively, and the three
      months ended September 30, 2004, the stock options and convertible preferred
      stock were not reflected, as their effect on earnings (loss) per share for
      the
      periods were anti-dilutive.





Reclassifications


Certain
      amounts from prior periods have been reclassified to conform to the current
      period presentation.





-10-


(2) New
      Accounting Pronouncements





On
      December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization
      Act of 2003 (the “Act”) became law in the U.S. The Act introduces a prescription
      drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree
      health care benefit plans that provide retiree benefits in certain
      circumstances. FASB Staff Position (FSP) 106-2, *Accounting
      and Disclosure Requirements Related to the Medicare Prescription Drug,
      Improvement and Modernization Act of 2003* (“FSP
      106-2”), issued in May 2004, requires measures of the accumulated postretirement
      benefit obligation (“APBO”) and net periodic postretirement benefit cost
      (“NPPBC”) to reflect the effects of the Act. FSP 106-2 became effective for the
      Company in the third quarter of fiscal 2004; however Katy had chosen to defer
      adoption until its next measurement date, subject to the final provisions of
      the
      Act. While the Company expects that it may be entitled to the federal subsidy
      for certain of its plans, the effect of the Act on the Company’s accumulated
      postretirement benefit obligations is not material. While the Company may be
      entitled to the federal subsidy for certain of its plans, we have determined
      that the administrative costs of obtaining the subsidy meet or exceed any
      potential subsidy benefit.





In
      November 2004, the FASB issued SFAS No. 151, *Inventory
      Costs, an amendment of ARB No. 43, Chapter 4* (SFAS
      151). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
      expense, freight, handling costs and spoilage. In addition, SFAS 151 requires
      that allocation of fixed production overhead to the costs of conversion be
      based
      on the normal capacity of the production facilities. The provisions of SFAS
      151
      are effective for inventory costs incurred during fiscal years beginning after
      June 15, 2005. The Company expects that the adoption of SFAS 151 will not have
      a
      material impact on its results of operations and financial
      position.





In
      December 2004, the FASB issued FSP No. 109-1, *Application
      of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction
      on
      Qualified Production Activities Provided by the American Jobs Creation Act
      of
      2004* .
      The
      American Jobs Creation Act of 2004 includes a tax deduction of up to 9% of
      the
      lesser of qualified production activities income, as defined, or taxable income,
      after the deduction for the utilization of any net operating loss carryforwards.
      The FSP clarified that this deduction should be accounted for as a special
      tax
      deduction in accordance with SFAS No. 109. The Company expects that due to
      its
      net operating loss carryforwards and its full domestic valuation allowance,
      the
      new deduction will have no impact on income tax expense for fiscal years 2005
      and 2006.





In
      December 2004, the FASB issued FSP No. 109-2, *Accounting
      and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
      the American Jobs Creation Act of 2004.* The
      Company has completed its review of the Repatriation Provision and has concluded
      that it will not benefit from the Act due to the Company's current tax position.
      As a result, the Repatriation Provision has not had any impact on income tax
      expense during fiscal 2004 and through the nine months ended September 30,
      2005.








-11-


(3) Intangible
      Assets





The
      following table sets forth information regarding Katy’s intangible assets
      (amounts in thousands):


September
                  30,
              
              December
                  31,2005
              
              2004Gross
              
              Accumulated
              
              Net
                  Carrying
              
              Gross
              
              Accumulated
              
              Net
                  CarryingAmount
              
              Amortization
              
              Amount
              
              Amount
              
              Amortization
              
              AmountPatents
              
              $
              1,380
              
              $
              (800
              )
              $
              580
              
              $
              1,114
              
              $
              (727
              )
              $
              387Customer
                  lists
              
              
              10,647
              
              
              (7,795
              )
              
              2,852
              
              
              10,666
              
              
              (7,619
              )
              
              3,047Tradenames
              
              
              5,508
              
              
              (1,794
              )
              
              3,714
              
              
              5,531
              
              
              (1,537
              )
              
              3,994Other
              
              
              679
              
              
              (11
              )
              
              668
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              18,214
              
              $
              (10,400
              )
              $
              7,814
              
              $
              17,311
              
              $
              (9,883
              )
              $
              7,428




All
      of
      Katy’s intangible assets are definite long-lived intangibles. Katy recorded
      amortization expense on intangible assets of $0.2 million and $0.4 million
      for
      the three-month periods ended September 30, 2005 and 2004, respectively, and
      $0.5 million and $1.3 million for the nine-month periods ended September 30,
      2005 and 2004, respectively. Estimated aggregate future amortization expense
      related to intangible assets is as follows (amounts in thousands):





2005  $331


2006   756


2007   752


2008   746


2009   732


2010   714







(4) Acquisition





During
      the third quarter of 2005, the Company’s Continental Commercial Products LLC
      subsidiary (“CCP”) acquired substantially all of the assets and assumed certain
      liabilities of Washington International Non-Wovens, LLC (“WIN”), based in
      Washington, GA. The purchase price was approximately $2.1 million and was
      allocated to the acquired net tangible assets and intangible lease asset at
      their estimated fair values. The WIN acquisition is not material for purposes
      of
      presenting pro forma financial information. This acquired business is part
      of
      the Abrasives business unit in the Maintenance Products Group.





(5)   Savannah
      Energy Systems Company Partnership





On
      April
      29, 2002, Savannah Energy Systems Company (“SESCO”), an indirect wholly owned
      subsidiary of Katy, entered into a partnership agreement with Montenay Power
      Corporation and its affiliates (“Montenay”) that turned over the operational
      control of SESCO's waste-to-energy facility to the partnership. The Company
      caused SESCO to enter into this agreement as a result of evaluations of SESCO's
      business. First, Katy concluded that SESCO was not a core component of the
      Company's long-term business strategy. Moreover, Katy did not feel it had the
      management expertise to deal with certain risks and uncertainties presented
      by
      the operation of SESCO's business, given that SESCO was the Company's only
      waste-to-energy facility. Katy had explored options for divesting SESCO for
      a
      number of years, and management felt that this transaction offered a reasonable
      strategy to exit this business.





The
      partnership, with Montenay's leadership, assumed SESCO's position in various
      contracts relating to the facility's operation. Under the partnership agreement,
      SESCO contributed its assets and liabilities (except for its liability under
      the
      loan agreement with the Resource Recovery Development Authority (the
“Authority”) of the City of Savannah and the related receivable under the
      service agreement with the Authority) to the partnership. While SESCO has a
      99%
      interest as a limited partner, Montenay has the day to day responsibility for
      administration, operations, financing and other matters of the partnership,
      and
      accordingly, the partnership will not be consolidated. Katy agreed to pay
      Montenay $6.6 million over the span of seven years under a note payable as
      part
      of the partnership and related agreements. Certain amounts may be due to SESCO
      upon expiration of the service agreement in 2008; also, Montenay may purchase
      SESCO's interest in the partnership at that time. Katy has not recorded any
      amounts receivable or other assets relating to amounts that may be received
      at
      the time the service agreement expires, given their uncertainty. The Company
      does not consolidate the partnership and, as such, there is no income statement
      activity related to the day-to-day operation of the partnership.


-12-


The
      Company made a payment of $1.1 million in June 2005 on the remaining portion
      of
      the $6.6 million note. The table below schedules the remaining payments as
      of
      September 30, 2005, which are reflected in accrued expenses and other
      liabilities in the Condensed Consolidated Balance Sheet (amounts in
      thousands):


2006
              
              $
              1,1002007
              
              
              1,1002008
              
              
              550$
              2,750
  In
        the first
        quarter of 2002, the Company recognized a charge of $6.0 million consisting
        of
        1) the discounted value of the $6.6 million note, 2) the carrying value of
        certain assets contributed to the partnership, consisting primarily of machinery
        spare parts, and 3) costs to close the transaction. It should be noted that
        all
        of SESCO's long-lived assets were reduced to a zero value during the year
        ended
        December 31, 2001, so no additional impairment was required. The Company
        expects
        that in the future, the only income statement activity associated with the
        partnership is the accretion of the discounted note payable, and Katy's
        Condensed Consolidated Balance Sheet will carry the liability mentioned
        above.





In
      1984,
      the Authority issued $55.0 million of Industrial Revenue Bonds and lent the
      proceeds to SESCO under the loan agreement for the acquisition and construction
      of the waste-to-energy facility that has now been transferred to the
      partnership. The funds required to repay the loan agreement come from the
      monthly disposal fee paid by the Authority under the service agreement for
      certain waste disposal services, a component of which is for debt service.
      To
      induce the required parties to consent to the SESCO partnership transaction,
      SESCO retained its liability under the loan agreement. In connection with that
      liability, SESCO also retained its right to receive the debt service component
      of the monthly disposal fee.





Management
      has determined that SESCO has a legally enforceable right to offset amounts
      it
      owes to the Authority under the loan agreement against amounts that are owed
      from the Authority under the service agreement. At September 30, 2005, this
      amount was $23.7 million. Accordingly, the amounts owed to and due from SESCO
      have been netted for financial reporting purposes and are not shown on the
      Condensed Consolidated Balance Sheets.





In
      addition to SESCO retaining its liabilities under the loan agreement, to induce
      the required parties to consent to the partnership transaction, Katy also
      continues to guarantee the obligations of the partnership under the service
      agreement. The partnership is liable for liquidated damages under the service
      agreement if it fails to accept the minimum amount of waste or to meet other
      performance standards under the service agreement. The liquidated damages,
      an
      off balance sheet risk for Katy, are equal to the amount of the Industrial
      Revenue Bonds outstanding, less $4.0 million maintained in a debt service
      reserve trust. Management does not expect non-performance by the other parties.
      Additionally, Montenay has agreed to indemnify Katy for any breach of the
      service agreement by the partnership.





Following
      are scheduled principal repayments on the loan agreement (and the Industrial
      Revenue Bonds) as of September 30, 2005 (amounts in thousands):




2005
              
              $
              8,3702006
              
              
              15,300Total
              
              $
              23,670
  -13-
 (6) Indebtedness





On
      April
      20, 2004, the Company completed a refinancing of its outstanding indebtedness
      (the “Refinancing”) and entered into a new agreement with Bank of America
      Business Capital (formerly Fleet Capital Corporation) (the “Bank of America
      Credit Agreement”). Like the previous credit agreement with Fleet Capital
      Corporation, the Bank of America Credit Agreement is a $110 million facility
      with a $20 million term loan (“Term Loan”) and a $90 million revolving credit
      facility (“Revolving Credit Facility”) with essentially the same terms as the
      previous credit agreement. The Bank of America Credit Agreement is an
      asset-based lending agreement and involves a syndicate of four banks, all of
      which participated in the syndicate from the previous credit agreement. In
      addition, the Bank of America Credit Agreement contains credit sub-facilities
      in
      Canada and the United Kingdom which allows the Company to borrow funds locally
      in these countries and provide a natural hedge against currency fluctuations.




Under
      the
      Bank of America Credit Agreement, the Term Loan has a final maturity date of
      April 20, 2009 with quarterly payments of $0.7 million. The Term Loan is
      collateralized by the Company’s property and equipment. The Revolving Credit
      Facility also has an expiration date of April 20, 2009 and its borrowing base
      is
      determined by eligible inventory and accounts receivable. Letters of credit,
      which reduce the unused borrowing availability under the Revolving Credit
      Facility, were $9.6 million at September 30, 2005.  Unused borrowing
      availability on the Revolving Credit Facility, after considering letters of
      credit, was $35.5 million at September 30, 2005. All extensions of credit
      under the Bank of America Credit Agreement are collateralized by a first
      priority security interest in and lien upon the capital stock of each material
      domestic subsidiary (65% of the capital stock of each material foreign
      subsidiary), and all present and future assets and properties of Katy. The
      Bank
      of America Credit Agreement contains various financial and operating covenants,
      which among other things, require the Company to maintain a fixed charge
      coverage ratio and certain other financial ratios (see discussion below). It
      also includes customary restrictions and default provisions.




From
      September 30, 2004, interest rate margins (i.e. the interest rate spread above
      LIBOR) on our Bank of America Credit Agreement borrowings have risen from 175
      basis points over applicable LIBOR rates for Revolving Credit Facility
      borrowings and 200 basis points over LIBOR for borrowings under the Term Loan
      to
      275 and 300 basis points, respectively. Current margins reflect the highest
      spread under the Bank of America Credit Agreement, as specified by the Third
      Amendment (see below). Additionally, margins on the Term Loan will drop 25
      basis
      points if the balance of the Term Loan is reduced below $10.0
      million.





Effective August
      17, 2005, the Company entered into a two-year interest rate swap on a notional
      amount of $25.0 million in the first year and $15.0 million in the second year.
      The purpose of the swap was to limit the Company’s exposure to interest rate
      increases on a portion of the Revolving Credit Facility over the two-year term
      of the swap. The fixed interest rate under the swap at September 30, 2005 and
      over the life of the agreement is 4.49%. (See Note 1 for further information
      regarding this transaction).




Long-term debt consists of the following (amounts in thousands):




September
                  30,
              
              December
                  31,2005
              
              2004Term
                  loan payable under the Bank of America Credit Agreement, interestbased
                  on LIBOR and Prime Rates (6.875% - 8%), due through 2009
              
              $
              16,428
              
              $
              18,571Revolving
                  loans payable under the Bank of America Credit Agreement,interest
                  based on LIBOR and Prime Rates (6.5% - 7.75%)
              
              
              41,085
              
              
              40,166Other
              
              
              615
              
              
              -Total
                  debt
              
              
              58,128
              
              
              58,737Less
                  revolving loans, classified as current (see below)
              
              
              (41,085
              )
              
              (40,166
              )Less
                  current maturities
              
              
              (3,472
              )
              
              (2,857
              )Long-term
                  debt
              
              $
              13,571
              
              $
              15,714




Aggregate remaining scheduled maturities of the Term Loan as of September 30,
      2005 are as follows (amounts in thousands):


2005
              $
              7142006
              
              2,8572007
              
              2,8572008
              
              2,8572009
              
              7,143





-14-


The
      Revolving Credit Facility under the Bank of America Credit Agreement requires
      lockbox agreements which provide for all receipts to be swept daily to reduce
      borrowings outstanding. These agreements, combined with the existence of a
      material adverse effect (“MAE”) clause in the Bank of America Credit Agreement,
      cause the Revolving Credit Facility to be classified as a current liability
      per
      guidance in Emerging Issues Task Force Issue No. 95--22, *Balance
      Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
      that Include Both a Subjective Acceleration Clause and a Lock-Box
      Arrangement* .
      The
      Company does not expect to repay, or be required to repay, within one year,
      the
      balance of the Revolving Credit Facility classified as a current liability.
      The
      MAE clause, which is a typical requirement in commercial credit agreements,
      allows the lenders to require the loan to become due if they determine there
      has
      been a material adverse effect on the Company’s operations, business,
      properties, assets, liabilities, condition or prospects. The classification
      of
      the Revolving Credit Facility as a current liability was a result only of the
      combination of the lockbox agreements and the MAE clause. The Revolving Credit
      Facility does not expire or have a maturity date within one year, but rather
      has
      a final expiration date of April 20, 2009. The lender has not notified Katy
      of
      any indication of a MAE at September 30, 2005, and to management’s knowledge,
      the Company was not in violation of any provision of the Bank of America Credit
      Agreement, as amended, at September 30, 2005.





The
      Company determined that due to declining profitability in the fourth quarter
      of
      2004, potentially lower profitability in the first half of 2005 and the timing
      of certain restructuring payments, it would not meet its Fixed Charge Coverage
      Ratio (as defined in the Bank of America Credit Agreement) and could potentially
      exceed its maximum Consolidated Leverage Ratio (also as defined in the Bank
      of
      America Credit Agreement) as of the end of the first, second and third quarters
      of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage
      Ratio or exceeding the maximum Consolidated Leverage Ratio, the Company obtained
      an amendment to the Bank of America Credit Agreement (the “Second Amendment”).
      The Second Amendment applied only to the first three quarters of 2005 and the
      covenants would have returned to their original levels for the fourth quarter
      of
      2005. Specifically, the Second Amendment eliminated the Fixed Charge Coverage
      Ratio, increased the maximum Consolidated Leverage Ratio, established a Minimum
      Consolidated EBITDA (on a latest twelve months basis) for each of the periods
      and also established a Minimum Availability (the eligible collateral base less
      outstanding borrowings and letters of credit) on each day within the nine-month
      period.





