United States
Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q/A

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2007

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-05558

Katy Industries, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		75-1277589 (I.R.S. Employer Identification No.)

2461 South Clark Street, Suite 630, Arlington, Virginia 22202
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (703) 236-4300

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.

Yes þ          No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o          No þ

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 April 30, 2007
Common Stock, $1 Par Value		7,951,177 Shares

 

 

EXPLANATORY NOTE

Restatement of Consolidated Financial Statements

We are filing this Amended Quarterly Report on Form 10-Q/A (“Amended Filing”) to our Quarterly Report on Form 10-Q for the three months ended March 31, 2007 (“Original Filing”) to amend and restate our consolidated financial statements and the related disclosures for the three months ended March 31, 2007 and 2006, as discussed in Note 1. The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on May 10, 2007. For further discussion, refer to the Annual Report on Form 10-K/A as of December 31, 2006 as filed on August 17, 2007.

On August 6, 2007, the Audit Committee of the Board of Directors, or the Audit Committee, of Katy Industries, Inc. (the “Company”), in consultation with management, concluded that our following previously issued financial statements should no longer be relied upon and should be restated based on identified errors: 1) the consolidated financial statements as of December 31, 2006 and 2005 and for the years then ended contained in the Company’s Annual Report on Form 10-K; and 2) the consolidated financial statements for the quarters ending March 31, 2006 and 2007, June 30, 2006, and September 30, 2006 contained in the Company’s corresponding Form 10-Qs. The unaudited quarterly financial information included in the Company’s Annual Report on Form 10-K as of December 31, 2006 has been updated in the Annual Report on Form 10-K/A, and the unaudited quarterly financial information included in the Company’s Quarterly Reports on Form 10-Q as of June 30, 2006 and September 30, 2006 will be updated as the Company files its corresponding Quarterly Reports for 2007.

In the second quarter of 2007, management of the Company noted discrepancies in its physical raw material inventory levels and the corresponding perpetual inventory records. These discrepancies led the Company to initiate an internal investigation which resulted in the identification of errors in the physical inventory count of raw material used for valuation purposes at the Company’s wholly-owned subsidiary, Continental Commercial Products, LLC (“CCP”). The Company has concluded these errors are isolated to fiscal 2005, fiscal 2006 and the three months ended March 31, 2007.

When management became aware of the issues referenced above, the Company, including the Audit Committee, initiated an investigation of the matter. Management has discussed the investigation, the resolution of the problems and the strengthening of internal controls with the Audit Committee.

Based on the results of the investigation, management and the Audit Committee determined that (a) the errors were caused by intentional acts of a CCP employee who improperly accounted for physical quantities of raw material inventory and who has since been dismissed; (b) the scope of the errors were contained in fiscal 2005, fiscal 2006 and the three months ended March 31, 2007; and (c) the errors were concentrated in the area discussed above.

Impact of Error on Previously filed Financial Statements

The impact of the raw material inventory error on loss from continuing operations and net loss is approximately ($0.2) million and ($0.6) million for the years ended December 31, 2005 and 2006, respectively. The impact of the raw material inventory error on loss from continuing operations and net loss is approximately ($0.2) million for the three months ended March 31, 2006, ($0.2) million and ($0.4) million for the three and six months ended June 30, 2006, ($0.2) million and ($0.6) million for the three and nine months ended September 30, 2006, and $0.1 million for the three months ended March 31, 2007. In addition, as part of the restatement, the Company has recorded additional items, certain of which were previously identified and determined to be immaterial. The impact of these additional items on net loss is approximately $0.1 million and $0.2 million for the three months ended March 31, 2007 and 2006, respectively, which is allocated entirely to loss from continuing operations.

Internal Control Considerations

In connection with the Company’s evaluation of the restatement described above, management has concluded that the restatement is the result of previously unidentified material weaknesses in the Company’s internal control over financial reporting, as discussed in Item 9A of the Company’s 10-K/A. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. Management has also determined that the Company’s disclosure controls and procedures were ineffective as of December 31, 2005 and 2006, March 31, 2006 and 2007, June 30, 2006, and September 30, 2006. For a discussion of management’s consideration of the Company’s disclosure controls and procedures, see Part I, Item 4 included in this Amended Filing.

