-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OF4w2UGrTxoCvSugXPQIW/SSbE6zG+DoD95H7wZiYbms1bTIe4B0LjF5595aJhl0 /3NJI9BrBgb4x9NFus5HZw== 0001140361-05-009819.txt : 20051117 0001140361-05-009819.hdr.sgml : 20051117 20051116174515 ACCESSION NUMBER: 0001140361-05-009819 CONFORMED SUBMISSION TYPE: 10-Q CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051117 DATE AS OF CHANGE: 20051116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KATY INDUSTRIES INC CENTRAL INDEX KEY: 0000054681 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 751277589 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05558 BUSINESS ADDRESS: STREET 1: 765 STRAITS TURNPIKE STREET 2: SUITE 2000 CITY: MIDDLEBURY STATE: CT ZIP: 06762 BUSINESS PHONE: 2035980397 MAIL ADDRESS: STREET 1: 765 STRAITS TURNPIKE STREET 2: SUITE 2000 CITY: MIDDLEBURY STATE: CT ZIP: 06762 10-Q 1 form10-q.htm KATY INDUSTRIES, INC. 10-Q 9/30/05 EX-10-1
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.

 
Yes x
  
No o
  


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


 
Yes o
  
No x
  


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, 2005
Common Stock, $1 Par Value
  
7,951,377
 
KATY INDUSTRIES, INC.
FORM 10-Q
September 30, 2005


INDEX

       
     
Page
PART I
FINANCIAL INFORMATION
  
       
 
Item 1.
Financial Statements:
  
       
     
   
       
     
     
   
       
     
   
       
   
       
   
   
       
 
       
 
       
       
PART II
OTHER INFORMATION
  
       
 
       
 
       
 
       
 
       
 
       
   
     



 
-2-






ASSETS
 

   
September 30,
  
December 31,
  
   
2005
 
2004
  
CURRENT ASSETS:
          
           
Cash and cash equivalents  
  
$
8,627
  
$
8,525
  
Accounts receivable, net  
    
76,084
   
66,689
 
Inventories, net 
    
60,536
   
65,674
 
Other current assets 
    
4,534
   
4,233
 
               
 Total current assets
    
149,781
   
145,121
 
               
               
OTHER ASSETS:
              
               
Goodwill 
    
2,239
   
2,239
 
Intangibles, net 
    
7,814
   
7,428
 
Other 
    
9,036
   
9,946
 
               
 Total other assets
    
19,089
   
19,613
 
               
               
PROPERTY AND EQUIPMENT
              
Land and improvements 
    
1,766
   
1,897
 
Buildings and improvements 
    
14,353
   
13,537
 
Machinery and equipment 
    
138,056
   
132,825
 
               
     
154,175
   
148,259
 
Less - Accumulated depreciation 
    
(97,009
)
  
(88,529
)
               
 Property and equipment, net
    
57,166
   
59,730
 
               
 Total assets
  
$
226,036
  
$
224,464
  
               
See 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
 
 
2004
  
CURRENT LIABILITIES:
              
               
Accounts payable 
  
$
51,284
  
$
39,079
  
Accrued compensation 
    
4,438
   
5,269
 
Accrued expenses 
    
41,441
   
39,939
 
Current maturities of long-term debt 
    
3,472
   
2,857
 
Revolving credit agreement 
    
41,085
   
40,166
 
               
 Total current liabilities
    
141,720
   
127,310
 
               
LONG-TERM DEBT, less current maturities
    
13,571
   
15,714
 
               
OTHER LIABILITIES
    
10,772
   
12,855
 
               
Total liabilities
    
166,063
   
155,879
 
               
COMMITMENTS AND CONTINGENCIES (Note 9)
    
-
   
-
 
               
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 9,822,204 shares
    
9,822
   
9,822
 
Additional paid-in capital 
    
27,016
   
25,111
 
Accumulated other comprehensive income  
    
3,338
   
4,564
 
Accumulated 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
   
68,585
 
               
 Total liabilities and stockholders' equity
  
$
226,036
  
$
224,464
  
               
See Notes to Condensed Consolidated Financial Statements.
            