Subsequent
      to the Second Amendment’s effective date, the Company determined that it would
      likely not meet its amended financial covenants. On April 13, 2005, the Company
      obtained a further amendment to the Bank of America Credit Agreement (the “Third
      Amendment”). The Third Amendment eliminates the maximum Consolidated Leverage
      Ratio and the Minimum Consolidated EBITDA as established by the Second Amendment
      and adjusts the Minimum Availability such that our eligible collateral must
      exceed the sum of the Company’s outstanding borrowings and letters of credit
      under the Revolving Credit Facility by at least $5 million from the effective
      date of the Third Amendment through September 29, 2005 and by at least $7.5
      million from September 30, 2005 until the date the Company delivers its
      financial statements for the first quarter of 2006 to its lenders. Subsequent
      to
      the delivery of the financial statements for the first quarter of 2006 the
      Third
      Amendment reestablishes the minimum Fixed Charge Coverage Ratio as originally
      set forth in the Bank of America Credit Agreement. The Third Amendment also
      reduces the maximum allowable capital expenditures for 2005 from $15 million
      to
      $10 million, and increases the interest rate margins on all of the Company’s
      outstanding borrowings and letters of credit to the largest margins set forth
      in
      the Bank of America Credit Agreement. Effective April 13, 2005, interest accrues
      on the Revolving Credit Facility and Term Loan borrowings at 275 and 300 basis
      points over LIBOR, respectively. Interest rate margins will return to levels
      set
      forth in the Bank of America Credit Agreement subsequent to the delivery of
      the
      Company’s financial statements for the first quarter of 2006 to its lenders.





As
      a
      result of the Third Amendment, the Company’s current debt covenants under the
      Bank of America Credit Agreement are as follows (see further discussion
      below):





*Minimum
      Availability* - At
      September 30, 2005, the Company was required to have a borrowing base
      (collateral) in excess of borrowings and outstanding letters of credit by at
      least $7.5 million. Pursuant to the Third Amendment, this covenant is in effect
      through the first quarter of 2006.





*Fixed
      Charge Coverage Ratio* - The
      Company is required to maintain a Fixed Charge Coverage Ratio (as defined in
      the
      Bank of America Credit Agreement) of 1.1:1. Pursuant to the Third Amendment,
      this covenant was suspended and will be reinstated following the first quarter
      of 2006.





*Capital
      Expenditures* - For
      the year ended December 31, 2005, the Company is not to exceed $10.0 million
      in
      capital expenditures. Subsequent to 2005, the Company is not to exceed $15.0
      million during a single fiscal year.





*Leverage
      Ratio* - The
      Third Amendment to the Bank of America Credit Agreement eliminated the Leverage
      Ratio (as defined in the Bank of America Credit Agreement) as a financial
      covenant. Following the first quarter of 2006, the Leverage Ratio will be
      utilized to determine the interest rate margin over the applicable LIBOR
      rate.





-15-


The
      Company has recently indicated to the syndicate of banks in the Bank of America
      Credit Agreement, that it may be unable to attain the required Fixed Charge
      Coverage Ratio as of the end of the first quarter of 2006. If the Company is
      unable to comply with the terms of the Fixed Charge Coverage Ratio or any of
      the
      other amended covenants, it may be required to obtain further amendments and
      pursue increased liquidity through additional debt financing and/or the sale
      of
      assets. The Company believes that given its strong working capital base,
      additional liquidity could be obtained through additional debt financing, if
      necessary. However, there is no guarantee that such amendments or financing
      could be obtained. In addition, the Company is continually evaluating
      alternatives relating to the sale of excess assets and divestitures of certain
      of its business units. Asset sales and business divestitures present
      opportunities to provide additional liquidity by de-leveraging our financial
      position.





All
      of
      the debt under the Bank of America Credit Agreement is re-priced to current
      rates at frequent intervals. Therefore, its fair value approximates its carrying
      value at September 30, 2005.




During
      the nine months ended September 30, 2005, the company incurred debt issuance
      costs of $0.2 million, primarily related to the Second Amendment to the Bank
      of
      America Credit Agreement.





Katy
      incurred additional debt issuance costs in 2004 associated with the Bank of
      America Credit Agreement. Additionally, at the time of the inception of the
      Bank
      of America Credit Agreement, Katy had approximately $4.0 million of unamortized
      debt issuance costs associated with the previous credit agreement. The remainder
      of the previously capitalized costs, along with the capitalized costs incurred
      in connection with the Bank of America Credit Agreement, will be amortized
      over
      the life of the Bank of America Credit Agreement through April 2009. Future
      quarterly amortization expense is expected to be approximately $0.3 million.
      During the nine months ended September 30, 2004, Katy incurred fees and expenses
      of $0.4  million
      (reported in Other, net on the Condensed Consolidated Statements of Operations)
      associated with a financing which the Company chose not to pursue.




(7) Retirement
      Benefit Plans





Several
      of the Company’s subsidiaries have pension plans covering substantially all of
      their employees. These plans are noncontributory, defined benefit pension plans.
      The benefits to be paid under these plans are generally based on employees’
retirement age and years of service. The companies’ funding policies, subject to
      the minimum funding requirement of employee benefit and tax laws, are to
      contribute such amounts as determined on an actuarial basis to provide the
      plans
      with assets sufficient to meet the benefit obligations. Plan assets consist
      primarily of fixed income investments, corporate equities and government
      securities. The Company also provides certain health care and life insurance
      benefits for some of its retired employees. The post-retirement health plans
      are
      unfunded. Katy uses an annual measurement date of December 31 for the majority
      of its pension and other postretirement benefit plans for all years presented.
      Information regarding the Company’s net periodic benefit cost for pension and
      other postretirement benefit plans for the three and nine months ended September
      30, 2005 and 2004, is as follows (amounts in thousands):





Pension
                  BenefitsThree
                  Months
              
              Nine
                  MonthsEnded
                  September 30,
              
              Ended
                  September 30,2005
              
              
              2004
              
              
              2005
              
              
              2004Components
                  of net periodic benefit cost:Service
                  cost
              
              $
              2
              
              $
              1
              
              $
              6
              
              $
              3Interest
                  cost
              
              
              23
              
              
              33
              
              
              70
              
              
              97Expected
                  return on plan assets
              
              
              (25
              )
              
              (33
              )
              
              (77
              )
              
              (98
              )Amortization
                  of net gain
              
              
              20
              
              
              18
              
              
              59
              
              
              52Net
                  periodic benefit cost
              
              $
              20
              
              $
              19
              
              $
              58
              
              $
              54





-16-


Other
                  BenefitsThree
                  Months
              
              Nine
                  MonthsEnded
                  September 30,
              
              Ended
                  September 30,2005
              
              2004
              
              2005
              
              2004Components
                  of net periodic benefit cost:Service
                  cost
              
              $
              -
              
              $
              7
              
              $
              -
              
              $
              21Interest
                  cost
              
              
              47
              
              
              40
              
              
              142
              
              
              120Amortization
                  of prior service cost
              
              
              15
              
              
              15
              
              
              45
              
              
              45Amortization
                  of net gain
              
              
              15
              
              
              -
              
              
              45
              
              
              -Net
                  periodic benefit cost
              
              $
              77
              
              $
              62
              
              $
              232
              
              $
              186





There
      are
      no required contributions to the pension plans for 2005 and Katy did not make
      any contributions during the first three quarters of 2005.








(8) Income
      Taxes





As
      of
      September 30, 2005 and December 31, 2004, the Company had deferred tax assets,
      net of deferred tax liabilities, of approximately $61.3 million. Domestic net
      operating loss (NOL) carry forwards comprised $28.9 million of the deferred
      tax
      assets. Katy’s history of operating losses in many of its taxing jurisdictions
      provides significant negative evidence with respect to the Company’s ability to
      generate future taxable income, a requirement in order to recognize deferred
      tax
      assets on the Condensed Consolidated Balance Sheets. For this reason, the
      Company was unable to conclude at September 30, 2005 and December 31, 2004
      that
      NOLs and other deferred tax assets in the United States and certain unprofitable
      foreign jurisdictions would be utilized in the future. As a result, valuation
      allowances for these entities were recorded as of such dates for the full amount
      of deferred tax assets, net of the amount of deferred tax liabilities.





The
      provision for income taxes for the three and nine months ended September 30,
      2005 reflects a current expense for foreign and state income taxes. The
      provision for income taxes for the three and nine months ended September 30,
      2004 reflects a foreign income tax provision offset by a current benefit for
      state income taxes. In both 2005 and 2004, tax benefits were not recorded in
      the
      U.S. (for federal and most state income taxes) and for certain foreign
      jurisdictions on pre-tax net losses. As a result of accumulated operating losses
      and inability to conclude that it will generate sufficient taxable income in
      the
      future in those jurisdictions, the Company has concluded that it was more likely
      than not that such benefits would not be realized.





-17-


(9) Commitments
      and Contingencies





*General
      Environmental Claims*


The
      Company and certain of its current and former direct and indirect corporate
      predecessors, subsidiaries and divisions are involved in remedial activities
      at
      certain present and former locations and have been identified by the United
      States Environmental Protection Agency (“EPA”), state environmental agencies and
      private parties as potentially responsible parties (“PRPs”) at a number of
      hazardous waste disposal sites under the Comprehensive Environmental Response,
      Compensation and Liability Act (“Superfund”) or equivalent state laws and, as
      such, may be liable for the cost of cleanup and other remedial activities at
      these sites. Responsibility for cleanup and other remedial activities at a
      Superfund site is typically shared among PRPs based on an allocation formula.
      Under the federal Superfund statute, parties could be held jointly and severally
      liable, thus subjecting them to potential individual liability for the entire
      cost of cleanup at the site. Based on its estimate of allocation of liability
      among PRPs, the probability that other PRPs, many of whom are large, solvent,
      public companies, will fully pay the costs apportioned to them, currently
      available information concerning the scope of contamination, estimated
      remediation costs, estimated legal fees and other factors, the Company has
      recorded and accrued for environmental liabilities in amounts that it deems
      reasonable and believes that any liability with respect to these matters in
      excess of the accruals will not be material. The ultimate costs will depend
      on a
      number of factors and the amount currently accrued represents management’s best
      current estimate of the total costs to be incurred. The Company expects this
      amount to be substantially paid over the next five to ten years.





*W.J.
      Smith Wood Preserving Company (“W.J. Smith”)*





The
      W. J.
      Smith matter originated in the 1980s when the United States and the State of
      Texas, through the Texas Water Commission, initiated environmental enforcement
      actions against W.J. Smith alleging that certain conditions on the W.J. Smith
      property (the “Property”) violated environmental laws. In order to resolve the
      enforcement actions, W.J. Smith engaged in a series of cleanup activities on
      the
      Property and implemented a groundwater monitoring program.





In
      1993,
      the EPA initiated a proceeding under Section 7003 of the Resource Conservation
      and Recovery Act (“RCRA”) against W.J. Smith and Katy. The proceeding sought
      certain actions at the site and at certain off-site areas, as well as
      development and implementation of additional cleanup activities to mitigate
      off-site releases. In December 1995, W.J. Smith, Katy and EPA agreed to resolve
      the proceeding through an Administrative Order on Consent under Section 7003
      of
      RCRA. While the Company has completed the cleanup activities required by the
      Administrative Order on Consent under Section 7003 of RCRA, the Company still
      has further obligations with respect to this matter in the areas of groundwater
      and land treatment unit monitoring as well as ongoing site operation and
      maintenance costs.





Since
      1990, the Company has spent in excess of $7.0 million undertaking cleanup and
      compliance activities in connection with this matter. The Company has recorded
      and accrued amounts that it deems reasonable for prospective liabilities with
      respect to this matter and believes that any additional liability with respect
      to this matter in excess of the accrual will not be material.





*Asbestos
      Claims*





A.  The
      Company has recently been named as a defendant in seven lawsuits filed in state
      court in Alabama by a total of approximately 62 individual plaintiffs. There
      are
      over 100 defendants named in each case. In all seven cases, the Plaintiffs
      claim
      that they were exposed to asbestos in the course of their employment at a former
      U.S. Steel plant in Alabama and, as a result, contracted mesothelioma,
      asbestosis, lung cancer or other illness. They claim that they were exposed
      to
      asbestos in products in the plant which were manufactured by each defendant.
      In
      five of the cases, Plaintiffs also assert wrongful death claims. The Company
      will vigorously defend the claims against it in these matters. The liability
      of
      the Company cannot be determined at this time.





B.  Sterling
      Fluid Systems (USA) has tendered over 1,900 cases pending in Michigan, New
      Jersey, Illinois, Nevada, Mississippi, Wyoming, Louisiana, Georgia,
      Massachusetts and California to the Company for defense and indemnification.
      With respect to one case, Sterling has demanded that Katy indemnify it for
      a
      $200,000 settlement. Sterling bases its tender of the complaints on the
      provisions contained in a 1993 Purchase Agreement between the parties whereby
      Sterling purchased the LaBour Pump business and other assets from the Company.
      Sterling has not filed a lawsuit against Katy in connection with these
      matters.





The
      tendered complaints all purport to state claims against Sterling and its
      subsidiaries. The Company and its current subsidiaries are not named as
      defendants. The plaintiffs in the cases also allege that they were exposed
      to
      asbestos and products containing asbestos in the course of their employment.
      Each complaint names as defendants many manufacturers of products containing
      asbestos, apparently because plaintiffs came into contact with a variety of
      different products in the course of their employment. Plaintiffs’ claim that
      LaBour Pump and/or Sterling may have manufactured some of those
      products.





With
      respect to many of the tendered complaints, including the one settled by
      Sterling for $200,000, the Company has taken the position that Sterling has
      waived its right to indemnity by failing to timely request it as required under
      the 1993 Purchase Agreement. With respect to the balance of the tendered
      complaints, the Company has elected not to assume the defense of Sterling in
      these matters.





-18-


C.  LaBour
      Pump Company, a former subsidiary of the Company, has been named as a defendant
      in over 300 similar cases in New Jersey. These cases have also been tendered
      by
      Sterling. The Company has elected to defend these cases, many of which have
      been
      dismissed or settled for nominal sums.





While
      the
      ultimate liability of the Company related to the asbestos matters above cannot
      be determined at this time, the Company has recorded and accrued amounts that
      it
      deems reasonable for prospective liabilities with respect to this matter.








*Non-Environmental
      Litigation - Banco del Atlantico, S.A.*





*Banco
      del Atlantico, S.A. v. Woods Industries, Inc., et al.* **** *Civil
      Action No.* ****** *L-96-139
      (U.S. District Court, Southern District of Indiana).* In
      December 1996, Banco del Atlantico (“plaintiff”), a bank located in Mexico,
      filed a lawsuit in Texas against Woods Industries, Inc., a subsidiary of Katy,
      and against certain past and/or then present officers, directors and owners
      of
      Woods (collectively, “defendants”). The plaintiff alleges that it was defrauded
      into making loans to a Mexican corporation controlled by certain past officers
      and directors of Woods based upon fraudulent representations and purported
      guarantees. Based on these allegations, and others, the plaintiff originally
      asserted claims for alleged violations of the federal Racketeer Influenced
      and
      Corrupt Organizations Act (“RICO”); “money laundering” of the proceeds of the
      illegal enterprise; the Indiana RICO and Crime Victims Act; common law fraud
      and
      conspiracy; and fraudulent transfer. As discussed below, certain of the
      plaintiff’s claims were recently dismissed with prejudice by the Court. The
      plaintiff also seeks recovery upon certain alleged guarantees purportedly
      executed by Woods Wire Products, Inc., a predecessor company from which Woods
      purchased certain assets in 1993 (prior to Woods’s ownership by Katy, which
      began in December 1996). The primary legal theories under which the plaintiff
      seeks to hold Woods liable for its alleged damages are respondeat superior,
      conspiracy, successor liability, or a combination of the three.