These control deficiencies resulted in the restatement of the Company’s consolidated financial statements for December 31, 2005 and 2006, March 31, 2006 and 2007, June 30, 2006, and September 30, 2006. Additionally, these control deficiencies could result in further misstatements to the Company’s financial statements, which could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management determined that these control deficiencies represented material weaknesses in internal control over financial reporting.

All of the information in this Amended Filing does not reflect events occurring after the Original Filing.

For the convenience of the reader, this Amended Filing sets forth the Original Filing in its entirety, as modified and superseded where necessary to reflect the restatement. The following items have been amended principally as a result of, and to reflect, the restatement, and no other information in the Original Filing is amended hereby as a result of the restatement:

Part I — Item 1: Financial Statements;
Part I — Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part I — Item 4: Controls and Procedures;
Part II — Item 1A: Risk Factors; and
Part I1 — Item 6: Exhibits.

In accordance with applicable SEC rules, this Amended Filing includes current dated certifications from our Chief Executive Officer and Chief Financial Officer.

The remaining items contained within this Amended Filing consist of all other Items originally contained in the Form 10-Q and are included for the convenience of the reader. The sections of the Form 10-Q which were not amended are unchanged and continue in full force and effect as originally filed. This Amended Filing speaks of the date of the original filing on the Form 10-Q and has not been updated to reflect events occurring subsequent to the original filing date.

KATY INDUSTRIES, INC.
FORM 10-Q
March 31, 2007

INDEX

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

PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
(Unaudited)

ASSETS

		As Restated,
		see Note 1
		March 31,				December 31,
		2007				2006
CURRENT ASSETS:
Cash and cash equivalents		$	2,919			$	7,392
Accounts receivable, net			47,811				55,014
Inventories, net			60,717				54,980
Other current assets			3,592				2,991
Asset held for sale			—				4,483
Total current assets			115,039				124,860
OTHER ASSETS:
Goodwill			665				665
Intangibles, net			6,358				6,435
Other			8,576				8,990
Total other assets			15,599				16,090
PROPERTY AND EQUIPMENT:
Land and improvements			336				336
Buildings and improvements			9,710				9,669
Machinery and equipment			120,701				119,703
			130,747				129,708
Less — Accumulated depreciation			(89,780	)			(87,964	)
Property and equipment, net			40,967				41,744
Total assets		$	171,605			$	182,694

See Notes to Condensed Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

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

See Notes to Condensed Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

		As Restated, see Note 1
		2007				2006
Net sales		$	94,803			$	75,818
Cost of goods sold			86,346				65,553
Gross profit			8,457				10,265
Selling, general and administrative expenses			11,440				12,289
Severance, restructuring and related charges			244				782
(Gain) loss on sale of assets			(120	)			102
Operating loss			(3,107	)			(2,908	)
Interest expense			(1,949	)			(1,771	)
Other, net			70				341
Loss from continuing operations before provision for income taxes			(4,986	)			(4,338	)
Provision for income taxes from continuing operations			(459	)			(262	)
Loss from continuing operations			(5,445	)			(4,600	)
Loss from operations of discontinued businesses (net of tax)			—				(389	)
Gain on sale of discontinued businesses (net of tax)			1,666				—
Loss before cumulative effect of a change in accounting principle			(3,779	)			(4,989	)
Cumulative effect of a change in accounting principle (net of tax)			—				(756	)
Net loss		$	(3,779	)		$	(5,745	)
Loss per share of common stock — Basic and diluted
Loss from continuing operations		$	(0.69	)		$	(0.57	)
Discontinued operations			0.21				(0.05	)
Cumulative effect of a change in accounting principle			—				(0.10	)
Net loss		$	(0.48	)		$	(0.72	)
Weighted average common shares outstanding (thousands):
Basic and diluted			7,951				7,971

See Notes to Condensed Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 and 2006
(Amounts in Thousands)
(Unaudited)

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

See Notes to Condensed Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited)