 
-4-


 
   
Three Months
  
Nine Months
  
 
Ended September 30,
  
 Ended September 30,
  
     
2005
 
 
2004
 
 
2005
 
 
2004
  
 
                          
Net sales
  
$
140,557
  
$
135,426
  
$
334,280
  
$
335,843
  
Cost of goods sold
    
122,896
   
117,569
   
295,310
   
288,095
 
Gross profit 
    
17,661
   
17,857
   
38,970
   
47,748
 
Selling, general and administrative expenses
    
13,861
   
14,846
   
40,100
   
43,834
 
Stock 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
)
  
2,504
 
Interest 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
   
1,617
 
                           
Net 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
   
7,875
 
 Diluted
    
26,880
   
7,870
   
7,948
   
7,875
 
                           
See Notes to Condensed Consolidated Financial Statements.
                         

 

-5-



   
2005
 
2004
  
Cash flows from operating activities:
              
Net loss 
  
$
(9,361
)
$
(2,188
)
Depreciation and amortization 
    
8,606
   
11,102
 
Amortization of debt issuance costs 
    
844
   
804
 
Stock option expense 
    
1,953
   
-
 
Gain on sale of assets 
    
(353
)
  
(546
)
     
1,689
   
9,172
 
Changes 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
   
5,546
 
 Accrued 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
   
14
 
Proceeds from sale of assets 
    
931
   
5,545
 
Net cash used in investing activities 
    
(6,406
)
  
(5,279
)
               
Cash flows from financing activities:
              
Net borrowings on revolving loans 
    
1,045
   
12,536
 
Proceeds of term loans 
    
-
   
18,152
 
Repayments 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
)
  
25,930
 
Effect of exchange rate changes on cash and cash equivalents
    
166
   
(117
)
Net increase in cash and cash equivalents
    
102
   
1,878
 
Cash and cash equivalents, beginning of period
    
8,525
   
6,748
 
Cash and cash equivalents, end of period
  
$
8,627
  
$
8,626
  
               
See Notes to Condensed Consolidated Financial Statements
              

 
-6-



(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
  
 2004
  
                 
 
Raw materials
  
$
21,045
  
$
23,220
  
 
Work in process
    
1,766
   
1,826
 
 
Finished goods
    
42,640
   
45,299
 
 
Inventory 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
  
$
1,237
  
Additions
    
330
 
Accretion expense
    
36
 
Changes in estimates, including timing
    
32
 
Payments
    
(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 Months
  
 
  
Ended September 30,
  
Ended September 30,
  
     
2005
 
 
2004
 
 
2005
 
 
2004
  
Net income (loss) attributable to common stockholders,
  
$
1,333
  
$
(2,946
)
$
(9,361
)
$
(12,934
)
as reported
                          
Add: Stock-based employee compensation expense
                          
included in reported net income (loss), with no related
                          
tax effects
    
-
   
-
   
1,953
   
-
 
Deduct: Total stock-based employee
                          
compensation expense determined under fair
                          
value based method for all awards, with no
                          
related 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 Company 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 ended  
 
 
September 30, 2005  
  
Basic EPS
  
 Income
 
 Shares
 
 Per-share amount
  
                     
Net income attributable to
                    
common stockholders
  
$
1,333
    
7,951
 
$
0.17
  
                     
Effect of Dilutive Securities [a]
                    
                     
Stock options
          
70
       
                     
Convertible preferred stock
          
18,859
       
                     
Diluted 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
  
2004
  
   
Gross
 
Accumulated
 
Net Carrying
 
Gross
 
Accumulated
 
Net Carrying
 
 
  
Amount
  
Amortization
  
Amount
  
Amount
  
Amortization
  
Amount
  
Patents
 
$
1,380
  
$
(800
)
$
580
  
$
1,114
  
$
(727
)
$
387
  
Customer lists
   
10,647
   
(7,795
)
  
2,852
   
10,666
   
(7,619
)
  
3,047
 
Tradenames
   
5,508
   
(1,794
)
  
3,714
   
5,531
   
(1,537
)
  
3,994
 
Other
   
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
  
$
1,100
  
2007
    
1,100
 
2008
    
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
  
$
8,370
  
2006
    
15,300
 
Total
  
$
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
 
2004
  
           
Term loan payable under the Bank of America Credit Agreement, interest
             
based on LIBOR and Prime Rates (6.875% - 8%), due through 2009
  
$
16,428
  
$
18,571
  
Revolving loans payable under the Bank of America Credit Agreement,
              
interest based on LIBOR and Prime Rates (6.5% - 7.75%)
    