The
      case
      was transferred from Texas to the Southern District of Indiana in 2003. In
      September 2004, the plaintiff and HSBC Mexico, S.A. (collectively,
“plaintiffs”), who intervened in the litigation as an additional alleged owner
      of the claims against the defendants, filed a Second Amended Complaint. The
      defendants filed motions to dismiss the Second Amended Complaint on November
      8,
      2004. These motions sought dismissal of plaintiffs’ Second Amended Complaint on
      grounds of, among other things, failure to state a claim and forum non
      conveniens.





On
      August
      11, 2005, the court granted significant aspects of Defendants’ motions to
      dismiss for failure to state a claim. Specifically, the Court dismissed *with
      prejudice* all
      of
      the federal and Indiana RICO claims asserted in the Second Amended Complaint
      against Woods. This ruling removes the treble damages exposure associated with
      the federal and Indiana RICO claims. Recently, the Court also denied the
      defendants’ renewed motion to dismiss for forum non conveniens. The sole claims
      now remaining against Woods are certain common law claims and claims under
      the
      Indiana Crime Victims Act. Discovery on the Plaintiffs’ claims is continuing,
      and fact discovery currently closes on April 11, 2006.





The
      plaintiffs seek damages in excess of $24 million, request that the Court void
      certain asset sales as purported “fraudulent transfers” (including the 1993
      Woods Wire Products, Inc./Woods asset sale), and continue to claim that the
      Indiana Crime Victims Act entitles them to treble damages for some or all of
      their claims. Katy may have recourse against the former owners of Woods and
      others for, among other things, violations of covenants, representations and
      warranties under the purchase agreement through which Katy acquired Woods,
      and
      under state, federal and common law. Woods may also have indemnity claims
      against the former officers and directors. In addition, there is a dispute
      with
      the former owners of Woods regarding the final disposition of amounts withheld
      from the purchase price, which may be subject to further adjustment as a result
      of the claims by the plaintiff. The extent or limit of any such adjustment
      cannot be predicted at this time.





While
      the
      ultimate liability of the Company related to this matter cannot be determined
      at
      this time, the Company has recorded and accrued amounts that it deems reasonable
      for prospective liabilities with respect to this matter.





-19-


*Other
      Claims*





Katy
      also
      has a number of product liability and workers’ compensation claims pending
      against it and its subsidiaries. Many of these claims are proceeding through
      the
      litigation process and the final outcome will not be known until a settlement
      is
      reached with the claimant or the case is adjudicated. The Company estimates
      that
      it can take up to 10 years from the date of the injury to reach a final outcome
      on certain claims. With respect to the product liability and workers’
compensation claims, Katy has provided for its share of expected losses beyond
      the applicable insurance coverage, including those incurred but not reported
      to
      the Company or its insurance providers, which are developed using actuarial
      techniques. Such accruals are developed using currently available claim
      information, and represent management’s best estimates. The ultimate cost of any
      individual claim can vary based upon, among other factors, the nature of the
      injury, the duration of the disability period, the length of the claim period,
      the jurisdiction of the claim and the nature of the final outcome.





Although
      management believes that the actions specified above in this section
      individually and in the aggregate are not likely to have outcomes that will
      have
      a material adverse effect on the Company’s financial position, results of
      operations or cash flow, further costs could be significant and will be recorded
      as a charge to operations when, and if, current information dictates a change
      in
      management’s estimates.








-20-


(10) Industry
      Segment Information





The
      Company is organized into two operating segments: Maintenance Products and
      Electrical Products. The activities of the Maintenance Products Group include
      the manufacture and distribution of a variety of commercial cleaning supplies
      and consumer home and automotive storage products. The Electrical Products
      Group
      is a distributor of consumer electrical corded products. The following table
      sets forth information by segment (amounts in thousands):




Three Months
                  Ended
              
              
              Nine
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2005
              
              
              2004
              
              
              2005
              
              
              2004Maintenance
                  Products GroupNet
                  external sales
              
              
              
              
              
              
              
              $
              64,013
              
              $
              72,218
              
              $
              189,355
              
              $
              212,444Operating
                  (loss) income
              
              
              
              
              
              
              
              
              591
              
              
              74
              
              
              (3,937
              )
              $
              1,121Operating
                  (deficit) margin
              
              
              
              
              
              
              
              
              0.9
              %
              
              0.1
              %
              
              (2.1
              %)
              
              0.5
              %Depreciation
                  and amortization
              
              
              
              
              
              
              
              
              2,466
              
              
              2,975
              
              
              7,592
              
              
              9,976Capital
                  expenditures
              
              
              
              
              
              
              
              
              2,731
              
              
              4,834
              
              
              5,534
              
              
              10,332Electrical
                  Products GroupNet
                  external sales
              
              
              
              
              
              
              
              $
              76,544
              
              $
              63,208
              
              $
              144,925
              
              $
              123,399Operating
                  income
              
              
              
              
              
              
              
              
              6,100
              
              
              6,329
              
              
              10,163
              
              
              10,879Operating
                  margin
              
              
              
              
              
              
              
              
              8.0
              %
              
              10.0
              %
              
              7.0
              %
              
              8.8
              %Depreciation
                  and amortization
              
              
              
              
              
              
              
              
              245
              
              
              364
              
              
              948
              
              
              948Capital
                  expenditures
              
              
              
              
              
              
              
              
              100
              
              
              300
              
              
              251
              
              
              504TotalNet
                  external sales
              
              -
              Operating
                  segments
              
              $
              140,557
              
              $
              135,426
              
              $
              334,280
              
              $
              335,843Total
              
              $
              140,557
              
              $
              135,426
              
              $
              334,280
              
              $
              335,843Operating
                  income (loss)
              
              -
              Operating
                  segments
              
              $
              6,691
              
              $
              6,403
              
              $
              6,226
              
              $
              12,000-
              Unallocated
                  corporate
              
              
              (2,704
              )
              
              (3,395
              )
              
              (7,003
              )
              
              (8,089
              )-
              Stock
                  option expense
              
              
              -
              
              
              -
              
              
              (1,953
              )
              
              --
              Severance,
                  restructuring,and
                  related charges
              
              $
              (662
              )
              
              (167
              )
              
              (1,975
              )
              
              (1,956
              )-
              Gain
                  on sale of real estate
              
              
              -
              
              
              -
              
              
              -
              
              
              549Total
              
              $
              3,325
              
              $
              2,841
              
              $
              (4,705
              )
              $
              2,504Depreciation
                  and amortization
              
              -
              Operating
                  segments
              
              $
              2,711
              
              $
              3,339
              
              $
              8,540
              
              $
              10,924-
              Unallocated
                  corporate
              
              
              26
              
              
              54
              
              
              66
              
              
              178Total
              
              
              $
              2,737
              
              $
              3,393
              
              $
              8,606
              
              $
              11,102Capital
                  expenditures
              
              -
              Operating
                  segments
              
              $
              2,831
              
              $
              5,134
              
              $
              5,785
              
              $
              10,836-
              Unallocated
                  corporate
              
              
              -
              
              
              -
              
              
              -
              
              
              2Total
              
              
              
              
              $
              2,831
              
              $
              5,134
              
              $
              5,785
              
              $
              10,838September
                  30,
              
              
              December
                  31,2005
              
              
              2004Total
                  assets
              
              -
              Maintenance
                  Products Group
              
              $
              136,950
              
              $
              154,635-
              Electrical
                  Products Group
              
              
              77,768
              
              
              57,698-
              Other
                  [a]
              
              
              1,617
              
              
              1,624Unallocated
                  corporate
              
              
              9,701
              
              
              10,507Total
              
              
              
              
              $
              226,036
              
              $
              224,464


[a]
      The
      amount shown as “Other” represents an equity investment in a shrimp harvesting
      and farming operation.








-21-


(11) Severance,
      Restructuring and Related Charges


The
      Company has initiated several cost reduction and facility consolidation
      initiatives since its recapitalization in mid-2001, resulting in severance,
      restructuring and related charges over the past four years. A summary of
      severance, restructuring and related charges (income) (by major initiative)
      for
      the three and nine months ended September 30, 2005 and 2004, respectively,
      is as
      follows (amounts in thousands):





Three
                    Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2005
              
              
              2004
              
              
              2005
              
              
              2004Consolidation
                  of abrasives facilities
              
              $
              371
              
              $
              170
              
              $
              1,295
              
              $
              833Consolidation
                  of St. Louis manufacturing/distribution facilities
              
              
              150
              
              
              (84
              )
              
              198
              
              
              (186
              )Consolidation
                  of administrative functions for CCP
              
              
              -
              
              
              55
              
              
              21
              
              
              227Shutdown
                  of Woods Canada manufacturing
              
              
              131
              
              
              3
              
              
              112
              
              
              1,045Other
              
              
              10
              
              
              23
              
              
              349
              
              
              37Total
                  severance, restructuring and related costs
              
              $
              662
              
              $
              167
              
              $
              1,975
              
              $
              1,956
   Consolidation
      of abrasives facilities - In
      2002, the Company approved a plan to consolidate the manufacturing facilities
      of
      its abrasives business in order
      to i mplement
      a more competitive cost structure. It was anticipated that this activity would
      begin in early 2003 and be completed by the end of the second quarter of 2004.
      Due to numerous operational issues, including management turnover and a small
      fire at the Wrens, Georgia facility, the completion of this consolidation has
      been delayed. The Lawrence, Massachusetts facility was closed in the second
      quarter of 2005 and it is expected that the Pineville, North Carolina facility
      will be closed in 2006. Both operations will be consolidated into the recently
      expanded Wrens, Georgia facility. Expenses incurred in the nine months ended
      September 30, 2005 consist of costs for demolition and repair of the Lawrence
      facility and various other consolidation related costs ($0.6 million), severance
      associated with the Lawrence facility ($0.4 million), and idle facility costs
      ($0.3 million). Costs incurred in the nine months ended September 30, 2004
      consisted of severance for terminations at the Lawrence facility ($0.4
      million), the closure of the Pineville facility ($0.3 million) and expenses
      for
      the preparation of the Wrens facility ($0.1 million). With respect to the
      severance costs, the employees covered by these termination benefits were
      required to provide service beyond the minimum retention period. Accordingly,
      the liability for these termination costs initially was being recognized ratably
      from September 2003 until approximately June 2004 (the periods that the
      employees were required to provide service until the Lawrence and Pineville
      facilities were expected to be closed). As a result of the delay in the closing
      of these facilities, the liability for these employee termination costs was
      recognized ratably through the second quarter of 2005, the closing date of
      the
      Lawrence facility, and will be recognized through 2006, the expected closing
      date of the Pineville facility. Other than closure costs and severance for
      the
      Pineville facility, management does not anticipate any material costs beyond
      2005.





One-time
              
              ContractTermination
              
              TerminationTotal
              
              Benefits
                  [a]
              
              Costs
                  [b]
              
              Other
                  [c]Restructuring
                  liabilities at December 31, 2004
              
              $
              983
              
              $
              733
              
              $
              250
              
              $
              -Additions
              
              
              1,295
              
              
              334
              
              
              263
              
              
              698Payments
              
              
              (1,821
              )
              
              (860
              )
              
              (263
              )
              
              (698
              )Restructuring
                  liabilities at September 30, 2005
              
              $
              457
              
              $
              207
              
              $
              250
              
              $
              -




-22-


Consolidation
      of St. Louis manufacturing/distribution facilities - In
      2002, the Company committed to a plan to consolidate the manufacturing and
      distribution of the four CCP facilities in the St. Louis area. Management
      believed that in order to implement a more competitive cost structure and combat
      competitive pricing pressure, the excess capacity at our four plastic molding
      facilities in this area would need to be eliminated. This plan was expected
      to
      be completed by the end of 2003; however charges have been incurred past 2003
      due to changes in assumptions in non-cancelable lease accruals, including the
      buyout of the Warson Road lease and changes in sublet assumptions. In addition,
      further charges have been incurred for the movement of inventory and equipment.
      Charges in 2005 were for miscellaneous costs for the termination of the Warson
      Road facility lease and the movement of equipment from Hazelwood to Bridgeton
      ($0.1 million), and an adjustment to the non-cancelable lease accrual at the
      Hazelwood facility due to change in assumptions in usage ($0.1 million). In
      the
      first nine months of 2004, a credit of $0.6 million was recorded to reverse
      a
      non-cancelable lease accrual based on a change in usage of leased facility
      (Hazelwood, Missouri) that was previously impaired and was offset by costs
      of
      $0.4 million related primarily to the movement of equipment between facilities.
      Management believes that no further costs will be incurred for this activity,
      except for potential adjustments to non-cancelable lease
      liabilities.




ContractTerminationTotal
              
              Costs
                  [b]
              
              Other
                  [c]Restructuring
                  liabilities at December 31, 2004
              
              $
              2,402
              
              $
              2,402
              
              $
              -Additions
              
              
              198
              
              
              100
              
              
              98Payments
              
              
              (479
              )
              
              (381
              )
              
              (98
              )Restructuring
                  liabilities at September 30, 2005
              
              $
              2,121
              
              $
              2,121
              
              $
              -


Consolidation
      of
      administrative functions for CCP - In
      2002, in order to streamline processes and eliminate duplicate functions, the
      Company initiated a plan to centralize certain administrative and back office
      functions into Bridgeton, Missouri from certain businesses within the
      Maintenance Products Group. This plan was anticipated to be completed in 2004
      upon the transfer of functions from the Lawrence, Massachusetts facility (see
      Consolidation of abrasives facilities above); however the closure was delayed
      and subsequently contributed to the delay in this plan. Katy has incurred
      various costs (mostly system conversions and the consolidation of administrative
      personnel) over the past three years for this integration of back office and
      administrative functions. The most significant project is the centralization
      of
      the customer service functions for the JanSan Plastics, Abrasives, Textiles
      and
      Filters and Grillbricks business units. For the nine months ended September
      30,
      2005, all costs related to an accrual for idle space at our Textiles facility
      in
      Atlanta. For the nine months ended September 30, 2004, costs were incurred
      for
      system conversions and the consolidation of administrative
      personnel. ** Management
      believes that no more costs will be incurred for this activity.





ContractTerminationCosts
                  [b]Restructuring
                  liabilities at December 31, 2004
              
              $
              -Additions
              
              
              21Payments
              
              
              (21
              )Restructuring
                  liabilities at September 30, 2005
              
              $
              -




Shutdown
      of Woods Canada manufacturing - In
      2003, the Company approved a plan to shut down the manufacturing operation
      in
      Toronto, Ontario and source substantially all of its products from Asia.
      Management believed that this action was necessary in order to implement a
      more
      competitive cost structure to combat pricing pressure by producers in Asia.
      In
      connection with this shutdown, the Company also anticipated the sale and
      leaseback of this facility, which would provide additional liquidity. It was
      anticipated that the shutdown and sale/leaseback would be completed by the
      end
      of 2003. In December 2003, Woods Canada closed this manufacturing facility
      in
      Toronto, Ontario, but was unable to complete the sale/leaseback transaction
      at
      that time. Accordingly, the charge for the non-cancelable lease accrual was
      recoded in the first quarter of 2004, upon the completion of the sale/leaseback
      transaction. The idle capacity was a direct result of the elimination of the
      manufacturing function from this facility. A portion of the facility was
      available for sublease at the time the accrual was established. In the first
      nine months of 2005, a charge of $0.1 million was recorded for an adjustment
      to
      the non-cancelable lease accrual based on a change in estimates, offset by
      a
      credit of less than $0.1 million for an adjustment to a severance reserve.
      In
      the first nine months of 2004, Woods Canada incurred a charge of $1.0 million
      for a non-cancelable lease accrual associated with a sale/leaseback transaction
      and idle capacity as a result of the shutdown of manufacturing. Also in the
      first nine months of 2004, Woods Canada recorded less than $0.1 million for
      additional severance. Management believes that no more costs will be incurred
      for this activity, except for potential adjustments to non-cancelable lease
      liabilities.