(1) Restatement of Prior Financial Information

Restatement — As a result of accounting errors in the raw material inventory records, management and the Company’s Audit Committee determined on August 6, 2007 that the Company’s consolidated financial statements for the three months ended March 31, 2007 and 2006 should no longer be relied upon. The Company’s decision to restate its consolidated financial statements is based on facts obtained by management and the results of an independent investigation of the physical raw material inventory counting process at Continental Commercial Products, LLC (“CCP”). These procedures resulted in the identification of an intentional overstatement of raw material inventory when completing the physical inventory. At the time of the physical inventories, the Company did not have sufficient controls in place to ensure that the accurate physical raw material inventory on hand was properly accounted for and reported in the proper period. For additional information on the restatement, refer to the Company’s Annual Report on Form 10-K/A filed on August 17, 2007.

(A) Impact of error on previously filed financial statements — The impact of the raw material inventory error on loss from continuing operations and net loss is approximately ($0.2) million for the three months ended March 31, 2006, and $0.1 million for the three months ended March 31, 2007.

Other Out-of-Period Adjustments and Revisions — Due to the adjustments discussed above that required a restatement of our previously filed consolidated financial statements, we are also correcting these out-of-period adjustments and revisions by recording them in the proper periods.

The out-of-period adjustments and revisions in the table include the following as referenced:

(B) Deferred compensation — In conjunction with a retirement compensation program, the Company made an adjustment for approximately $0.4 million in 2005 associated with the accounting for related compensation expense. The Company had originally recorded the out-of-period adjustment in the first two quarters of 2006; therefore, the Company reduced compensation expense by the corresponding amount in 2006. The Company reduced compensation expense by $0.2 million for the three months ended March 31, 2006.

(C) Inventory reserves — The Company recorded an adjustment of approximately $0.1 million to increase inventory reserves and cost of goods sold in 2006 associated with our lower of cost or market evaluation. The Company had originally recorded the out-of-period adjustment in the first quarter of 2007; therefore, the Company reduced costs of goods sold by the corresponding amount in the first quarter of 2007.

(D) Revision of SESCO as a continuing operation — For all periods presented, the Company previously inappropriately reported the results from the Savannah Energy Systems Company Partnership operation as discontinued operations, as described further in Note 5. As a result, the Company revised for the three months ended March 31, 2006 $31 thousand from loss from operations of discontinued businesses into interest expense within continuing operations.

All affected amounts described in these Notes to Consolidated Financial Statements have been restated. As a result of this restatement, the Company’s financial results are adjusted as follows:

Consolidated Balance Sheets
(Amounts in thousands)

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

Consolidated Statements of Operations
(Amounts in thousands, except per share data)

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

Consolidated Statements of Cash Flows
(Amounts in thousands)

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

The comprehensive loss of approximately $4.4 million and $6.1 million for the three months ended March 31, 2007 and 2006, respectively, as previously reported was restated to a comprehensive loss of $4.2 million and $6.1 million, respectively. The change resulted from changes within our net loss attributable to common stockholders.

Financial statement footnotes affected by this restatement are as follows:

2. Significant Accounting Policies;
8. Income Taxes;
10. Industry Segments and Geographic Information; and
13. Discontinued Operations.

(2) 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, which do not meet the criteria of a variable interest entity and are not majority owned or where the Company exercises significant influence, are reported using the equity method. The condensed consolidated financial statements at March 31, 2007 and December 31, 2006 and for the three month periods ended March 31, 2007 and March 31, 2006 are unaudited and reflect all adjustments (consisting only of normal recurring 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, 2006. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

Use of Estimates and Reclassifications

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.

Certain reclassifications associated with the presentation of discontinued operations were made to the 2006 amounts in order to conform to the 2007 presentation.

Inventories

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

		As Restated,
		see Note 1
		March 31,				December 31,
		2007				2006
Raw materials		$	15,788			$	14,777
Work in process			1,279				613
Finished goods			54,012				47,230
Inventory reserves			(6,833	)			(3,905	)
LIFO reserve			(3,529	)			(3,735	)
		$	60,717			$	54,980

At March 31, 2007 and December 31, 2006, approximately 21% and 23%, 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 $3.5 million and $3.7 million at March 31, 2007 and December 31, 2006, respectively. The primary increase in the inventory reserves relates to an adjustment for approximately $2.4 million associated with the net realizable value and potential obsolescence of inventory within the Electrical Products Group.