41,085
   
40,166
 
Other
    
615
   
-
 
Total debt
    
58,128
   
58,737
 
Less 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
 $
714
2006
  
2,857
2007
  
2,857
2008
  
2,857
2009
  
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 Benefits
 
 
 
Three Months
 
Nine Months
 
 
 
Ended September 30,
 
Ended September 30,
 
 
 
 
2005
 
 
2004
 
 
2005
 
 
2004
  
                           
                           
Components of net periodic benefit cost:
                          
Service cost
  
$
2
  
$
1
  
$
6
  
$
3
  
Interest cost
    
23
   
33
   
70
   
97
 
Expected return on plan assets
    
(25
)
  
(33
)
  
(77
)
  
(98
)
Amortization of net gain
    
20
   
18
   
59
   
52
 
Net periodic benefit cost
  
$
20
  
$
19
  
$
58
  
$
54
  

-16-

 
 
Other Benefits
 
 
 
Three Months
 
Nine Months
 
 
 
Ended September 30,
 
Ended September 30,
 
 
 
2005
 
2004
 
2005
 
2004
  
                   
                           
Components of net periodic benefit cost:
                          
Service cost
  
$
-
  
$
7
  
$
-
  
$
21
  
Interest cost
    
47
   
40
   
142
   
120
 
Amortization of prior service cost
   
15
   
15
   
45
   
45
 
Amortization 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 Ended
  
 
                
September 30, 
    
September 30,
  
                 
2005
 
 
2004
 
 
2005
 
 
2004
  
Maintenance Products Group
                                      
Net external sales
              
$
64,013
  
$
72,218
  
$
189,355
  
$
212,444
  
Operating (loss) income
                
591
   
74
   
(3,937
)
$
1,121
  
Operating (deficit) margin
               
0.9
%
  
0.1
%
  
(2.1
%)
  
0.5
%
Depreciation and amortization
                
2,466
   
2,975
   
7,592
   
9,976
 
Capital expenditures
                
2,731
   
4,834
   
5,534
   
10,332
 
                                       
Electrical Products Group
                                      
Net external sales
              
$
76,544
  
$
63,208
  
$
144,925
  
$
123,399
  
Operating income
                
6,100
   
6,329
   
10,163
   
10,879
 
Operating margin
                
8.0
%
  
10.0
%
  
7.0
%
  
8.8
%
Depreciation and amortization
               
245
   
364
   
948
   
948
 
Capital expenditures
                
100
   
300
   
251
   
504
 
                                       
Total
                                      
Net external sales
    -
Operating segments
  
$
140,557
  
$
135,426
  
$
334,280
  
$
335,843
  
   
Total 
  
$
140,557
  
$
135,426
  
$
334,280
  
$
335,843
  
                                     
Operating 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
    
-
   
-
   
-
   
549
 
   
Total
  
$
3,325
  
$
2,841
  
$
(4,705
)
$
2,504
  
 
                                  
 
                                
Depreciation and amortization
   -
Operating segments
  
$
2,711
  
$
3,339
  
$
8,540
  
$
10,924
  
 
    -
Unallocated corporate
    
26
   
54
   
66
   
178
 
 
    
Total
    
$
2,737
  
$
3,393
  
$
8,606
  
$
11,102
  
                                       
Capital expenditures
    -
Operating segments
  
$
2,831
  
$
5,134
  
$
5,785
  
$
10,836
  
 
    -
Unallocated corporate
    
-
   
-
   
-
   
2
 
 
    
Total
        
$
2,831
  
$
5,134
  
$
5,785
  
$
10,838
  
                                       
 
 
 
 
 
 
 
 
 
September 30, 
 
 
December 31,
             
                 
2005
 
 
2004
              
Total assets
    -
Maintenance Products Group
  
$
136,950
  
$
154,635
              
 
    -
 Electrical Products Group
    
77,768
   
57,698
             
 
    -
 Other [a]
 
  
1,617
   
1,624
             
 
    
Unallocated corporate
    
9,701
   
10,507
             
 
    
Total
        
$
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 Ended
 
 
 September 30,
  
 September 30,
  
 
    
2005
 
 
2004
 
 
2005
 
 
2004
  
Consolidation of abrasives facilities
  
$
371
  
$
170
  
$
1,295
  
$
833
  
Consolidation of St. Louis manufacturing/distribution facilities
    
150
   
(84
)
  
198
   
(186
)
Consolidation of administrative functions for CCP
    
-
   
55
   
21
   
227
 
Shutdown of Woods Canada manufacturing
    
131
   
3
   
112
   
1,045
 
Other
    
10
   
23
   
349
   
37
 
Total 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 implement 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
 
 Contract
        
       
Termination
    Termination        
 
 Total
  
 Benefits [a]
 
 Costs [b]
 
 Other [c]
 
Restructuring liabilities at December 31, 2004
  
$
983
  
$
733
  
$
250
  
$
-
  
Additions
    
1,295
   
334
   
263
   
698
 
Payments
    
(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.
 