One-time
              
              ContractTermination
              
              TerminationTotal
              
              Benefits
                  [a]
              
              Costs
                  [b]Restructuring
                  liabilities at December 31, 2004
              
              $
              808
              
              $
              54
              
              $
              754Additions
              
              
              131
              
              
              -
              
              
              131Reductions
              
              
              (19
              )
              
              (19
              )
              
              -Payments
              
              
              (185
              )
              
              (33
              )
              
              (152
              )Currency
                  translation and other
              
              
              14
              
              
              (1
              )
              
              15Restructuring
                  liabilities at September 30, 2005
              
              $
              749
              
              $
              1
              
              $
              748
  -23-


Other  - Charges
      in the first nine months of 2005 related to severance associated with the
      reduction in workforce principally due to the exit of certain product lines
      in
      the Consumer Plastics business units in the U.S. ($0.2 million) and the U.K.
      ($0.1 million). Costs in the first nine months of 2004 relate primarily to
      the
      closure of CCP’s facility in Canada and the subsequent consolidation into the
      Woods Canada facility ($0.1 million), the closure of CCP’s metals facility in
      Santa Fe Springs, California ($0.1 million), and the shutdown and relocation
      of
      a procurement office in Asia for Woods U.S. ($0.1 million) offset by a credit
      of
      $0.2 million for an adjustment to a non-cancelable lease accrual related to
      the
      shutdown of the Woods U.S. manufacturing .





The
      following table details activity in all restructuring reserves since December
      31, 2004 (amounts in thousands):




One-time
              
              ContractTermination
              
              TerminationTotal
              
              Benefits
                  [a]
              
              Costs
                  [b]
              
              Other
                  [c]Restructuring
                  liabilities at December 31, 2004
              
              $
              4,454
              
              $
              807
              
              $
              3,647
              
              $
              -Additions
              
              
              1,994
              
              
              683
              
              
              515
              
              
              796Reductions
              
              
              (19
              )
              
              (19
              )
              
              -
              
              
              -Payments
              
              
              (2,941
              )
              
              (1,223
              )
              
              (922
              )
              
              (796
              )Currency
                  translation and other
              
              
              124
              
              
              (1
              )
              
              125
              
              
              -Restructuring
                  liabilities at September 30, 2005
              
              $
              3,612
              
              $
              247
              
              $
              3,365
              
              $
              -




[a]
      Includes severance, benefits, and other employee-related costs associated with
      the employee terminations.





[b]
      Includes charges related to non-cancelable lease liabilities for abandoned
      facilities, net of potential sub-lease revenue.





[c]
      Includes charges associated with moving inventory, machinery and equipment,
      and
      the consolidation of administrative and operational functions.





Katy
      expects to substantially complete its restructuring program in 2005. The
      remaining severance, restructuring and related charges for these initiatives
      are
      expected to be less than $0.5 million. Payments associated with non-cancelable
      lease liabilities for abandoned facilities are scheduled to end in
      2011.





The
      following table details activity in restructuring and related reserves by
      operating segment since December 31, 2004 (amounts in thousands):





Maintenance
              
              ElectricalProducts
              
              ProductsTotal
              
              Group
              
              Group2005
              
              $
              909
              
              $
              724
              
              $
              1852006
              
              
              912
              
              
              592
              
              
              3202007
              
              
              501
              
              
              281
              
              
              2202008
              
              
              460
              
              
              234
              
              
              2262009
              
              
              307
              
              
              243
              
              
              642010
              
              
              255
              
              
              255
              
              
              -Thereafter
              
              
              268
              
              
              268
              
              
              -Total
                  Payments
              
              $
              3,612
              
              $
              2,597
              
              $
              1,015





The
      following table summarizes the future obligations for severance, restructuring
      and other related charges by operating segment detailed above (amounts in
      thousands):





Maintenance
              
              ElectricalProducts
              
              ProductsTotal
              
              Group
              
              GroupRestructuring
                  liabilities at December 31, 2004
              
              $
              4,454
              
              $
              3,385
              
              $
              1,069Additions
              
              
              1,994
              
              
              1,863
              
              
              131Reductions
              
              
              (19
              )
              
              -
              
              
              (19
              )Payments
              
              
              (2,941
              )
              
              (2,651
              )
              
              (290
              )Currency
                  translation and other
              
              
              124
              
              
              -
              
              
              124Restructuring
                  liabilities at September 30, 2005
              
              $
              3,612
              
              $
              2,597
              
              $
              1,015


-24-


Item
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS





RESULTS
      OF OPERATIONS





Three
      Months Ended September 30, 2005 versus Three Months Ended September 30,
      2004





2005
              
              2004(Amounts
                  in Millions, Except Per Share Data)$
              
              %
                  to Sales
              
              $
              
              %
                  to SalesNet
                  sales
              
              $
              140.6
              
              
              100.0
              
              $
              135.4
              
              
              100.0Cost
                  of goods sold
              
              
              122.9
              
              
              87.4
              
              
              117.6
              
              
              86.8Gross
                  profit
              
              
              17.7
              
              
              12.6
              
              
              17.9
              
              
              13.2Selling,
                  general and administrative expenses
              
              
              13.9
              
              
              9.9
              
              
              14.8
              
              
              11.0Severance,
                  restructuring and related charges
              
              
              0.7
              
              
              0.5
              
              
              0.2
              
              
              0.1Gain
                  on sale of assets
              
              
              (0.2
              )
              
              (0.1
              )
              
              -
              
              
              -Operating
                  income
              
              
              3.3
              
              
              2.4
              
              
              2.8
              
              
              2.1Interest
                  expense
              
              
              (1.5
              )
              
              
              
              
              (1.0
              )Other,
                  net
              
              
              0.2
              
              
              
              
              
              -Income
                  before provision for income taxes
              
              
              2.1
              
              
              
              
              
              1.8Provision
                  for income taxes
              
              
              0.7
              
              
              
              
              
              0.9Net
                  income
              
              
              1.3
              
              
              
              
              
              0.9Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              
              
              
              (3.8
              )Net
                  income (loss) attributable to common stockholders
              
              $
              1.3
              
              
              
              
              $
              (2.9
              )Income
                  (loss) per share of common stock - basic:Net
                  income
              
              $
              0.17
              
              
              
              
              $
              0.11Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              
              
              
              (0.48
              )Net
                  income (loss) attributable to common stockholders
              
              $
              0.17
              
              
              
              
              $
              (0.37
              )Income
                  (loss) per share of common stock - diluted:Net
                  income
              
              $
              0.05
              
              
              
              
              $
              0.11Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              
              
              
              (0.48
              )Net
                  income (loss) attributable to common stockholders
              
              $
              0.05
              
              
              
              
              $
              (0.37
              )





Overview





Our
      consolidated net sales for the three month period ended September 30, 2005
      increased $5.2 million compared to the three month period ended September 30,
      2004. The improvement in net sales of 4% was comprised of higher pricing [4%],
      favorable currency translation [1%] and lower volumes [(1%)]. Gross margins
      were
      12.6% for the three month period ended September 30, 2005; a decrease of 0.6
      percentage points compared to the three month period ended September 30, 2004.
      Higher raw material costs and higher operating costs in our Abrasives business
      unit were partially offset by selling price increases. Selling, general and
      administrative expense (SG&A) as a percentage of sales decreased from 11.0%
      for the third quarter of 2004 to 9.9% in the third quarter of 2005, primarily
      due to cost containment in the Electrical Products Group and lower corporate
      expenses. Operating income increased by $0.5 million to $3.3 million, as lower
      SG&A was partially offset by higher severance and restructuring costs.





Overall,
      we reported net income attributable to common shareholders of $1.3 million
      [$0.17 per share basic and $0.05 per share diluted] for the three month period
      ended September 30, 2005, versus a net loss attributable to common shareholders
      of ($2.9) million [($0.37) per share basic and diluted] in the same period
      of
      2004. During the third quarter of 2004, we recorded the impact of
      payment-in-kind dividends earned on our convertible preferred stock of ($3.8)
      million [($0.48) per share basic and diluted]. The payment-in-kind dividends
      ended in December 2004.





-25-


Net
      Sales





*Maintenance
      Products Group*





Net
      sales
      from the Maintenance Products Group decreased from $72.2 million during the
      three month period ended September 30, 2004 to $64.0 million during the three
      month period ended September 30, 2005. Overall, this decline of 11% was
      primarily due to lower volumes [(15%)] partially offset by higher pricing [4%].
      Sales volume for the Consumer Plastics business units in the U.S. and the U.K.,
      which sell primarily to mass merchant customers, was significantly lower due
      to
      our decision to exit certain unprofitable product lines. In addition, volumes
      at
      our U.K. Consumer Plastics business unit were negatively impacted by softening
      demand due to a continued weak retail sector in the U.K. We also experienced
      volume declines in our Abrasives business unit in the U.S. due to certain
      operational disruptions including inefficiencies caused by the consolidation
      of
      two additional abrasives facilities into the Wrens, Georgia facility as well
      as
      a fire in Wrens early in the fourth quarter of 2004. These disruptions to our
      Abrasives operations have resulted in the loss of certain customers. Volumes
      for
      our Metal Truck Box business unit are lower due to weakened demand from a major
      customer (a large mass merchant retailer). Sales volumes for our Container
      business unit improved over last year principally due to available production
      capacity at our Norwalk, California facility, which resulted from the exit
      of
      certain product lines by the Consumer Plastics business.





Higher
      pricing resulted from the implementation of selling price increases across
      the
      Maintenance Products Group, which took effect throughout the first half of
      2005,
      with the most significant increases in the domestic business units which sell
      plastics products. The implementation of price increases was in response to
      the
      accelerating cost of our primary raw materials, packaging materials, utilities
      and freight starting in 2004 and continuing into 2005.





*Electrical
      Products Group*





The
      Electrical Products Group’s sales improved from $63.2 million for the three
      month period ended September 30, 2004 to $76.5 million for the three month
      period ended September 30, 2005. The sales improvement of 21% was primarily
      the
      result of increased volume [14%], higher pricing [5%] and favorable currency
      translation [2%]. Volume at Woods U.S. benefited principally from increases
      in
      store growth at some of our large mass merchant retailers, hurricane related
      orders, and the timing of purchases by customers switching to direct import
      (direct import sales represent merchandise shipped directly from our suppliers
      to our customers). Woods Canada experienced volume increases with most of its
      major customers (primarily mass merchant retailers) and volumes are higher
      across all of its product categories, especially garden lighting.





Multiple
      selling price increases have been implemented since the beginning of 2004 at
      Woods U.S. (and to a lesser extent at Woods Canada) to offset the rising cost
      of
      copper and PVC. We continue to implement price increases; however there can
      be
      no assurance that such increases will be accepted. In addition, sales at Woods
      Canada were favorably impacted by a stronger Canadian dollar versus the U.S.
      dollar in the third quarter of 2005 as compared to the same period in
      2004.


-26-


Operating
      Income




Three
                  months ended September 30,(Amounts
                  in Millions)**Operating
                  income**
              
              2005
              
              2004
              
              Change$
              
              %
                  of Sales
              
              $
              
              %
                  of Sales
              
              $
              
              %
                  of SalesMaintenance
                  Products Group
              
              $
              0.6
              
              
              0.9
              
              $
              0.1
              
              
              0.1
              
              $
              0.5
              
              
              0.8Electrical
                  Products Group
              
              
              6.1
              
              
              8.0
              
              
              6.3
              
              
              10.0
              
              
              (0.2
              )
              
              (2.0
              )Unallocated
                  corporate expense
              
              
              (2.7
              )
              
              
              
              
              (3.4
              )
              
              
              
              
              0.7Severance,
                  restructuring and related charges
              
              
              (0.7
              )
              
              
              
              
              (0.2
              )
              
              
              
              
              (0.5
              )Operating
                  income
              
              $
              3.3
              
              
              
              
              $
              2.8
              
              
              
              
              $
              0.5


*Maintenance
      Products Group*





The
      Maintenance Products Group’s operating income improved from $0.1 million (0.1%
      of net sales) during the three month period ended September 30, 2004 to $0.6
      million (0.9% of net sales) for the three month period ended September 30,
      2005.
      The improvement was primarily attributable to improved gross margins as the
      impact of higher selling prices (principally in the U.S.) implemented in 2005
      which outpaced the impact of higher raw material costs and to improved
      manufacturing efficiency at our domestic plastic molding facilities. Partially
      offsetting these items was a decline in the gross profit of our domestic
      Abrasives business resulting from lower volumes and increased costs resulting
      from certain operational disruptions at our Wrens, Georgia facility. Gross
      profit also declined at our Consumer Plastics business in the U.K. due to lower
      volumes and the inability to recover higher raw material costs through selling
      price increases. SG&A expenses for the Maintenance Products Group were
      slightly lower in the third quarter of 2005 versus the third quarter of 2004,
      but overall were slightly higher as a percentage of sales.





*Electrical
      Products Group*





The
      Electrical Products Group’s operating income decreased from $6.3 million (10.0%
      of net sales) for the three month period ended September 30, 2004 to $6.1
      million (8.0% of net sales) for the three month period ended September 30,
      2005.
      The decrease in profitability was principally the result of selling price
      increases not quite keeping pace with the increasing costs of copper and PVC.
      SG&A expenses for the Electrical Products Group were slightly higher in the
      third quarter of 2005 versus the third quarter of 2004, but overall were
      slightly lower as a percentage of sales primarily due to cost containment.




*Corporate*




Corporate
      operating expenses decreased from $3.4 million in the three month period ended
      September 30, 2004 to $ 2.7
      million in three month period ended September 30, 2005 principally due to lower
      bonus expense resulting from a decline in operating performance, decreased
      expense for stock appreciation rights due to a lower stock price and lower
      insurance costs.




-27-


*Severance,
      Restructuring and Related Charges*





Operating
      results for the Company during the three months ended September 30, 2005 and
      2004 were impacted by severance, restructuring and related charges of $0.7
      million and $0.2 million, respectively. Charges in 2005 related to severance,
      facility closure costs and inventory and equipment moves associated with the
      closure of one of our abrasives facilities ($0.4 million); and adjustments
      to
      non-cancelable lease accruals at our Hazelwood, Missouri facility and at our
      Woods Canada facility ($0.3 million).





Charges
      in the third quarter of 2004 related primarily to the restructuring of the
      abrasives business (principally severance) ($0.2 million), the movement of
      inventory and equipment in connection with the consolidation of St. Louis
      manufacturing and distribution facilities ($0.2 million), and the shutdown
      and
      relocation of a procurement office for our Electrical Products Group in Asia
      ($0.1 million) which were offset by credits to adjust non-cancelable lease
      accruals based on changes in usage of the previously impaired leased facilities
      in Hazelwood ($0.3 million) and Woods ($0.1 million).





Other
      Items





Interest
      expense increased by $0.5 million in the third quarter of 2005 compared to
      the
      same period of 2004, primarily as a result of higher interest rates in 2005
      and
      increased margins over LIBOR pursuant to the Third Amendment of our Bank of
      America Credit Agreement (see Note 6 of the Notes to Condensed Consolidated
      Financial Statements), partially offset by lower average borrowings in the
      third
      quarter of 2005 versus the third quarter of 2004. Other, net for the three
      months ended September 30, 2005 is primarily comprised of foreign currency
      transaction gains and interest income.