Property 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 method; 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 $1.9 million and $2.1 million for the three month periods ended March 31, 2007 and 2006, respectively.

Stock Options and Other Stock Awards

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment (“SFAS No. 123R”), which sets accounting requirements for “share-based” compensation to employees, requires companies to recognize the grant date fair value of stock options and other equity-based compensation issued to employees and disallows the use of intrinsic value method of accounting for stock compensation. The Company has adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized during the three month period ended March 31, 2007 includes: a) compensation cost for all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS No. 123R amortized over the options’ vesting period and b) compensation cost for outstanding stock appreciation rights based on the March 31, 2007 fair value estimated in accordance with SFAS No. 123R. Compensation cost recognized during the three month period ended March 31, 2006 includes: a) compensation cost for all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS No. 123R amortized over the options’ vesting period; b) compensation cost for stock appreciation rights granted prior to, but vested as of January 1, 2006, based on the January 1, 2006 fair value estimated in accordance with SFAS No. 123R; and c) compensation cost for outstanding stock appreciation rights as of March 31, 2006 based on the March 31, 2006 fair value estimated in accordance with SFAS No. 123R.

The following table shows total compensation (income) expense included in the Condensed Consolidated Statement of Operations for the three month periods ended March 31, 2007 and 2006:

		Three Months Ended March 31,
		2007				2006
Selling, general and administrative expense		$	(85	)		$	489
Cumulative effect of a change in accounting principle			—				756
		$	(85	)		$	1,245

The fair value for stock options was estimated at the date of grant using a Black-Scholes option pricing model. The Company used the simplified method, as allowed by Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment, for estimating the expected term by averaging the minimum and maximum lives expected for each award. In addition, the Company estimated volatility by considering its historical stock volatility over a term comparable to the remaining expected life of each award. The risk-free interest rate was the current yield available on U.S. treasury rates with issues with a remaining term equal in term to each award. The Company estimates forfeitures using historical results. Its estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimate. The assumptions for expected term, volatility and risk-free rate are presented in the table below:

Expected term (years)			5.3 - 6.5
Volatility			53.8% - 57.6%
Risk-free rate			3.98% - 4.48%

The fair value for stock appreciation rights, a liability award, was estimated at the effective date of SFAS No. 123R, and March 31, 2007 and 2006, using a Black-Scholes option pricing model. The Company estimated the expected term to be equal to the average between the minimum and maximum lives expected for each award. In addition, the Company estimated volatility by considering its historical stock volatility over a term comparable to the remaining expected life of each award. The risk-free interest rate was the current yield available on U.S. treasury rates with issues with a remaining term equal in term to each award. The Company estimates forfeitures using historical results. Its estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimate. The assumptions for expected term, volatility and risk-free rate are presented in the table below:

		March 31,				March 31,
		2007				2006
Expected term (years)			0.1 - 5.3				3.0 - 5.3
Volatility			53.7% - 80.6%				48.2% - 55.0%
Risk-free rate			4.54% - 5.07%				4.37% - 4.83%

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 when the interest expense on the debt is recognized. In connection with the Company’s adoption of SFAS No. 133, Accounting for Derivative Financial Instruments and Hedging Activities (“SFAS No. 133”), the Company is required to recognize all derivatives, such as interest rate swaps, on its balance sheet at fair value. As the derivative instrument held by the Company is classified as a cash flow hedge under SFAS No. 133, changes in the fair value of the derivative will be 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 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 SFAS No. 133, the Company recorded an asset of $0.1 million on its balance sheet at March 31, 2007, with changes in fair market value included in other comprehensive income.