   
 
 
Contract
 
 
 
 
 
 
 
Termination
 
 
 
 
 
Total
 
Costs [b]
 
Other [c]
  
Restructuring liabilities at December 31, 2004
  
$
2,402
  
$
2,402
  
$
-
  
Additions
    
198
   
100
   
98
 
Payments
    
(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.


 
 
Contract
 
 
 
Termination
 
 
 
Costs [b]
  
Restructuring liabilities at December 31, 2004
  
$
-
  
Additions
    
21
 
Payments
    
(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
 
Contract
 
 
 
 
 
Termination
 
Termination
 
 
 
Total
 
Benefits [a]
 
Costs [b]
  
Restructuring liabilities at December 31, 2004
  
$
808
  
$
54
  
$
754
  
Additions
    
131
   
-
   
131
 
Reductions
    
(19
)
  
(19
)
  
-
 
Payments
    
(185
)
  
(33
)
  
(152
)
Currency translation and other
    
14
   
(1
)
  
15
 
Restructuring 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
 
Contract
 
 
 
 
 
 
 
Termination
 
Termination
 
 
 
 
 
Total
 
Benefits [a]
 
Costs [b]
 
Other [c]
  
Restructuring liabilities at December 31, 2004
  
$
4,454
  
$
807
  
$
3,647
  
$
-
  
Additions
    
1,994
   
683
   
515
   
796
 
Reductions
    
(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
  
Electrical
 
       
Products
  
Products
  
   
Total
  
Group
  
Group
  
2005
  
$
909
  
$
724
  
$
185
  
2006
    
912
   
592
   
320
 
2007
    
501
   
281
   
220
 
2008
    
460
   
234
   
226
 
2009
    
307
   
243
   
64
 
2010
    
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
 
Electrical
 
 
 
 
 
Products
 
Products
 
 
 
Total
 
Group
 
Group
  
Restructuring liabilities at December 31, 2004
  
$
4,454
  
$
3,385
  
$
1,069
  
Additions
    
1,994
   
1,863
   
131
 
Reductions
    
(19
)
  
-
   
(19
)
Payments
    
(2,941
)
  
(2,651
)
  
(290
)
Currency translation and other
    
124
   
-
   
124
 
Restructuring liabilities at September 30, 2005
  
$
3,612
  
$
2,597
  
$
1,015
  


 
-24-
 


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 Sales
  
Net sales
  
$
140.6
    
100.0
 
$
135.4
    
100.0
 
Cost of goods sold
    
122.9
   
87.4
   
117.6
   
86.8
 
Gross profit
    
17.7
   
12.6
   
17.9
   
13.2
 
Selling, general and administrative expenses
    
13.9
   
9.9
   
14.8
   
11.0
 
Severance, restructuring and related charges
    
0.7
   
0.5
   
0.2
   
0.1
 
Gain on sale of assets
    
(0.2
)
  
(0.1
)
  
-
   
-
 
Operating income
    
3.3
   
2.4
   
2.8
   
2.1
 
Interest expense
    
(1.5
)
        
(1.0
)
      
Other, net
    
0.2
         
-
       
                           
Income before provision for income taxes
    
2.1
         
1.8
       
                           
Provision for income taxes
    
0.7
         
0.9
       
                           
Net income
    
1.3
         
0.9
       
Payment-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
        
 $
0.11
       
Payment-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
        
$
0.11
        
Payment-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 Sales
  
Maintenance Products Group
 
$
0.6
    
0.9
 
$
0.1
    
0.1
 
$
0.5
    
0.8
 
Electrical Products Group
   
6.1
   
8.0
   
6.3
   
10.0
   
(0.2
)
  
(2.0
)
Unallocated corporate expense
   
(2.7
)
        
(3.4
)
        