The provision for income taxes for both the three months ended September 30,
      2005 and 2004 reflect a current expense for state and foreign income taxes.
      In
      both 2005 and 2004, tax benefits were not recorded in the U.S. (for federal
      and
      state income taxes) and for certain foreign subsidiaries on pre-tax net losses
      as a result of accumulated operating losses in the those jurisdictions, as
      we
      concluded that it was more likely than not that such benefits would not be
      realized.


-28-


Nine
      Months Ended September 30, 2005 versus Nine Months Ended September 30,
      2004





2005
              
              2004(Amounts
                  in Millions, Except Per Share Data)$
              
              %
                  to Sales
              
              $
              
              %
                  to SalesNet
                  sales
              
              $
              334.3
              
              
              100.0
              
              $
              335.8
              
              
              100.0Cost
                  of goods sold
              
              
              295.3
              
              
              88.3
              
              
              288.1
              
              
              85.8Gross
                  profit
              
              
              39.0
              
              
              11.7
              
              
              47.7
              
              
              14.2Selling,
                  general and administrative expenses
              
              
              40.1
              
              
              12.0
              
              
              43.8
              
              
              13.1Stock
                  option expense
              
              
              2.0
              
              
              0.6
              
              
              -
              
              
              -Severance,
                  restructuring and related charges
              
              
              2.0
              
              
              0.6
              
              
              2.0
              
              
              0.6Gain
                  on sale of assets
              
              
              (0.4
              )
              
              (0.1
              )
              
              (0.5
              )
              
              (0.2
              )Operating
                  income (loss)
              
              
              (4.7
              )
              
              (1.4
              )
              
              2.5
              
              
              0.7Interest
                  expense
              
              
              (4.1
              )
              
              
              
              
              (2.8
              )Other,
                  net
              
              
              0.2
              
              
              
              
              
              (0.3
              )Loss
                  before provision for income taxes
              
              
              (8.6
              )
              
              
              
              
              (0.6
              )Provision
                  for income taxes
              
              
              0.7
              
              
              
              
              
              1.6Net
                  loss
              
              
              (9.4
              )
              
              
              
              
              (2.2
              )Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              
              
              
              (10.7
              )Net
                  loss attributable to common stockholders
              
              $
              (9.4
              )
              
              
              
              $
              (12.9
              )Loss
                  per share of common stock - basic and diluted:Net
                  loss
              
              $
              (1.18
              )
              
              
              
              $
              (0.28
              )Payment-in-kind
                  dividends on convertible preferred stock
              
              
              -
              
              
              
              
              
              (1.36
              )Net
                  loss attributable to common stockholders
              
              $
              (1.18
              )
              
              
              
              $
              (1.64
              )





Overview





Our
      consolidated net sales for the nine month period ended September 30, 2005
      decreased $1.5 million compared to the nine month period ended September 30,
      2004. The decline in net sales of less than 1% was comprised of lower volumes
      [(6%)], offset by higher pricing [5%] and favorable currency translation [1%].
      Gross margins were 11.7% for the nine month period ended September 30, 2005;
      a
      decrease of 2.5 percentage points compared to the nine month period ended
      September 30, 2004. Higher raw material costs and incremental operating costs
      incurred due to certain production disruptions at our abrasives facilities
      were
      partially offset by selling price increases and the favorable impact of
      restructuring and cost containment. Selling, general and administrative expense
      (SG&A) as a percentage of sales declined from 13.1% for the first nine
      months of 2004 to 12.0% in the first nine months of 2005, primarily due to
      cost
      containment (mostly in the Electrical Products Group). The operating loss
      increased by $7.2 million to ($4.7) million, mostly due to lower gross margins
      and higher non-cash stock option expense.





Overall,
      we reported a net loss attributable to common shareholders of ($9.4) million
      [($1.18) per share basic and diluted] for the nine month period ended September
      30, 2005, versus a net loss attributable to common shareholders of ($12.9)
      million [($1.64) per share basic and diluted] in the same period of 2004. During
      the first nine months of 2004, we recorded the impact of payment-in-kind
      dividends earned on our convertible preferred stock of ($10.7) million [($1.36)
      per share basic and diluted]. The payment-in-kind dividends ended in December
      2004.




-29-


Net
      Sales





*Maintenance
      Products Group*





Net
      sales
      from the Maintenance Products Group decreased from $212.4 million during the
      nine month period ended September 30, 2004 to $189.4 million during the nine
      month period ended September 30, 2005. Overall, this decline of 11% was
      primarily due to lower volumes [(15%)] net of higher pricing [4%]. Sales volume
      for the Consumer Plastics business units in the U.S. and the U.K., which sell
      primarily to mass merchant customers, was significantly lower due to our
      decision to exit certain unprofitable product lines. In addition, volumes at
      our
      U.K Consumer Plastics business unit were negatively impacted by softening demand
      due to a weak retail sector in the U.K. We also experienced volume declines
      in
      our Abrasives business unit in the U.S. due to certain operational disruptions
      including inefficiencies caused by the consolidation of two additional abrasives
      facilities into the Wrens, Georgia facility as well as a fire in Wrens early
      in
      the fourth quarter of 2004. These disruptions to our Abrasives operations have
      resulted in the loss of certain customers. These decreases in Abrasives sales
      were partially offset by stronger sales of roofing products to the construction
      industry. Sales of Metal Truck Box products declined in first nine months of
      2005 versus the first nine months of 2004 primarily due to lower demand from
      a
      major retail outlet customer, while sales of Textiles were down slightly due
      to
      the loss of a customer. Lower volumes at our UK Jan-San Plastics business unit
      reflected increased foreign competition for sprayers. Sales volumes for our
      Container business unit improved over last year principally due to available
      production capacity at our Norwalk, California facility, which resulted from
      the
      exit of certain product lines by the U.S. Consumer Plastics business.





Higher
      pricing resulted from the implementation of selling price increases across
      the
      Maintenance Products Group, which took effect throughout the first nine months
      of 2005. The implementation of price increases was in response to the
      accelerating cost of our primary raw materials, packaging materials, utilities
      and freight starting in 2004 and continuing into 2005. We have continued to
      implement price increases; however, there can be no assurance that such
      increases will be accepted.





*Electrical
      Products Group*





The
      Electrical Products Group’s sales improved from $123.4 million for the nine
      month period ended September 30, 2004 to $144.9 million for the nine month
      period ended September 30, 2005. The sales improvement of 17% was primarily
      the
      result of increased volume [9%], higher pricing [6%], and favorable currency
      translation [2%]. Woods Canada’s net pricing was negatively impacted by
      incremental program costs necessary to retain business with a significant
      customer. Volume at Woods U.S. benefited principally from increased promotional
      activity at one of its largest mass merchant retailers in the first quarter
      of
      2005,increases in store growth at some of our large mass merchant retailers,
      hurricane related orders, and the timing of purchases by customers switching
      to
      direct import (direct import sales represent merchandise shipped directly from
      our suppliers to our customers). Volumes at Woods Canada were favorably impacted
      by increased demand at its largest customer (a national mass merchant retailer
      in Canada). Sales at Woods Canada also benefited from a stronger Canadian dollar
      versus the U.S. dollar in the first nine months of 2005 as compared to the
      same
      period in 2004.





Multiple
      selling price increases were implemented since the beginning of 2004 at Woods
      U.S. (and to a lesser extent at Woods Canada) to offset the rising cost of
      copper and PVC. We have continued to implement price increases; however, there
      can be no assurance that such increases will be accepted.





-30-


Operating
      Income





Nine
                  months ended September 30,(Amounts
                  in Millions)**Operating
                  income (loss)**
              
              2005
              
              2004
              
              Change$
              
              %
                  of Sales
              
              $
              
              %
                  of Sales
              
              $
              
              %
                  of SalesMaintenance
                  Products Group
              
              $
              (3.9
              )
              
              (2.1
              )
              $
              1.1
              
              
              0.5
              
              $
              (5.0
              )
              
              (2.6
              )Electrical
                  Products Group
              
              
              10.2
              
              
              7.0
              
              
              10.9
              
              
              8.8
              
              
              (0.7
              )
              
              (1.8
              )Unallocated
                  corporate expense
              
              
              (7.0
              )
              
              
              
              
              (8.1
              )
              
              
              
              
              1.1Stock
                  option expense
              
              
              (2.0
              )
              
              
              
              
              -
              
              
              
              
              
              (2.0
              )Severance,
                  restructuring and related charges
              
              
              (2.0
              )
              
              
              
              
              (2.0
              )
              
              
              
              
              -Gain
                  on sale of real estate
              
              
              -
              
              
              
              
              
              0.5
              
              
              
              
              
              (0.5
              )Operating
                  income (loss)
              
              $
              (4.7
              )
              
              
              
              $
              2.5
              
              
              
              
              
              (7.2
              )





*Maintenance
      Products Group*





The
      Maintenance Products Group’s operating income decreased from $1.1 million (0.5%
      of net sales) during the nine month period ended September 30, 2004 to an
      operating loss of $3.9 million (-2.1% of net sales) for the nine month period
      ended September 30, 2005. The decrease was primarily attributable to lower
      volumes in the U.S. and U.K. Consumer Plastics and domestic Abrasives business
      units. In addition, higher raw material costs in the first nine months of 2005
      versus the first nine months of 2004 were substantially recovered through higher
      selling prices, except in our U.K Consumer Plastics business unit. Raw material
      costs stabilized somewhat in the second quarter of 2005 and we were able to
      implement price increases across most business units starting in the first
      quarter of 2005. However, we have recently observed a rise in raw material
      costs
      (See OUTLOOK FOR 2005). In addition, manufacturing throughput was low at our
      plastics molding facilities in the U.S. and U.K., especially in the first
      quarter as we reduced inventory and adjusted our production levels in connection
      with our decision to exit certain unprofitable lines of Consumer Plastics
      business. However, manufacturing throughput improved in the second and third
      quarters of 2005. We continue to experience declines in the profitability of
      our
      domestic Abrasives business resulting from increased costs which were
      principally due to certain operational disruptions at our Wrens, Georgia
      facility. SG&A expenses were lower in the first nine months of 2005 versus
      the first nine months of 2004, but as a percentage of net sales, SG&A has
      remained essentially unchanged.





*Electrical
      Products Group*





The
      Electrical Products Group’s operating income decreased from $10.9 million (8.8%
      of net sales) for the nine month period ended September 30, 2004 to $10.2
      million (7.0% of net sales) for the nine month period ended September 30, 2005,
      a decline of 7%. The lower profitability was principally the result of selling
      price increases not quite keeping pace with the increasing costs of copper
      and
      PVC, most notably in the second and third quarters. Lower gross margins were
      partially offset by stronger volumes. In addition, SG&A expenses were
      essentially unchanged versus the same period last year, but were significantly
      lower as a percentage of sales primarily due to cost containment
      initiatives.





*Corporate*




Corporate
      operat ing
      expenses decreased from $8.1 million in the nine month period ended September
      30, 2004 to $7.0 million in the nine month period ended September 30, 2005
      principally due to lower bonus expense resulting from a decline in operating
      performance, decreased expense for stock appreciation rights due to a lower
      stock price and lower insurance costs offset by non-recurring severance costs
      and search fees associated with the CEO transition in the second quarter of
      2005.




-31-


*Stock
      Option Expense*




The
      non-cash stock option expense of $2.0 million during the nine months ended
      September 30, 2005 related to the March 2004 acceleration of vesting of options
      that were held by our former CEO at that time. A substantial portion of these
      options were forfeited by the former CEO upon his retirement, however. See
      Note
      1 of the Notes to Condensed Consolidated Financial Statements.


*Severance,
      Restructuring and Related Charges*





Operating
      results for the Company during the nine months ended September 30, 2005 and
      2004
      were negatively impacted by severance, restructuring and related charges of
      $2.0
      million and $2.0 million, respectively. Charges in 2005 related to severance,
      facility closure costs and inventory and equipment moves associated with the
      consolidation of our Abrasives facilities ($1.3 million); severance associated
      with the reduction in workforce principally due to the exit of certain product
      lines in the U.S. and U.K. Consumer Plastics business units ($0.3 million);
      adjustments to non-cancelable lease accruals at our Hazelwood, Missouri facility
      and at our Woods Canada facility ($0.2 million); and charges aggregating to
      $0.1
      million for miscellaneous costs for the termination of the Warson Road facility
      lease and the movement of inventory and equipment from Hazelwood to
      Bridgeton.





Charges
      in the first nine months of 2004 related to a non-cancelable lease accrual
      associated with a sale/leaseback transaction and idle capacity as a result
      of
      the shutdown of manufacturing at Woods Canada ($1.0 million); the restructuring
      of the abrasives business ($0.9 million); costs for the movement of inventory
      and equipment in connection with the consolidation of St. Louis manufacturing
      and distribution facilities ($0.4 million); costs incurred for the consolidation
      of administrative functions for CCP ($0.2 million); expenses for the closure
      of
      CCP’s facility in Canada and the subsequent consolidation into the Woods Canada
      facility ($0.1 million); and costs for the shutdown and relocation of a
      procurement office in Asia ($0.1 million); partially offset by credits for
      adjustments to non-cancelable leases based on changes in the usage of these
      leased facilities ($0.8 million).





Other
      Items





Interest
      expense increased by $1.3 million in the first nine months of 2005 versus the
      same period of 2004, primarily as a result of higher interest rates and
      increased margins over LIBOR pursuant to the Third Amendment of our Bank of
      America Credit Agreement (see Note 6 of the Notes to Condensed Consolidated
      Financial Statements). In addition, slightly higher average borrowings in 2005
      (principally due to increased working capital levels and poor financial
      performance in 2004), contributed to the increase. Other, net for the nine
      months ended September 30, 2004 included the write-off of fees and expenses
      of
      $0.4 million associated with a financing which the Company chose not to pursue.





The
      provision for income taxes for the nine month periods ended September 30, 2005
      and 2004 reflect a current expense for state and foreign income taxes. In both
      2005 and 2004, tax benefits were not recorded in the U.S. (for federal and
      state
      income taxes) and for certain foreign subsidiaries on pre-tax net losses as
      a
      result of accumulated operating losses in the those jurisdictions, as we
      concluded that it was more likely than not that such benefits would not be
      realized. We recorded tax benefits for other foreign subsidiaries as we
      concluded that it was more likely than not that such benefits would be
      realized.




-32-


LIQUIDITY
      AND CAPITAL RESOURCES




We
      require funding for working capital needs and capital expenditures. We believe
      that our cash flow from operations and the use of available borrowings under
      the
      Bank of America Credit Agreement (as defined below) provide sufficient liquidity
      for our operations for the foreseeable future. As of September 30, 2005, we
      had
      cash and cash equivalents of $8.6 million versus cash and cash equivalents
      of
      $8.5 million at December 31, 2004. Also as of September 30, 2005, we had
      outstanding borrowings of $58.1 million [49% of total capitalization]. As of
      December 31, 2004, we had outstanding borrowings of $58.7 million [46% of total
      capitalization]. We generated $7.7 million of cash flow from operations during
      the nine months ended September 30, 2005 versus the utilization of $18.7 million
      of cash flow from operations during the nine months ended September 30, 2004.
      The improvement in cash flow from operations was primarily attributable to
      a
      reduction of inventory in the
      first
      nine months of 2005
      versus an inventory build in the
      first
      nine months of 2004.






We
      expect
      liquidity to generally stabilize for the remainder of 2005, as increased
      receivable collections will be offset by increased accounts payable settlements
      in (both primarily related to the Electrical Products Group). Other elements
      of
      working capital will continue to be closely managed. Capital expenditures in
      the
      fourth quarter are expected to continue at approximately at the same pace as
      the
      first three quarters of 2005, but overall are expected to be lower than 2004.  We
      have a
      number of obligations and commitments, which are listed on the schedule later
      in
      this section entitled “Contractual and Commercial Obligations.” We have
      considered all of these obligations and commitments in structuring our capital
      resources to ensure that they can be met. See the notes accompanying the table
      in that section for further discussions of those items. We believe that given
      our strong working capital base, additional liquidity could be obtained through
      additional debt financing, if necessary. However, there is no guarantee that
      such financing could be obtained. In addition, we are continually evaluating
      alternatives relating to the sale of excess assets and divestitures of certain
      of our business units. Asset sales and business divestitures present
      opportunities to provide additional liquidity by de-leveraging our financial
      position.