The Company reported no gain or loss for the three months ended March 31, 2007, as a result of any 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 March 31, 2007 are as follows (amounts in thousands):

Notional Amount		Maturity				Rate Paid				Rate Received				Fair Value (2)
$15,000		August 17, 2007					4.49	%		LIBOR (1)				$	58

(1)		LIBOR rate is determined on the 23rd of each month and continues up to and including the maturity date.
(2)		The fair value is the mark-to-market value.

Comprehensive Loss

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

		As Restated, see Note 1
		Three Months Ended
		March 31,
		2007				2006
Net loss		$	(3,779	)		$	(5,745	)
Foreign currency translation losses			(334	)			(417	)
Unrealized (losses) gains on interest rate swap			(29	)			93
Other			(17	)			—
			(380	)			(324	)
Comprehensive loss		$	(4,159	)		$	(6,069	)

(3) New Accounting Pronouncements

As discussed in Note 9, the Company adopted, effective January 1, 2007, Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”), which describes a comprehensive model for the measurement, recognition, presentation, and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities’ full knowledge of the position and all relevant facts, but without considering time values.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This standard does not require any new fair value measurements but provides guidance in determining fair value measurements presently used in the preparation of financial statements. For the Company, SFAS No. 157 is effective January 1, 2008. The Company is assessing the impact this statement may have in its future financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact this statement may have in its future financial statements.

(4) Intangible Assets

Following is detailed information regarding Katy’s intangible assets (amounts in thousands):

		March 31,												December 31,
		2007												2006
		Gross				Accumulated				Net Carrying				Gross				Accumulated				Net Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Patents		$	1,583			$	(1,093	)		$	490			$	1,511			$	(1,065	)		$	446
Customer lists			10,454				(8,157	)			2,297				10,454				(8,111	)			2,343
Tradenames			5,613				(2,410	)			3,203				5,612				(2,345	)			3,267
Other			441				(73	)			368				441				(62	)			379
Total		$	18,091			$	(11,733	)		$	6,358			$	18,018			$	(11,583	)		$	6,435

All of Katy’s intangible assets are definite long-lived intangibles. Katy recorded amortization expense on intangible assets of $0.2 million for both the three month periods ended March 31, 2007 and 2006. Estimated aggregate future amortization expense related to intangible assets is as follows (amounts in thousands):

2007 (remainder)		$	639
2008			635
2009			600
2010			547
2011			507
2012			505
Thereafter			2,925
		$	6,358

(5) Savannah Energy Systems Company Partnership

In 1984, Savannah Energy Systems Company (“SESCO”), an indirect wholly owned subsidiary of Katy, entered into a series of contracts with the Resource Recovery Development Authority of the City of Savannah, Georgia (“the Authority”) to construct and operate a waste-to-energy facility. The facility would be owned and operated by SESCO solely for the purpose of processing and disposing of waste from the City of Savannah.

On April 29, 2002, SESCO entered into a partnership agreement with Montenay Power Corporation and its affiliates (“Montenay”) that turned over the control of SESCO’s waste-to-energy facility to Montenay Savannah Limited 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.

On June 27, 2006, the Company and Montenay amended the partnership interest purchase agreement in order to allow the Company to completely exit from the SESCO operations and related obligations. Montenay purchased the Company’s limited partnership interest for $0.1 million and a reduction of approximately $0.6 million in the face amount due to Montenay as agreed upon in the original partnership agreement.

The final payment of $0.4 million due to Montenay as of December 31, 2006 was reflected in accrued expenses in the Condensed Consolidated Balance Sheets, and was paid in January 2007.

(6) Indebtedness

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

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

Aggregate remaining scheduled maturities of the Term Loan as of March 31, 2007 are as follows (amounts in thousands):

2007		$	1,125
2008			1,500
2009			10,343
		$	12,968

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 (the “Bank of America Credit Agreement”). The current Bank of America Credit Agreement, as amended is a $93.0 million facility with a $13.0 million term loan (“Term Loan”) and a $80.0 million revolving credit facility (“Revolving Credit Facility”). The Bank of America Credit Agreement is an asset-based lending agreement and involves a syndicate of four banks.