0.7
       
Severance, 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 Sales
  
Net sales
  
$
334.3
    
100.0
 
$
335.8
    
100.0
 
Cost of goods sold
    
295.3
   
88.3
   
288.1
   
85.8
 
Gross profit
    
39.0
   
11.7
   
47.7
   
14.2
 
Selling, general and administrative expenses
    
40.1
   
12.0
   
43.8
   
13.1
 
Stock option expense
    
2.0
   
0.6
   
-
   
-
 
Severance, restructuring and related charges
    
2.0
   
0.6
   
2.0
   
0.6
 
Gain on sale of assets
    
(0.4
)
  
(0.1
)
  
(0.5
)
  
(0.2
)
Operating income (loss)
    
(4.7
)
  
(1.4
)
  
2.5
   
0.7
 
Interest 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
         
1.6
       
                           
Net 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 Sales
  
Maintenance 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
)
        
1.1
       
Stock 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 operating 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.

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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 years
  
Revolving 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
    
2,903
  
Severance and restructuring [c]
    
2,414
    
1,105
    
716
    
384
    
209
  
SESCO payable to Montenay [d]
    
2,750
    
1,100
    
1,100
    
550
    
-
 
Postretirement benefits [e]
    
5,930
    
877
    
1,494
    
1,314
    
2,245
 
Interest 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 years
  
Commercial 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.
 
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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.
 
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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 Charges” and “RESULTS OF OPERATIONS - Nine Months Ended September 30, 2005 versus Nine Months Ended September 30, 2004 - Severance, Restructuring and Related Charges” 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.

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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.

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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.
 

 
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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.
 
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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.

 
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-

(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.
 
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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.
 
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PART II - OTHER INFORMATION


Except 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.


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.



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%.





 
 
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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 Officer
   By:
 /s/ Amir Rosenthal
Amir Rosenthal
Vice President, Chief Financial Officer,
General Counsel and Secretary
 
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 EX-10.1 2 ex10-1.htm ISDA MASTER AGREEMENT, SCHEDULES, AND TRANSACTION CONFIRMATION ISDA Master Agreement, Schedules, and Transaction Confirmation

ISDA
International Swaps and Derivatives Association, Inc.
2002 MASTER AGREEMENT

 
dated as of    
August 11, 2005
  



Bank of America, N.A. 
and
 Katy Industries, Inc.


have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this 2002 Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties or otherwise effective for the purpose of confirming or evidencing those Transactions. This 2002 Master Agreement and the Schedule are together referred to as this "Master Agreement".

Accordingly, the parties agree as follows:—

1.    Interpretation

(a)   Definitions. The terms defined in Section 14 and elsewhere in this Master Agreement will have the meanings therein specified for the purpose of this Master Agreement.

(b)   Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement, such Confirmation will prevail for the purpose of the relevant Transaction.

(c)   Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions.

2.    Obligations

(a)   General Conditions.

(i)    Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.

(ii)   Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.
 
Copyright © 2002 by International Swaps and Derivatives Association, Inc.


(iii)    Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other condition specified in this Agreement to be a condition precedent for the purpose of this Section 2(a)(iii).

(b)   Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the Scheduled Settlement Date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change.
 
(c)   Netting of Payments. If on any date amounts would otherwise be payable:—
 
(i)    in the same currency; and
 
(ii)   in respect of the same Transaction,

by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by which the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount.

The parties may elect in respect of two or more Transactions that a net amount and payment obligation will be determined in respect of all amounts payable on the same date in the same currency in respect of those Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or any Confirmation by specifying that "Multiple Transaction Payment Netting" applies to the Transactions identified as being subject to the election (in which case clause (ii) above will not apply to such Transactions). If Multiple Transaction Payment Netting is applicable to Transactions, it will apply to those Transactions with effect from the starting date specified in the Schedule or such Confirmation, or, if a starting date is not specified in the Schedule or such Confirmation, the starting date otherwise agreed by the parties in writing. This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries.

(d)
Deduction or Withholding for Tax.

(i)    Gross-Up. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party ("X") will:—

(1)    promptly notify the other party ("Y") of such requirement;

(2)    pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y;

(3)    promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities; and
 
ISDA® 2002
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(4)    if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for:—

(A)   the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d); or

(B)    the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law.

(ii)    Liability. If:—

(1)    X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4);

(2)    X does not so deduct or withhold; and

(3)    a liability resulting from such Tax is assessed directly against X,
 
then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)).