Bank
      of America Credit Agreement





On
      April
      20, 2004, we completed a refinancing of our outstanding indebtedness (the
“Refinancing”) and entered into a new agreement with Bank of America Business
      Capital (formerly Fleet Capital Corporation) (the “Bank of America Credit
      Agreement”). Like the previous credit agreement with Fleet Capital Corporation,
      the Bank of America Credit Agreement is a $110 million facility with a $20
      million term loan (“Term Loan”) and a $90 million revolving credit facility
      (“Revolving Credit Facility”) with essentially the same terms as the previous
      credit agreement. The Bank of America Credit Agreement is an asset-based lending
      agreement and involves a syndicate of four banks, all of which participated
      in
      the syndicate from the previous credit agreement. The Bank of America Credit
      Agreement, and the additional borrowing ability under the Revolving Credit
      Facility obtained by incurring new term debt, results in three important
      benefits related to our long-term strategy: (1) additional borrowing capacity
      to
      invest in capital expenditures and/or acquisitions key to our strategic
      direction, (2) increased working capital flexibility to build inventory when
      necessary to accommodate lower cost outsourced finished goods inventory and
      (3)
      the ability to borrow locally in Canada and the United Kingdom and provide
      a
      natural hedge against currency fluctuations.





The
      Revolving Credit Facility has an expiration date of April 20, 2009 and its
      borrowing base is determined by eligible inventory and accounts receivable.
      The
      Term Loan also has a final maturity date of April 20, 2009 with quarterly
      payments of $0.7 million. A final payment of $6.4 million is scheduled to be
      paid in April 2009. The term loan is collateralized by our property, plant
      and
      equipment. All extensions of credit under the Bank of America Credit Agreement
      are collateralized by a first priority security interest in and lien upon the
      capital stock of each material domestic subsidiary (65% of the capital stock
      of
      each material foreign subsidiary), and all of our present and future assets
      and
      properties. The
      Bank
      of America Credit Agreement contains various financial and operating covenants,
      which among other things, require us to maintain a fixed charge coverage ratio
      and certain other financial ratios (see discussion below). It also includes
      customary restrictions and default provisions.





-33-


Our
      borrowing base under the Bank of America Credit Agreement is reduced by the
      outstanding amount of standby and commercial letters of credit. Vendors,
      financial institutions and other parties with whom we conduct business may
      require letters of credit in the future that either (1) do not exist today
      or
      (2) would be at higher amounts than those that exist today. Currently, our
      largest letters of credit relate to our casualty insurance programs. At
      September 30, 2005, total outstanding letters of credit were $9.6 million.




Unused
      borrowing availability on the Revolving Credit Facility, after considering
      letters of credit, was $35.5 million at September 30, 2005.




From
      September 30, 2004, interest rate margins (i.e. the interest rate spread above
      LIBOR) on our Bank of America Credit Agreement borrowings have risen from 175
      basis points over applicable LIBOR rates for Revolving Credit Facility
      borrowings and 200 basis points over LIBOR for borrowings under the Term Loan
      to
      275 and 300 basis points, respectively. Current margins reflect the highest
      spread under the Bank of America Credit Agreement, as specified by the Third
      Amendment (see below). Additionally, margins on the Term Loan will drop 25
      basis
      points if the balance of the Term Loan is reduced below $10.0
      million.





Effective August
      17, 2005, we entered into a two-year interest rate swap agreement (the “Interest
      Rate Swap”) with a counterparty to limit our exposure to rising interest rates
      on our Bank of America Credit Agreement. The Interest Rate Swap has a notional
      amount of $25.0 million in the first year and $15.0 million in the second year.
      We will pay the counterparty a fixed rate of 4.49% in exchange for receiving
      one-month LIBOR.





In
      the
      2005, we paid fees of $0.2 million to our lenders primarily related to the
      Second Amendment to our credit agreement. We incurred additional debt issuance
      costs in 2004 associated with the Bank of America Credit Agreement.
      Additionally, at the time of the inception of the Bank of America Credit
      Agreement, we had approximately $4.0 million of unamortized debt issuance costs
      associated with the previous credit agreement. The remainder of the previously
      capitalized costs, along with the capitalized costs from the Bank of America
      Credit Agreement, will be amortized over the life of the Bank of America Credit
      Agreement through April 2009. Also, during the first nine months of 2004, we
      incurred fees and expenses of $0.4 million associated with a financing which
      we
      chose not to pursue.




The
      revolving credit facility under the Bank of America Credit Agreement requires
      lockbox agreements which provide for all receipts to be swept daily to reduce
      borrowings outstanding. These agreements, combined with the existence of a
      material adverse effect (“MAE”) clause in the Bank of America Credit Agreement,
      caused the revolving credit facility to be classified as a current liability
      (except as noted below), per guidance in the Emerging Issues Task Force Issue
      No. 95-22, *Balance
      Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
      that Include Both a Subjective Acceleration Clause and a Lock-Box
      Arrangement* .
      We do
      not expect to repay, or be required to repay, within one year, the balance
      of
      the revolving credit facility classified as a current liability. The MAE clause,
      which we believe is a common requirement in commercial credit agreements, allows
      the lenders to require the loan to become due if they determine there has been
      a
      material adverse effect on our operations, business, properties, assets,
      liabilities, condition or prospects. The classification of the revolving credit
      facility as a current liability (except as noted above) is a result only of
      the
      combination of the lockbox agreements and the MAE clause. The Bank of America
      Credit Agreement does not expire or have a maturity date within one year, but
      rather has a final expiration date of April 20, 2009. The lender had not
      notified us of any indication of a MAE at September 30, 2005, and, to
      management’s knowledge, we were not in default of any provision of the Bank of
      America Credit Agreement, as amended at September 30, 2005.





-34-


We
      determined that due to declining profitability in the fourth quarter of 2004,
      potentially lower profitability in the first nine months of 2005 and the timing
      of certain restructuring payments, we would not meet our Fixed Charge Coverage
      Ratio (as defined in the Bank of America Credit Agreement) and could potentially
      exceed our maximum Consolidated Leverage Ratio (also as defined in the Bank
      of
      America Credit Agreement) as of the end of the first, second and third quarters
      of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage
      Ratio or exceeding the maximum Consolidated Leverage Ratio, we obtained an
      amendment to the Bank of America Credit Agreement (the “Second Amendment”). The
      Second Amendment applied only to the first three quarters of 2005 and the
      covenants would have returned to their original levels for the fourth quarter
      of
      2005. Specifically, the Second Amendment eliminated the Fixed Charge Coverage
      Ratio, increased the maximum Consolidated Leverage Ratio, established a Minimum
      Consolidated EBITDA (on a latest twelve months basis) for each of the periods
      and also established a Minimum Availability (the eligible collateral base less
      outstanding borrowings and letters of credit) on each day within the nine-month
      period.





Subsequent
      to the Second Amendment’s effective date, we determined that we would likely not
      meet our amended financial covenants. On April 13, 2005, we obtained a further
      amendment to the Bank of America Credit Agreement (the “Third Amendment”). The
      Third Amendment eliminated the maximum Consolidated Leverage Ratio and the
      Minimum Consolidated EBITDA as established by the Second Amendment and adjusted
      the Minimum Availability such that our eligible collateral must exceed the
      sum
      of our outstanding borrowings and letters of credit under the Revolving Credit
      Facility by at least $5 million from the effective date of the Third Amendment
      through September 29, 2005 and by at least $7.5 million from September 30,
      2005
      until the date we deliver our financial statements for the first quarter of
      2006
      to our lenders. Subsequent to the delivery of the financial statements for
      the
      first quarter of 2006, the Third Amendment reestablished the minimum Fixed
      Charge Coverage Ratio as originally set forth in the Bank of America Credit
      Agreement. The Third Amendment also reduced the maximum allowable capital
      expenditures for 2005 from $15 million to $10 million, and increased the
      interest rate margins on all of the Company’s outstanding borrowings and letters
      of credit to the largest margins set forth in the Bank of America Credit
      Agreement. Effective April 13, 2005, interest accrues on the Revolving Credit
      Facility and Term Loan borrowings at 275 and 300 basis points over LIBOR,
      respectively. Interest rate margins will return to levels set forth in the
      Bank
      of America Credit Agreement subsequent to the delivery of our financial
      statements for the first quarter of 2006 to our lenders.





As
      a
      result of the Third Amendment, the Company’s current debt covenants under the
      Bank of America Credit Agreement are as follows (see further discussion
      below):





*Minimum
      Availability* - At
      September 30, 2005, the Company was required to have a borrowing base
      (collateral) in excess of borrowings and outstanding letters of credit by at
      least $7.5 million. Pursuant to the Third Amendment, this covenant is in effect
      through the first quarter of 2006.





*Fixed
      Charge Coverage Ratio* - The
      Company is required to maintain a Fixed Charge Coverage Ratio (as defined in
      the
      Bank of America Credit Agreement) of 1.1:1. Pursuant to the Third Amendment,
      this covenant was suspended and will be reinstated following the first quarter
      of 2006.





*Capital
      Expenditures* - For
      the year ended December 31, 2005, the Company is not to exceed $10.0 million
      in
      capital expenditures. Subsequent to 2005, the Company is not to exceed $15.0
      million during a single fiscal year.





*Leverage
      Ratio* - The
      Third Amendment to the Bank of America Credit Agreement eliminated the Leverage
      Ratio (as defined in the Bank of America Credit Agreement) as a financial
      covenant. Following the first quarter of 2006, the Leverage Ratio will be
      utilized to determine the interest rate margin over the applicable LIBOR
      rate.





We
      have
      recently indicated to the syndicate of banks in the Bank of America Credit
      Agreement, that we may be unable to attain the required Fixed Charge Coverage
      Ratio as of the end of the first quarter of 2006. If we are unable to comply
      with the terms of the Fixed Charge Coverage Ratio or any of the amended
      covenants, we may be required to obtain further amendments and pursue increased
      liquidity through additional debt financing and/or the sale of assets (see
      discussion above). However, there is no guarantee that such amendments or
      financing could be obtained.





-35-


Contractual
      Obligations and Commercial Obligations





Katy’s
      obligations as of September 30, 2005 are summarized below (amounts in
      thousands):





Contractual
                Obligations
            
            Total
            
            Due
                in less than 1 year
            
            Due
                in 1-3 years
            
            Due
                in 3-5 years
            
            Due
                after 5 yearsRevolving
                credit facility [a]
            
            $
            41,085
            
            $
            41,085
            
            $
            -
            
            $
            -
            
            $
            -Term
                loans
            
            
            17,043
            
            
            3,472
            
            
            5,714
            
            
            7,857
            
            
            -Interest
                on debt [b]
            
            
            14,047
            
            
            4,356
            
            
            7,707
            
            
            1,984
            
            
            -Operating
                leases [c]
            
            
            25,279
            
            
            6,861
            
            
            11,235
            
            
            4,280
            
            
            2,903Severance
                and restructuring [c]
            
            
            2,414
            
            
            1,105
            
            
            716
            
            
            384
            
            
            209SESCO
                payable to Montenay [d]
            
            
            2,750
            
            
            1,100
            
            
            1,100
            
            
            550
            
            
            -Postretirement
                benefits [e]
            
            
            5,930
            
            
            877
            
            
            1,494
            
            
            1,314
            
            
            2,245Interest
                rate swap [f]
            
            
            39
            
            
            39
            
            
            -
            
            
            -
            
            
            -Total
                Contractual Obligations
            
            $
            108,587
            
            $
            58,895
            
            $
            27,966
            
            $
            16,369
            
            $
            5,357




Other
                  Commercial Commitments
              
              Total
              
              Due
                  in less than 1 year
              
              Due
                  in 1-3 years
              
              Due
                  in 4-5 years
              
              Due
                  after 5 yearsCommercial
                  letters of credit
              
              $
              892
              
              $
              892
              
              $
              -
              
              $
              -
              
              $
              -Stand-by
                  letters of credit
              
              
              8,678
              
              
              8,678
              
              
              -
              
              
              -
              
              
              -Guarantees
                  [g]
              
              
              23,670
              
              
              8,370
              
              
              15,300
              
              
              -
              
              
              -Total
                  Commercial Commitments
              
              $
              33,240
              
              $
              17,940
              
              $
              15,300
              
              $
              -
              
              $
              -





[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, the entire
      revolving credit facility under the Bank of America Revolving Credit Agreement
      is classified as a current liability on the Consolidated Statements of Financial
      Position as a result of the combination in the Bank of America Credit Agreement
      of (i) lockbox agreements on Katy’s depository bank accounts, and (ii) a
      subjective Material Adverse Effect (MAE) clause. The Revolving Credit Facility
      expires in April of 2009.





[b]  Represents
      interest on the Revolving Credit Facility and Term Loan of the Bank of America
      Credit Agreement. Amounts assume interest accrues at the current rate in effect,
      including the effect the impact of the increased margins through the end of
      the
      first quarter of 2006 pursuant to the Third Amendment. Amount also assumes
      the
      principal balance of the Revolving Credit Facility remains constant through
      its
      expiration date of April 20, 2009 and the principal balance of the Term Loan
      amortizes in accordance with the terms of the Bank of America Credit Agreement.
      Due to the variable nature of the Bank of America Credit Agreement, actual
      interest rates could differ from the assumptions above. In addition, actual
      borrowing levels could differ from the assumptions above due to liquidity needs.





[c]
      Future non-cancelable lease rentals are included in the line entitled “Operating
      leases,” which also includes obligations associated with restructuring
      activities. The Condensed Consolidated Balance Sheet at September 30, 2005
      and
      December 31, 2004, includes $3.4 million and $3.6 million, respectively, in
      discounted liabilities associated with non-cancelable operating lease rentals,
      net of estimated sub-lease revenues, related to facilities that have been
      abandoned as a result of restructuring and consolidation activities.





[d]
      Amount owed to Montenay as a result of the SESCO partnership, discussed in
      Note
      5 to the Condensed Consolidated Financial Statements. $1.1 million of this
      obligation is classified in the Condensed Consolidated Balance Sheets as an
      Accrued Expense in Current Liabilities, while the remainder is included in
      Other
      Liabilities, recorded on a discounted basis.





[e]
      Benefits consisting 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.





[f]
      As
      discussed in Note 1 to the Condensed Consolidated Financial Statements, the
      amount consists of the liability for the interest rate swap entered into by
      the
      company in August 2005.





[g]
      As
      discussed in Note 5 to the Condensed Consolidated Financial Statements in Part
      I, Item 1, SESCO, an indirect wholly-owned subsidiary of Katy, is party to
      a
      partnership that operates a waste-to-energy facility, and has certain
      contractual obligations, for which Katy provides certain guarantees. If the
      partnership is not able to perform its obligations under the contracts, under
      certain circumstances SESCO and Katy could be subject to damages equal to the
      amount of Industrial Revenue Bonds outstanding (which financed construction
      of
      the facility) less amounts held by the partnership in debt service reserve
      funds. As of September 30, 2005, $23.7 million of the Industrial Revenue Bonds
      remained outstanding. Katy and SESCO do not anticipate non-performance by
      parties to the contracts.




-36-


Off-balance
      Sheet Arrangements





See
      Note
      5 to the Condensed Consolidated Financial Statements in Part II, Item 8 for
      a
      discussion of SESCO.