The Revolving Credit Facility has an expiration date of April 20, 2009 and its borrowing base is determined by eligible inventory and accounts receivable. Unused borrowing availability on the Revolving Credit Facility was $14.2 million at March 31, 2007. 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 Term Loan also has a final maturity date of April 20, 2009 with quarterly payments of $0.4 million, as amended and beginning April 1, 2007. A final payment of $10.0 million is scheduled to be paid in April 2009. The Term Loan is collateralized by the Company’s property, plant and equipment.

The Company’s 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 the Company conducts 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, the Company’s largest letters of credit relate to its casualty insurance programs. At March 31, 2007, total outstanding letters of credit were $6.6 million.

On March 8, 2007 the Company obtained the Eighth Amendment to the Bank of America Credit Agreement. The Eighth Amendment eliminates the Fixed Charge Coverage Ratio for the remaining life of the debt agreement and requires the Company to maintain a minimum level of availability (eligible collateral base less outstanding borrowings and letters of credit) such that its eligible collateral must exceed the sum of its outstanding borrowings and letters of credit by at least $5.0 million from the effective date of the Eighth Amendment through September 29, 2007 and by $7.5 million from that point through December 2007. Thereafter, the Company is required to maintain a minimum level of availability such that eligible collateral must exceed the sum of its outstanding borrowings and letters of credit by at least $5.0 million for the first three quarters of the year and $7.5 million for the fourth quarter. In addition, the Company reduced its Revolving Credit Facility from $90.0 million to $80.0 million.

If the Company is unable to comply with the terms of the amended covenants, it could seek to obtain further amendments and pursue increased liquidity through additional debt financing and/or the sale of assets. It is possible, however, the Company may not be able to obtain further amendments from the lender or secure additional debt financing or liquidity through the sale of assets on favorable terms or at all. However, the Company believes that it will be able to comply with all covenants, as amended, throughout 2007.

Effective since April 2005, interest rate margins have been set at the largest margins set forth in the Bank of America Credit Agreement, 275 basis points over applicable LIBOR rates for Revolving Credit Facility borrowings and 300 basis points over LIBOR for borrowings under the Term Loan. In accordance with the Bank of America Credit Agreement, margins on the Term Loan will drop an additional 25 basis points if the balance of the Term Loan is reduced below $10.0 million. Interest accrues at higher margins on prime rates for swing loans, the amounts of which were nominal at March 31, 2007.

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 March 31, 2007 and over the life of the agreement is 4.49%.

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 March 31, 2007. For the three month periods ended March 31, 2007 and 2006, the Company had amortization of debt issuance costs, included within interest expense, of $0.6 million and $0.3 million, respectively. Included in amortization of debt issuance costs is approximately $0.3 million for the three month period ended March 31, 2007 of debt issuance costs written off due to the reduction in the Revolving Credit Facility on March 8, 2007. In addition, the Company incurred $0.1 million and $0.2 million associated with amending the Bank of America Credit Agreement, as discussed above, for the three month periods ended March 31, 2007 and 2006, respectively.

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, 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. 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 is a result only of the combination of the lockbox agreements and 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 had not notified the Company of any indication of a MAE at March 31, 2007, and the Company was not in default of any provision of the Bank of America Credit Agreement at March 31, 2007.

(7) Retirement Benefit Plans

Several 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 month periods ended March 31, 2007 and 2006 are as follows (amounts in thousands):

		Pension Benefits								Other Benefits
		March 31,				March 31,				March 31,				March 31,
		2007				2006				2007				2006
Components of net periodic benefit cost:
Service cost		$	2			$	2			$	—			$	—
Interest cost			23				22				51				36
Expected return on plan assets			(24	)			(22	)			—				—
Amortization of prior service cost			—				—				22				14
Amortization of net loss			13				14				4				10
Net periodic benefit cost		$	14			$	16			$	77			$	60

Required contributions to the pension plans for 2007 are $10 thousand and Katy made contributions of $35 thousand during the first quarter of 2007.