3.
Representations

Each party makes the representations contained in Sections 3(a), 3(b), 3(c), 3(d), 3(e) and 3(f) and, if specified in the Schedule as applying, 3(g) to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement). If any "Additional Representation" is specified in the Schedule or any Confirmation as applying, the party or parties specified for such Additional Representation will make and, if applicable, be deemed to repeat such Additional Representation at the time or times specified for such Additional Representation.

 
(a)
Basic Representations.

(i)    Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing;

(ii)   Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance;

ISDA® 2002
3
 
 
(iii)
No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets;

 
(iv)
Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and

 
(v)
Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)).

(b)   Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party.

(c)   Absence of Litigation. There is not pending or, to its knowledge, threatened against it, any of its Credit Support Providers or any of its applicable Specified Entities any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document.

(d)   Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect.

(e)   Payer Tax Representation. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true.

(f)   Payee Tax Representations. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true.

(g)   No Agency. It is entering into this Agreement, including each Transaction, as principal and not as agent of any person or entity.

4.
Agreements

Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party:—

(a)
Furnish Specified Information. It will deliver to the other party or, in certain cases under clause (iii) below, to such government or taxing authority as the other party reasonably directs:—

(i)    any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation;

(ii)   any other documents specified in the Schedule or any Confirmation; and

ISDA® 2002
4
 
(iii)    upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification,

in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable.

(b)   Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future.

(c)   Comply With Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party.

(d)   Tax Agreement. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure.

(e)   Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, organised, managed and controlled or considered to have its seat, or where an Office through which it is acting for the purpose of this Agreement is located ("Stamp Tax Jurisdiction"), and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the other party.

5.
Events of Default and Termination Events

(a)   Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes (subject to Sections 5(c) and 6(e)(iv)) an event of default (an "Event of Default") with respect to such party:—

(i)    Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 9(h)(i)(2) or (4) required to be made by it if such failure is not remedied on or before the first Local Business Day in the case of any such payment or the first Local Delivery Day in the case of any such delivery after, in each case, notice of such failure is given to the party;

(ii)   Breach of Agreement; Repudiation of Agreement.

(1)    Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 9(h)(i)(2) or (4) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied within 30 days after notice of such failure is given to the party; or

(2)    the party disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, this Master Agreement, any Confirmation executed and delivered by that party or any
 
ISDA® 2002
5
 
Transaction evidenced by such a Confirmation (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf);

(iii)   Credit Support Default.

(1)    Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed;

(2)    the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document, or any security interest granted by such party or such Credit Support Provider to the other party pursuant to any such Credit Support Document, to be in full force and effect for the purpose of this Agreement (in each case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or

(3)    the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in-whole or in part, or challenges the validity of, such Credit Support Document (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf);

(iv)   Misrepresentation. A representation (other than a representation under Section 3(e) or 3(f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated;

(v)    Default Under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:—

(1)    defaults (other than by failing to make a delivery) under a Specified Transaction or any credit support arrangement relating to a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, such default results in a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction;

(2)    defaults, after giving effect to any applicable notice requirement or grace period, in making any payment due on the last payment or exchange date of, or any payment on early termination of, a Specified Transaction (or, if there is no applicable notice requirement or grace period, such default continues for at least one Local Business Day);

(3)    defaults in making any delivery due under (including any delivery due on the last delivery or exchange date of) a Specified Transaction or any credit support arrangement relating to a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, such default results in a liquidation of, an acceleration of obligations under, or an early termination of, all transactions outstanding under the documentation applicable to that Specified Transaction; or

(4)    disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, a Specified Transaction or any credit support arrangement relating to a Specified Transaction that is, in either case, confirmed or evidenced by a document or other confirming evidence executed and delivered by that party, Credit Support Provider or Specified Entity (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf);
 
ISDA® 2002
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(vi)      Cross-Default. If "Cross-Default" is specified in the Schedule as applying to the party, the occurrence or existence of:—

(1)    a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) where the aggregate principal amount of such agreements or instruments, either alone or together with the amount, if any, referred to in clause (2) below, is not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments before it would otherwise have been due and payable; or

(2)    a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments under such agreements or instruments on the due date for payment (after giving effect to any applicable notice requirement or grace period) in an aggregate amount, either alone or together with the amount, if any, referred to in clause (1) above, of not less than the applicable Threshold Amount;

(vii)      Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:—

(1)    is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4)(A) institutes or has instituted against it, by a regulator, supervisor or any similar official with primary insolvency, rehabilitative or regulatory jurisdiction over it in the jurisdiction of its incorporation or organisation or the jurisdiction of its head or home office, a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation by it or such regulator, supervisor or similar official, or (B) has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and such proceeding or petition is instituted or presented by a person or entity not described in clause (A) above and either (I) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (II) is not dismissed, discharged, stayed or restrained in each case within 15 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 15 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) above (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or
 
ISDA® 2002
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(viii)    Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, or reorganises, reincorporates or reconstitutes into or as, another entity and, at the time of such consolidation, amalgamation, merger, transfer, reorganisation, reincorporation or reconstitution:—

(1)    the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party; or

(2)    the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement.