Cash
      Flow





*Operating
      Activities*


Cash
      flow
      provided by operating activities before changes in operating assets and
      liabilities was $1.7 million in the first nine months of 2005 versus cash flow
      provided by operating activities before changes in operating assets and
      liabilities of $9.2 million in the first nine months of 2004. While we had
      net
      losses in both periods, these amounts included non-cash items such as
      depreciation, amortization and amortization of debt issuance costs. We generated
      $6.0 million of cash related to operating assets and liabilities during the
      nine
      months ended September 30, 2005 versus cash used related to operating assets
      and
      liabilities of $27.8 million during the nine months ended September 30, 2004.
      Our operating cash flow was favorably impacted in the first nine months of
      2005
      by a decrease in inventory of $5.0 million, as a liquidation of inventory in
      the
      business units of the Maintenance Products Group was partially offset by a
      seasonal increase in inventory in the Electrical Products Group. In addition
      seasonally higher accounts payable of $12.5 million was offset by seasonally
      higher accounts receivable, principally resulting from a increase in net sales
      in the third quarter of 2005 versus the fourth quarter of 2004. Operating cash
      flow during the first nine months of 2005 was negatively impacted by lower
      accruals due to the settlement of previously recorded restructuring charges.
      Operating cash flow in the first nine months of 2004 was negatively impacted
      by
      higher inventory and receivables and lower accruals. The inventory build was
      due
      to the early purchase of certain materials in advance of scheduled supplier
      price increases, increased material prices and planned builds in connection
      with
      facility closures. Accounts payable were higher also as a result of the
      seasonally stronger Electrical Products Group. During the first nine months
      of
      2005, we were turning our inventory at 5.0 times per year versus 4.3 times
      per
      year during the first nine months of 2004. Cash of $2.9 million and $4.3 million
      was used in the nine months ended September 30, 2005 and 2004, respectively,
      to
      satisfy severance, restructuring and related obligations. Severance,
      restructuring and related charges are expected to substantially end in 2005,
      however, cash payments will continue through 2011 to satisfy non-cancelable
      lease obligations. See Note 11 of the Notes to Condensed Consolidated Financial
      Statements.





*Investing
      Activities*





Capital
      expenditures totaled $5.8 million during the nine months ended September 30,
      2005 as compared to $10.8 million during the nine months ended September 30,
      2004. Capital expenditures in the fourth quarter are expected to continue at
      approximately at the same pace as the first three quarters of 2005, but overall
      are expected to be lower than 2004. On August 5, 2005, we purchased
      substantially all of the assets of Washington International Non-wovens (“WIN”).
      Through September 30, 2005, we have expended $1.5 million to purchase the assets
      and satisfy certain of the obligations of WIN. During the fourth quarter of
      2005, we expect to expend approximately $0.6 million to satisfy the remaining
      obligations of WIN. During the nine months ended September 30, 2005, we have
      received $0.9 million in proceeds primarily relating to the sales of excess
      equipment of our Maintenance Products Group. On March 31, 2004, Woods Canada
      sold its manufacturing facility for net proceeds of $3.2 million and immediately
      entered into a sale/leaseback arrangement to allow that business unit to occupy
      this property as a distribution facility. On June 28, 2004, CCP sold its vacant
      metals facility in Santa Fe Springs, California for net proceeds of $1.9
      million.








*Financing
      Activities*





Overall,
      debt decreased $1.0 million during the nine months ended September 30, 2005
      versus an increase of $27.4 million during the nine months ended September
      30,
      2004, primarily relating to the changes in working capital during those periods.
      Direct debt costs totaling $0.2 million in the first nine months of 2005
      primarily represents a fee paid to our lenders in connection with the Second
      Amendment and $1.4 million in the first nine months of 2004 principally relates
      to the April 20, 2004 refinancing of the Bank of America Credit Agreement.
      On
      May 10, 2004, we suspended our $5.0 million share repurchase program after
      announcing the resumption of the plan on April 20, 2004. We had previously
      suspended the program in November 2003. There currently are no plans to resume
      the share repurchase program.




-37-


SEVERANCE,
      RESTRUCTURING AND RELATED CHARGES


We
      expect
      to substantially complete our restructuring program in 2005. The remaining
      severance, restructuring and related charges for these initiatives are expected
      to be less than $0.5 million. The remaining cash obligations of $3.6 million
      primarily relate to payments associated with non-cancelable lease liabilities
      for abandoned facilities which are scheduled to end in 2011.





See
      Note
      11 to the Condensed Consolidated Financial Statements in Part I, Item 1,
“RESULTS OF OPERATIONS - Three Months Ended September 30, 2005 versus Three
      Months Ended September 30, 2004 - *Severance,
      Restructuring and Related Charg* es”
and
      “RESULTS OF OPERATIONS - Nine Months Ended September 30, 2005 versus Nine Months
      Ended September 30, 2004 - *Severance,
      Restructuring and Related Charg* es”
for
      further discussion of severance, restructuring and related charges. .





OUTLOOK
      FOR 2005





We continue to experience a strong sales performance during the first nine
      months of 2005 from the Woods U.S. business unit, offset by lower volumes in
      our
      U.S. and U.K. Consumer Plastics and domestic Abrasives business units. Price
      increases were passed along to our Woods U.S. customers during 2004 and 2005
      as
      a result of the rise in copper prices since late 2003; and we continue to
      implement price increases; however there can be no assurance that such increases
      will be accepted. Also at our Woods U.S. business unit, we continue to be at
      risk from foreign competitors and our customers who desire to source their
      materials directly from foreign markets (particularly Asia). Our volumes in
      our
      U.S. Consumer Plastics business appear to have stabilized following our exit
      from certain unprofitable lines of business in the first half of 2005. We expect
      continued softness in the U.K., especially in the consumer /retail sector.
      In
      2005, we have implemented price increases for all of our business units in
      our
      Maintenance Products Group in response to the increase in raw material costs
      over the past few years. However, in the U.S. and U.K. Consumer Plastics
      business, we face the continuing challenge of passing through price increases
      to
      offset these higher costs, and sales volumes have been and could continue to
      be
      negatively impacted as a result of raising prices. The disruptions to our
      Abrasives operations have resulted in the loss of certain customers, commencing
      in the second half of 2004. While we expect to recover some of these lost sales
      in the current year, we may experience additional lost sales in 2005. We believe
      that sales for the Abrasives business unit in the fourth quarter of 2005 will
      be
      continue at approximately the same pace as the first nine months of
      2005.





Cost
      of
      goods sold is subject to variability in the prices for certain raw materials,
      most significantly thermoplastic resins used in the manufacture of plastic
      products for the JanSan Plastics, Consumer Plastics and Container businesses
      and
      copper which is used in the Woods’ business units. Management has observed that
      the prices of plastic resins are driven to an extent by prices for crude oil
      and
      natural gas, in addition to other factors specific to the supply and demand
      of
      the resins themselves.  Prices of these resins, such as polyethylene and
      polypropylene have increased steadily from the latter half of 2002 through
      the
      early months of 2005. Prices for resin decreased in the second quarter of
      2005, but have recently returned to historically high levels. We currently
      believe that these higher prices will remain in effect until at least the early
      part of 2006. Prices for copper generally increased from late 2003 and have
      continued through the present time. Prices for copper appeared to have
      stabilized in a historically high range in the second quarter of 2005, but
      more
      recently have sharply increased again. We have not employed an active hedging
      program related to our commodity price risk, but are employing other strategies
      for managing this risk, including contracting for a certain percentage of resin
      needs through supply agreements and opportunistic spot purchases.  In more
      recent months, we have experienced sharp rises in energy costs which have
      impacted our plant operating costs and the cost of distributing our products.
      We
      believe that in the short run, these energy costs will continue to rise. We
      announced price increases in the first nine months of 2005 across almost all
      of
      our business units. We continue to implement price increases; however, there
      can
      be no assurance that such increases will be accepted. In a climate of rising
      raw
      material and energy costs, we have generally experienced difficulty in raising
      prices sufficiently to our customers (most notably in the major home improvement
      and mass market retail outlets) to cover these higher costs.  Our future
      earnings may be negatively impacted to the extent further increases in costs
      for
      raw materials and energy cannot be recovered or offset through higher selling
      prices. We ultimately cannot predict the direction our raw material and energy
      prices will take during late 2005 and beyond.





Certain
      operational disruptions including inefficiencies caused by the consolidation
      of
      two additional abrasives facilities into the Wrens, Georgia facility as well
      as
      a fire in Wrens early in the fourth quarter of 2004, have resulted in higher
      operating costs despite lower sales volumes. The fire damaged certain production
      equipment and affected the operations of certain of our production lines.
      However, we have been able to continue to operate the remainder of our
      production lines at this facility and have obtained equipment allowing us to
      operate all product lines at this facility. Various cost reduction initiatives,
      including the elimination of headcount, manufacturing process improvements,
      and
      overhead cost control have been implemented or will be implemented in the near
      term. In addition, cost reduction initiatives are being undertaken at our U.K.
      Consumer Plastics business unit to offset the lower sales volumes.





-38-


Since
      our
      Recapitalization in 2001, our management has been focused on a number of
      restructuring and cost reduction initiatives, including the consolidation of
      facilities; divestiture of non-core operations; SG&A cost rationalization
      and organizational changes. We are now substantially complete with our
      restructuring plans. In the future, we expect to benefit from sales
      growth opportunities across our various business units. We believe we can
      accomplish this without having to add significant capital because our
      facilities are currently under utilized.





As
      a
      percentage of sales, we expect SG&A expenses in the fourth quarter of 2005
      will remain in line with the same period in 2004. Overall, SG&A expense has
      continually declined since 2001as a percentage of sales. We expect to maintain
      modest headcount and rental costs for our corporate office. We have completed
      the process of transferring back-office functions of our Textiles (Wilen),
      Abrasives (Glit-Microtron and Loren) and Filters and Grillbricks (Disco)
      business units from Georgia to Bridgeton, Missouri, the headquarters of CCP.
      We
      will continue to evaluate the possibility of further consolidation of
      administrative processes.




Our
        cost
        reduction efforts, integration of back office functions and simplifications
        of
        our business transactions are all dependent on executing a system integration
        plan. This plan involves the migration of data across information technology
        platforms and implementation of new software and hardware. The domestic systems
        integration plan was substantially completed in October 2003, while our
        international systems integration plan is substantially complete.
  Interest rates rose in the second half of 2004 and we expect rates to continue
          to rise in the fourth quarter of 2005. Effective August 17, 2005, in response
          to
          the rising interest rates, we entered into an interest rate swap agreement
          with
          a counterparty to effectively convert $25 million of our debt from a variable
          rate to a fixed rate (see Note 6 of the Notes to Condensed Consolidated
          Financial Statements). From September 30, 2004, interest rate margins (i.e.
          the
          interest rate spread above LIBOR) on our Bank of America Credit Agreement
          borrowings have risen from 175 basis points over applicable LIBOR rates
          for
          Revolving Credit Facility borrowings and 200 basis points over LIBOR for
          borrowings under the Term Loan to 275 and 300 basis points, respectively.
          Current margins reflect the highest spread under the Bank of America Credit
          Agreement, as specified by the Third Amendment (see below). Additionally,
          margins on the Term Loan will drop 25 basis points if the balance of the
          Term
          Loan is reduced below $10.0 million.





Given
      our
      history of operating losses, along with guidance provided by the accounting
      literature covering accounting for income taxes, we are unable to conclude
      it is
      more likely than not that we will be able to generate future taxable income
      sufficient to realize the benefits of domestic deferred tax assets and deferred
      tax assets of unprofitable foreign subsidiaries. Therefore, except for certain
      of our profitable foreign subsidiaries, a full valuation allowance on the net
      deferred tax asset position was recorded at September 30, 2005 and December
      31,
      2004, and we do not expect to record the benefit of any deferred tax assets
      that
      may be generated in 2005 from domestic and certain unprofitable foreign
      jurisdictions. We will continue to record current expense associated with
      foreign and state income taxes.





In
      2004,
      our financial performance benefited from favorable currency translation as
      the
      British Pound Sterling and the Canadian dollar strengthened throughout the
      year
      against the U.S. dollar. In the first nine months of 2005, the Canadian dollar
      appears to have stabilized against the U.S. dollar and the British Pound
      Sterling has somewhat weakened against the U.S. dollar in the same period.
      While
      we cannot predict the ultimate direction of exchange rates, we do not anticipate
      any material impact on our financial performance in 2005.





-39-


We
      expect
      our debt levels to generally stabilize for the fourth quarter of 2005. Elements
      of working capital continue to be closely managed. Capital expenditures in
      the
      fourth quarter are expected to continue at approximately the same pace as the
      first three quarters of 2005, but overall are expected to be lower than 2004.
      We
      expect our current working capital levels to remain constant as increased
      receivable collections in the fourth quarter of 2005 will be offset by the
      increased settlement of accounts payable (both primarily in the Electrical
      Products Group). We intend to use cash flow in the fourth quarter of 2005 for
      additional costs related to the consolidation of the Abrasives facilities
      (primarily severance and related benefits). Additionally, funds required in
      2006
      for the closure of the Pineville, North Carolina are not expected to be
      material. We also intend to use cash flow over the next several years for the
      settlement of previously established restructuring accruals. The majority of
      these accruals relate to non-cancelable lease obligations for abandoned
      facilities. These accruals do not create incremental cash obligations in that
      we
      are obligated to make the associated payments whether we occupy the facilities
      or not. The amount we will ultimately pay out under these accruals is dependent
      on our ability to successfully sublet all or a portion of the abandoned
      facilities.





We
      determined that due to declining profitability in the fourth quarter of 2004,
      potentially lower profitability in the first half of 2005 and the timing of
      certain restructuring payments, we would not meet our Fixed Charge Coverage
      Ratio (as defined in the Bank of America Credit Agreement) and could potentially
      exceed our maximum Consolidated Leverage Ratio (also as defined in the Bank
      of
      America Credit Agreement) as of the end of the first, second and third quarters
      of 2005. In anticipation of not achieving the minimum Fixed Charge Coverage
      Ratio or exceeding the maximum Consolidated Leverage Ratio, we obtained the
      Second Amendment to the Bank of America Credit Agreement. The Second Amendment
      applied only to the first three quarters of 2005 and the covenants would have
      returned to their original levels for the fourth quarter of 2005. Specifically,
      the Second Amendment eliminated the Fixed Charge Coverage Ratio, increased
      the
      maximum Consolidated Leverage Ratio, established a Minimum Consolidated EBITDA
      (on a latest twelve months basis) for each of the periods and also established
      a
      Minimum Availability (the eligible collateral base less outstanding borrowings
      and letters of credit) on each day within the nine-month period.





Subsequent
      to the Second Amendment’s effective date, we determined that we would likely not
      meet our amended financial covenants. On April 13, 2005, we obtained the Third
      Amendment to the Bank of America Credit Agreement. The Third Amendment
      eliminated the maximum Consolidated Leverage Ratio and the Minimum Consolidated
      EBITDA as established by the Second Amendment and adjusted the Minimum
      Availability such that our eligible collateral must exceed the sum of our
      outstanding borrowings and letters of credit under the Revolving Credit Facility
      by at least $5 million from the effective date of the Third Amendment through
      September 29, 2005 and by at least $7.5 million from September 30, 2005 until
      the date we deliver our financial statements for the first quarter of 2006
      to
      our lenders. Subsequent to the delivery of the financial statements for the
      first quarter of 2006, the Third Amendment reestablished the minimum Fixed
      Charge Coverage Ratio as originally set forth in the Bank of America Credit
      Agreement. The Third Amendment also reduced the maximum allowable capital
      expenditures for 2005 from $15 million to $10 million, and increased the
      interest rate margins on all of the Company’s outstanding borrowings and letters
      of credit to the largest margins set forth in the Bank of America Credit
      Agreement. Effective April 13, 2005, interest accrues on the Revolving Credit
      Facility and Term Loan borrowings at 275 and 300 basis points over LIBOR,
      respectively. Interest rate margins will return to levels set forth in the
      Bank
      of America Credit Agreement subsequent to the delivery of our financial
      statements for the first quarter of 2006 to our lenders. We expect to be in
      compliance with the amended covenants in the Bank of America Credit Agreement
      for the remainder of 2005.