(8) Stock Incentive Plans

Stock Options

The following table summarizes stock option activity under each of the applicable Company’s plans:

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
		Options				Price				Life				(in thousands)
Outstanding at December 31, 2006			1,718,000			$	3.66
Granted			—			$	0.00
Exercised			—			$	0.00
Cancelled			—			$	0.00
Outstanding at March 31, 2007			1,718,000			$	3.66			6.45 years				$	—
Vested and Exercisable at March 31, 2007			1,098,000			$	4.20			5.44 years				$	—

As of March 31, 2007, total unvested compensation expense associated with stock options amounted to $0.2 million and is being amortized on a straight-line basis over the respective option’s vesting period. The weighted average period in which the above compensation cost will be recognized is 0.7 years as of March 31, 2007.

Stock Appreciation Rights

The following table summarizes SARs activity under each of the applicable Company’s plans:

Non-Vested at December 31, 2006			53,434
Granted			—
Vested			(26,667	)
Non-Vested at March 31, 2007			26,767
Total Outstanding at March 31, 2007			798,281

For the three months ended March 31, 2007 and 2006, total compensation (income) expense associated with stock appreciation rights amounted to approximately ($0.2) million and $1.0 million, respectively.

(9) Income Taxes

The Company adopted FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized approximately a $1.1 million increase in the liability for unrecognized tax benefits, which was accounted for as an increase of $0.1 million to the January 1, 2007 balance of deferred tax assets and a reduction of $1.0 million to the January 1, 2007 balance of retained earnings.

Included in the balance at March 31, 2007 are $1.8 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would have accelerated the payment of cash to the taxing authority to an earlier period.

The Company recognizes interest and penalties accrued related to the unrecognized tax benefits in the provision for income taxes. During the three months ended March 31, 2007, the Company recognized an insignificant amount in interest and penalties. The Company had approximately $0.3 million for the payment of interest and penalties accrued at March 31, 2007.

The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will change within twelve months of the date of adoption. The Company has certain tax return years subject to statutes of limitation which will close within twelve months of the date of adoption. Unless challenged by tax authorities, the closure of those statutes of limitation is expected to result in the recognition of uncertain tax positions in the amount of $0.2 million. The Company has uncertain tax positions relating to transfer pricing practices and filings in certain jurisdictions, none of which are currently under examination.

The Company and all of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. The Company’s foreign subsidiaries file income tax returns in certain foreign jurisdictions since they have operations outside the U.S. The Company and its subsidiaries are generally no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2002.

As of March 31, 2007 and December 31, 2006, the Company had deferred tax assets, net of deferred tax liabilities and valuation allowances, of $1.1 million and $1.0 million, respectively. Domestic net operating loss (“NOL”) carry forwards comprised $35.3 million of the deferred tax assets for both periods. 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 March 31, 2007 and December 31, 2006 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 months ended March 31, 2007 and 2006 reflects current expense for state and foreign income taxes. Tax benefits were not recorded on the pre-tax net loss for the first quarter of 2007 as valuation allowances were recorded related to deferred tax assets created as a result of operating losses in the United States and certain foreign jurisdictions. As a result of accumulated operating losses in those jurisdictions, the Company has concluded that it was more likely than not that such benefits would not be realized.

(10) 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 the 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 and closure 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. While ultimate liability with respect to this matter is not easy to determine, the Company has recorded and accrued amounts that it deems reasonable for prospective liabilities with respect to this matter.

Asbestos Claims

A. The Company has been named as a defendant in ten lawsuits filed in state court in Alabama by a total of approximately 324 individual plaintiffs. There are over 100 defendants named in each case. In all ten 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 eight 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 2,086 cases pending in Michigan, New Jersey, New York, 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.

C. LaBour Pump Company, a former subsidiary of the Company, has been named as a defendant in over 364 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 (now 1:03-CV-1342-LJM-VSS, U.S. District Court, Southern District of Indiana). The case against Woods Industries, Inc. (“Woods”) was dismissed by order of the District Court dated April 9, 2007. As reflected below, however, motions to reconsider and/or an appeal are likely, and certain disputes remain between Woods, Katy, and certain of Woods’ codefendants.

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. 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.