(b)   Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes (subject to Section 5(c)) an Illegality if the event is specified in clause (i) below, a Force Majeure Event if the event is specified in clause (ii) below, a Tax Event if the event is specified in clause (iii) below, a Tax Event Upon Merger if the event is specified in clause (iv) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to clause (v) below or an Additional Termination Event if the event is specified pursuant to clause (vi) below:—

(i)    Illegality. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, due to an event or circumstance (other than any action taken by a party or, if applicable, any Credit Support Provider of such party) occurring after a Transaction is entered into, it becomes unlawful under any applicable law (including without limitation the laws of any country in which payment, delivery or compliance is required by either party or any Credit Support Provider, as the case may be), on any day, or it would be unlawful if the relevant payment, delivery or compliance were required on that day (in each case, other than as a result of a breach by the party of Section 4(b)):—

(1)    for the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction to perform any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or

(2)    for such party or any Credit Support Provider of such party (which will be the Affected Party) to perform any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, to receive a payment or delivery under such Credit Support Document or to comply with any other material provision of such Credit Support Document;

(ii)   Force Majeure Event. After giving effect to any applicable provision, disruption fallback or remedy specified in, or pursuant to, the relevant Confirmation or elsewhere in this Agreement, by reason of force majeure or act of state occurring after a Transaction is entered into, on any day:—

(1)    the Office through which such party (which will be the Affected Party) makes and receives payments or deliveries with respect to such Transaction is prevented from performing any absolute or contingent obligation to make a payment or delivery in respect of such Transaction, from receiving a payment or delivery in respect of such Transaction or from complying with any other material provision of this Agreement relating to such Transaction (or would be so prevented if such payment, delivery or compliance were required on that day), or it becomes impossible or

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impracticable for such Office so to perform, receive or comply (or it would be impossible or impracticable for such Office so to perform, receive or comply if such payment, delivery or compliance were required on that day); or

(2)    such party or any Credit Support Provider of such party (which will be the Affected Party) is prevented from performing any absolute or contingent obligation to make a payment or delivery which such party or Credit Support Provider has under any Credit Support Document relating to such Transaction, from receiving a payment or delivery under such Credit Support Document or from complying with any other material provision of such Credit Support Document (or would be so prevented if such payment, delivery or compliance were required on that day), or it becomes impossible or impracticable for such party or Credit Support Provider so to perform, receive or comply (or it would be impossible or impracticable for such party or Credit Support Provider so to perform, receive or comply if such payment, delivery or compliance were required on that day),

so long as the force majeure or act of state is beyond the control of such Office, such party or such Credit. Support Provider, as appropriate, and such Office, party or Credit Support Provider could not, after using all reasonable efforts (which will not require such party or Credit Support Provider to incur a loss, other than immaterial, incidental expenses), overcome such prevention, impossibility or impracticability;

(iii)   Tax Event. Due to (1) any action taken by a taxing authority, or brought in a court of competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (2) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Settlement Date (A) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (B) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 9(h)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B));

(iv)   Tax Event Upon Merger. The party (the "Burdened Party") on the next succeeding Scheduled Settlement Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 9(h)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets (or any substantial part of the assets comprising the business conducted by it as of the date of this Master Agreement) to, or reorganising, reincorporating or reconstituting into or as, another entity (which will be the Affected Party) where such action does not constitute a Merger Without Assumption;

(v)    Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, a Designated Event (as defined below) occurs with respect to such party, any Credit Support Provider of such party or any applicable Specified Entity of such party (in each case, "X") and such Designated Event does not constitute a Merger Without Assumption, and the creditworthiness of X or, if applicable, the successor, surviving or transferee entity of X, after taking into account any applicable Credit Support Document, is materially weaker immediately after the occurrence of such Designated Event than that of X immediately prior to the occurrence of such Designated Event (and, in any such event, such party or its successor, surviving or transferee entity, as appropriate, will be the Affected Party). A "Designated Event" with respect to X means that:—