We
      have
      recently indicated to the syndicate of banks in the Bank of America Credit
      Agreement, that we may be unable to attain the required Fixed Charge Coverage
      Ratio as of the end of the first quarter of 2006. If we are unable to comply
      with the terms of the Fixed Charge Coverage Ratio or any of the amended
      covenants, we may be required to obtain further amendments and pursue increased
      liquidity through additional debt financing and/or the sale of assets. We
      believe that given our strong working capital base, additional liquidity could
      be obtained through additional debt financing, if necessary. However, there
      is
      no guarantee that such amendments or financing could be obtained. We are
      continually evaluating alternatives relating to the sale of excess assets and
      divestitures of certain of our business units. Asset sales and business
      divestitures present opportunities to provide additional liquidity by
      de-leveraging our financial position.




-40-


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


This
      report
      and the information incorporated by reference in this report contain various
      “forward-looking statements” as defined in Section 27A of the Securities Act of
      1933 and Section 21E of the Exchange Act of 1934, as amended. The
      forward-looking statements are based on the beliefs of our management, as well
      as assumptions made by, and information currently available to, our management.
      We have based these forward-looking statements on current expectations and
      projections about future events and trends affecting the financial condition
      of
      our business. These forward-looking statements are subject to risks and
      uncertainties that may lead to results that differ materially from those
      expressed in any forward-looking statement made by us or on our behalf,
      including, among other things:





- Our
      inability to achieve product price increases, especially as they relate to
      potentially higher raw material costs.





- The
      potential impact of losing lines of business at large mass merchant retailers
      in
      the discount and do-it-yourself markets.





- Competition
      from foreign competitors.





- Increases
      in the cost of, or in some cases continuation of, the current price levels
      of
      plastic resins, copper, paper board packaging, and other raw
      materials.





- Our
      inability to reduce product costs, including manufacturing, sourcing, freight,
      and other product costs.





- Greater
      reliance on third parties for our finished goods as we increase the portion
      of
      our manufacturing that is outsourced.





- Labor
      issues, including union activities that require an increase in production costs
      or lead to a strike, thus impairing production and decreasing sales. We are
      also
      subject to labor relations issues at entities involved in our supply chain,
      including both suppliers and those involved in transportation and
      shipping.





- Our
      inability to execute our systems integration plan.





- Our
      inability to successfully integrate our operations as a result of the facility
      consolidations.





- Our
      inability to sub-lease rented facilities which have been abandoned as a result
      of consolidation and restructuring initiatives.





- The
      potential impact of rising costs for insurance for properties and various forms
      of liabilities.





- The
      potential impact of rising interest rates on our LIBOR-based Bank of America
      Credit Agreement.





- Our
      inability to meet covenants associated with the Bank of America Credit
      Agreement.





- The
      potential impact of changes in foreign currency exchange rates related to our
      foreign operations.





- The
      potential impact of our inability to satisfy NYSE listing
      standards;





- Changes
      in significant laws and government regulations affecting environmental
      compliance and income taxes.





Words
      and
      phrases such as
“expects,”“may,”“estimates,”“will,”“would,”“intends,”“plans,”“seeks,”“believes,”“anticipates”
or the negative of these words and phrases or similar words and phrases are
      intended to identify forward-looking statements. The results referred to in
      forward-looking statements may differ materially from actual results because
      they involve estimates, assumptions and uncertainties. Forward-looking
      statements included herein are as of the date hereof and we undertake no
      obligation to revise or update such statements to reflect events or
      circumstances after the date hereof or to reflect the occurrence of
      unanticipated events. All forward-looking statements should be viewed with
      caution. These factors are not intended to represent a complete list of all
      risks and uncertainties inherent in our business and should be read in
      conjunction with the cautionary statements and risks included in our other
      filings with the SEC, including, but not limited to, our Annual Report on Form
      10-K for the fiscal year ended December 31, 2004.




-41-


ENVIRONMENTAL
      AND OTHER CONTINGENCIES




See
      Note
      9 to the Condensed Consolidated Financial Statements in Part I, Item 1 for
      a
      discussion of environmental and other contingencies.




RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS




See
      Note
      2 to the Condensed Consolidated Financial Statements in Part I, Item 1 for
      a
      discussion of recently issued accounting pronouncements.




CRITICAL
      ACCOUNTING POLICIES




We
      disclosed details regarding certain of our critical accounting policies in
      the
      Management’s Discussion and Analysis section of our 2004 Annual Report on Form
      10-K (Part II, Item 7). There have been no changes to policies as of September
      30, 2005.





Item
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK




Interest
      Rate Risk


Our
      exposure to market risk associated with changes in interest rates relates
      primarily to our debt obligations. Accordingly, effective August 17, 2005,
      we entered into a two-year interest rate swap agreement on a notional amount
      of
      $25.0 million in the first year and $15.0 million in the second year. The fixed
      interest rate under the swap at September 30, 2005 and over the life of the
      agreement is 4.49%.Our interest obligations on outstanding debt at September
      30,
      2005 were indexed from short-term LIBOR. As a result of the current rising
      interest rate environment and the increase in the interest rate margins on
      our
      borrowings as a result of the Third Amendment to the Bank of America Credit
      Agreement, our exposures to interest rate risks could be material to our
      financial position or results of operations.





Foreign
      Exchange Risk


We
      are
      exposed to fluctuations in the Euro, British pound, Canadian dollar and Chinese
      Yuan Renminbi. Some of our subsidiaries make significant U.S. dollar purchases
      from Asian suppliers, particularly in China. An adverse change in foreign
      currency exchange rates of Asian countries could result in an increase in the
      cost of purchases. We do not currently hedge foreign currency transaction or
      translation exposures. In July, the Chinese Central Bank revalued the Yuan
      Renminbi, breaking the link to the U.S. Dollar. We are currently unable to
      determine the long-term effects of China’s revaluation on the foreign currency
      exchange rate with the U.S.




Commodity
      Price Risk


We
      have not
      employed an active hedging program related to our commodity price risk, but
      are
      employing other strategies for managing this risk, including contracting for
      a
      certain percentage of resin needs through supply agreements and opportunistic
      spot purchases. See Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS - OUTLOOK FOR 2005, for further discussion
      of our exposure to increasing raw material costs.




-42-


Item
      4. CONTROLS AND PROCEDURES





(a)
            Evaluation
                of Disclosure Controls and
                Procedures





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our SEC filings is reported within
      the
      time periods specified in the SEC's rules, and that such information is
      accumulated and communicated to our management, including the Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure. We also have investments in certain
      unconsolidated entities. The oversight of these entities includes an assessment
      of controls over the recording of related amounts in the consolidated financial
      statements, including controls over the selection of accounting methods, the
      recognition of equity method income and losses, and the determination,
      valuation, and recording of assets in our investment account
      balances.





Pursuant
      to Rule 13a-15(b) under the Securities Exchange Act of 1934, Katy carried out
      an
      evaluation, under the supervision and with the participation of our management,
      including the Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of
      1934, as amended) as of the end of the period of our report. Based upon that
      evaluation, the Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures are effective to ensure that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the SEC’s rules and forms, and that such
      information is accumulated and communicated to our management, including our
      principal executive officer and primary financial officer, as appropriate,
      to
      allow timely decisions regarding required disclosure.








(b)
            Change
                in Internal Controls





There
      have been no changes in Katy’s internal control over financial reporting during
      the quarter ended September 30, 2005 that has materially affected, or is
      reasonably likely to materially affect Katy’s internal control over financial
      reporting.





As
      noted
      in our 2004 Annual Report on Form 10-K, our Abrasives facility in Wrens, Georgia
      lacks a perpetual inventory system and relies on quarterly physicals to value
      inventory. Throughout 2004, we adjusted our material cost of sales estimate
      (for
      preparation of non-quarter-end interim financial statements) to reflect rising
      material cost of sales.





Also
      during 2004, the Wrens facility experienced significant personnel turnover,
      consolidation of other operations (consistent with our strategy of consolidating
      our abrasives operations into the Wrens facility), and manufacturing disruption
      events such as the production interruption caused by the air handling system
      fire in October 2004. Management determined that key inventory processes such
      as
      receiving, production reporting, scrap, and shipping required improvement.




In
      light
      of the above developments, our management requested that our independent
      auditor, PricewaterhouseCoopers LLP (PwC), perform a comprehensive analysis
      of
      the Wrens inventory process controls. As part of the analysis, PwC conducted
      an
      on-site review of the operations and inventory-related process controls of
      the
      Wrens facility as well as related certain back-office processes conducted in
      St.
      Louis, Missouri.





The
      PwC
      review concluded that inventory process controls were inadequate. Among the
      inadequacies identified were those relating to shipping and receiving controls,
      bills of material and routings, security measures, and systems implementation
      (we are in the process of re-implementing a new ERP system). As a result of
      its
      review, PwC recommended that we take certain corrective actions, including
      the
      establishment of a perpetual inventory system. In response to each of PwC’s
      detailed recommendations, management developed an itemized corrective action
      plan which was discussed with our Audit Committee, Board of Directors and PwC.
      We believe that the action plan developed by our management will correct the
      inadequacies in our internal control over financial reporting as they relate
      to
      our inventory process at our Wrens facility. We also believe that despite these
      inadequacies, the quarterly physical inventory process at this facility has
      provided us with an accurate inventory valuation.




-43-


The
      following is a summary of the specific actions that have been taken to correct
      the internal control deficiencies:





·
            Implementation
                of short term corrective actions in shipping and receiving - Revised
                shipping, receiving, physical inventory, period end cut-off and returned
                goods procedures have been issued. Training to reinforce the importance
                of
                the physical verification will be provided to all appropriate material
                handlers by the end of September. Products loaded for shipment are
                now
                verified against system generated bill of ladings. A receiving log
                was
                implemented in the first quarter of 2005 and is reviewed at least
                weekly
                by the distribution manager.




·
            Establish
                improved interim recording of raw material usage - The shop floor
                module in PRMS (the facility’s ERP system) was activated on July 1, 2005.
                Large raw material variances can now be reviewed and/or isolated
                by work
                order to allow bill of material (“BOM”) corrections as required.
                Miscellaneous inventory transactions are being downloaded and reviewed
                at
                least weekly by cost accounting. A supplemental system was also
                re-implemented to allow the daily review of costed non-woven production
                runs to identify process or material variances. The output of this
                system
                yields a daily cost per yard of non-woven material produced, as well
                as an
                average cost per yard over multiple batches/runs. This information
                was
                used as a reference point and allowed material cost verifications
                with
                PRMS formula BOM’s.




·
            Reestablish
                a monthly physical inventory until the PRMS perpetual inventory process
                is
                re-implemented - This location’s monthly physical inventory was
                reinstituted for the February 2005 accounting
                close.




·
            Establish
                security measures to mitigate the risk of theft - All employees were
                issued parking permits to help identify on-site traffic of non-employees.
                A security camera system was installed and became operational in
                June
                2005. Cameras provide monitoring of key plant areas by both security
                personnel and key managers.




·
            Improve
                bill of material and routing accuracy - In the second quarter of 2005,
                a BOM accuracy project was started which encompassed the review of
                the
                most significant BOM’s across all product lines. This project was
                completed in late July. Efforts are now ongoing to review remaining
                BOM’s,
                prioritizing based on sales volumes and comparative analysis with
                other
                BOM’s of like material/sizes.




·
            Properly
                staff and plan PRMS re-implementation - The PRMS re-implementation was
                completed at the end of July 2005. The Material Planning and Scheduling
                module of PRMS will be completed in the fourth quarter of 2005. The
                total
                re-implementation is being facilitated by a consultant with expertise
                with
                both PRMS and ERP system implementation across varied
                industries.




·
            Establish
                procedures for production reporting and inventory transactions -
                Detailed procedures for reporting of production in PRMS have been
                issued.
                The implementation of scanning for inventory transactions was completed
                in
                August and documented procedures are currently under development.
                Additional procedures are being finalized and will be documented
                when they
                are validated.




The
        implementation of our action plan is an ongoing process.  Although we
        believe that we have made significant progress in the items noted above,
        we have
        not yet fully implemented certain of the PwC recommendations, including the
        establishment of a perpetual inventory system.  Accordingly, we are unable
        to conclude as of September 30, 2005 that our inventory process controls
        at our
        Wrens facility are adequate.


-44-
 PART
        II - OTHER INFORMATION





Item
      1.LEGAL
      PROCEEDINGS





E xcept
      as
      otherwise noted in Note 9 to the Condensed Consolidated Financial Statements,
      during the quarter for which this report is filed there have been no material
      developments in previously reported legal proceedings, and no other cases
      or legal proceedings, other than ordinary routine litigation incidental to
      the
      Company’s business and other nonmaterial proceedings were brought against the
      company.





Item
      2.UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On
      April
      20, 2003, the Company announced a plan to spend up to $5.0 million to repurchase
      shares of its common stock. In 2004, 12,000 shares of common stock were
      repurchased on the open market for approximately $75 thousand under this plan,
      while in 2003, 482,800 shares of its common stock were repurchased on the open
      market for approximately $2.6 million. The Company suspended further purchases
      under the plan on May 10, 2004.








Item
      5.OTHER
      INFORMATION





Other


On
      October 11, 2005, the Company received notification from the New York Stock
      Exchange ("NYSE") that the Company was not in compliance with the NYSE’s
      continued listing standards. Katy is considered "below criteria" by the NYSE
      because the Company’s total market capitalization was less than $75 million over
      a consecutive 30 trading-day period and its shareholders’ equity was less than
      $75 million as of June 30, 2005. While Katy was in compliance with previous
      continued listing standards set forth by the NYSE, the NYSE adopted new
      continued listing standards, effective June 9, 2005, which increased the
      former standards significantly.





In
      accordance with the continued listing criteria set forth by the NYSE, the
      Company intends to present a plan to the NYSE within 45 days of its receipt
      of
      the notice, demonstrating how it intends to comply with the continued listing
      standards within 18 months of its receipt of the notice. The NYSE may take
      up to
      45 days to review and evaluate the plan after it is submitted. If the plan
      is
      accepted, the Company will be subject to quarterly monitoring for compliance
      by
      the NYSE. If the NYSE does not accept the plan or if the Company is unable
      to
      achieve compliance with the NYSE’s continued listing criteria through its
      implementation of the plan, the Company will be subject to NYSE trading
      suspension and delisting, at which time the Company would intend to apply to
      have its shares listed on another stock exchange or quotation system .





Entry
      into Material Definitive Agreement


Effective August
      17, 2005, the company entered into a two-year interest rate swap on a notional
      amount of $25.0 million in the first year and $15.0 million in the second year.
      The purpose of the swap is to limit the Company’s exposure to interest rate
      increases on a portion of the Bank of America Credit Agreement over the two-year
      term of the swap. The fixed interest rate under the swap at September 30, 2005
      and over the life of the agreement is 4.49%.





Item
      6.EXHIBITS





10.1
            ISDA
                Master Agreement and Schedule dated as of August
                11, 2005, between Bank of America, N.A. and Katy Industries, Inc.
                and
                Transaction Confirmation dated as of August 16,
                2005.





31.1
            Certification
                of Chief Executive Officer pursuant to
                Securities Exchange Act Rule 13a-14, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Chief Financial Officer pursuant to
                Securities Exchange Act Rule 13a-14, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.





32.1
            Certification
                of Chief Executive Officer pursuant to 18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.




32.2
            Certification
                of Chief Financial Officer pursuant to 18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002




-45-


Signatures
 
 Pursuant
        to the requirements of the Securities and Exchange Act of 1934, the registrant
        has duly caused this report to be signed on its behalf by the undersigned
        thereunto duly authorized.
 
 
 
 KATY
        INDUSTRIES, INC.
 Registrant
 
   DATE: November 15, 2005
              By:
              /s/ Anthony T. Castor
                  III
                Anthony
                  T. Castor III
                President
                  and Chief Executive OfficerBy:
              /s/ Amir Rosenthal
                Amir
                  Rosenthal
                Vice
                  President, Chief Financial Officer,
                General
                  Counsel and Secretary




-46-