On August 11, 2005, the Court dismissed with prejudice all of the federal and Indiana RICO claims asserted in the Second Amended Complaint against Woods. During subsequent discovery, Defendants moved for sanctions for the Plaintiffs’ asserted failures to abide by the rules of discovery and produce certain documents and witnesses, including the sanction of dismissal of the case with prejudice. Defendants also moved for summary judgment on the remaining claims on January 16, 2007. Plaintiffs also cross-moved for summary judgment in their favor on their claims under the alleged guarantees purportedly executed by old Woods Wire Products, Inc.

On April 9, 2007, while the parties’ summary judgment motions were still being briefed, the Court granted Defendants’ motion for sanctions and dismissed all of Plaintiffs’ claims with prejudice. The Court’s dismissal order dismisses all remaining claims against Woods.

Katy expects Plaintiffs to request a reconsideration of and/or appeal the Court’s dismissal orders, although no such request or notice of appeal has yet been filed. Plaintiffs’ claims as originally pled sought damages in excess of $24.0 million, requested that the Court void certain asset sales as purported “fraudulent transfers” (including the 1993 Woods Wire Products, Inc./Woods asset sale), and 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 Plaintiffs. 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.

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.

(11) 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 products. The Electrical Products Group is a marketer and distributor of consumer electrical corded products. For all periods presented, information for the Maintenance Products Group excludes amounts related to the United Kingdom consumer plastics and Metal Truck Box business units as the units are classified as discontinued operations as discussed further in Note 13. The following table sets forth information by segment (amounts in thousands):

						As Restated, see Note 1
						Three months ended March 31,
						2007				2006
Maintenance Products Group
Net external sales						$	50,308			$	49,973
Operating income							907				800
Operating margin							1.8	%			1.6	%
Depreciation and amortization							1,873				1,968
Capital expenditures							1,017				653
Electrical Products Group
Net external sales						$	44,495			$	25,845
Operating (loss) income							(1,224	)			59
Operating (deficit) margin							(2.8	%)			0.2	%
Depreciation and amortization							165				239
Capital expenditures							113				163
Total
Net external sales		—		Operating segments		$	94,803			$	75,818
				Total		$	94,803			$	75,818
Operating loss		—		Operating segments		$	(317	)		$	859
		—		Unallocated corporate			(2,666	)			(2,883	)
		—		Severance, restructuring and related charges			(244	)			(782	)
		—		Gain (loss) on sale of assets			120				(102	)
				Total		$	(3,107	)		$	(2,908	)
Depreciation and amortization		—		Operating segments		$	2,038			$	2,207
		—		Unallocated corporate			34				34
				Total		$	2,072			$	2,241
Capital expenditures		—		Operating segments		$	1,130			$	816
				Total		$	1,130			$	816
						March 31,				December 31,
						2007				2006
Total assets		—		Maintenance Products Group		$	98,454			$	95,119
		—		Electrical Products Group			66,253				74,025
		—		Other [a]			2,217				6,700
		—		Unallocated corporate			4,681				6,850
				Total		$	171,605			$	182,694

[a]		Amounts shown as “Other” represent items associated with Sahlman Holding Company, Inc., the Company’s equity method investment in both periods. For December 31, 2006, amount also includes the real assets of the United Kingdom consumer plastics business unit, which is classified as an asset held for sale at December 31, 2006.

(12) Severance, Restructuring and Related Charges

Over the past three years, the Company has initiated several cost reduction and facility consolidation initiatives, resulting in severance, restructuring and related charges. Key initiatives were the consolidation of the St. Louis, Missouri manufacturing/distribution facilities, shutdown of both Woods U.S. and Woods Canada manufacturing as well as the consolidation of the Glit facilities. These initiatives resulted from the on-going strategic reassessment of the Company’s various businesses as well as the markets in which they operate.

A summary of charges by major initiative is as follows (amounts in thousands):

		Three Months Ended March 31,
		2007				2006
Consolidation of St. Louis manufacturing/distribution facilities		$	189			$	699
Consolidation of Glit facilities			19				—
Shutdown of Woods Canada manufacturing			36				—
Corporate office relocation			—				83
Total severance, restructuring and related charges		$	244			$	782