(1)    X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets (or any substantial part of the assets comprising the business conducted by X as of the

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date of this Master Agreement) to, or reorganises, reincorporates or reconstitutes into or as, another entity;

(2)    any person, related group of persons or entity acquires directly or indirectly the beneficial ownership of (A) equity securities having the power to elect a majority of the board of directors (or its equivalent) of X or (B) any other ownership interest enabling it to exercise control of X; or

(3)    X effects any substantial change in its capital structure by means of the issuance, incurrence or guarantee of debt or the issuance of (A) preferred stock or other securities convertible into or exchangeable for debt or preferred stock or (B) in the case of entities other than corporations, any other form of ownership interest; or

(vi)   Additional Termination Event. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties will be as specified for such Additional Termination Event in the Schedule or such Confirmation).

(c)
Hierarchy of Events.

(i)    An event or circumstance that constitutes or gives rise to an Illegality or a Force Majeure Event will not, for so long as that is the case, also constitute or give rise to an Event of Default under Section 5(a)(i), 5(a)(ii)(l) or 5(a)(iii)(l) insofar as such event or circumstance relates to the failure to make any payment or delivery or a failure to comply with any other material provision of this Agreement or a Credit Support Document, as the case may be.

(ii)   Except in circumstances contemplated by clause (i) above, if an event or circumstance which would otherwise constitute or give rise to an Illegality or a Force Majeure Event also constitutes an Event of Default or any other Termination Event, it will be treated as an Event of Default or such other Termination Event, as the case may be, and will not constitute or give rise to an Illegality or a Force Majeure Event.

(iii)   If an event or circumstance which would otherwise constitute or give rise to a Force Majeure Event also constitutes an Illegality, it will be treated as an Illegality, except as described in clause (ii) above, and not a Force Majeure Event.

(d)   Deferral of Payments and Deliveries During Waiting Period. If an Illegality or a Force Majeure Event has occurred and is continuing with respect to a Transaction, each payment or delivery which would otherwise be required to be made under that Transaction will be deferred to, and will not be due until:—

(i)    the first Local Business Day or, in the case of a delivery, the first Local Delivery Day (or the first day that would have been a Local Business Day or Local Delivery Day, as appropriate, but for the occurrence of the event or circumstance constituting or giving rise to that Illegality or Force Majeure Event) following the end of any applicable Waiting Period in respect of that Illegality or Force Majeure Event, as the case may be; or

(ii)   if earlier, the date on which the event or circumstance constituting or giving rise to that Illegality or Force Majeure Event ceases to exist or, if such date is not a Local Business Day or, in the case of a delivery, a Local Delivery Day, the first following day that is a Local Business Day or Local Delivery Day, as appropriate.

(e)   Inability of Head or Home Office to Perform Obligations of Branch. If (i) an Illegality or a Force Majeure Event occurs under Section 5(b)(i)(l) or 5(b)(ii)(l) and the relevant Office is not the Affected Party's head or home office, (ii) Section 10(a) applies, (iii) the other party seeks performance of the relevant obligation or
 
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compliance with the relevant provision by the Affected Party's head or home office and (iv) the Affected Party's head or home office fails so to perform or comply due to the occurrence of an event or circumstance which would, if that head or home office were the Office through which the Affected Party makes and receives payments and deliveries with respect to the relevant Transaction, constitute or give rise to an Illegality or a Force Majeure Event, and such failure would otherwise constitute an Event of Default under Section 5(a)(i)or 5(a)(iii)(l) with respect to such party, then, for so long as the relevant event or circumstance continues to exist with respect to both the Office referred to in Section 5(b)(i)(l) or 5(b)(ii)(l), as the case may be, and the Affected Party's head or home office, such failure will not constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(l).

6.
Early Termination; Close-Out Netting

(a)   Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in die Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(l), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

(b)
Right to Terminate Following Termination Event.

(i)    Notice. If a Termination Event other than a Force Majeure Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction, and will also give the other party such other information about that Termination Event as the other party may reasonably require. If a Force Majeure Event occurs, each party will, promptly upon becoming aware of it, use all reasonable efforts to notify the other party, specifying the nature of that Force Majeure Event, and will also give the other party such other information about that Force Majeure Event as the other party may reasonably require.

(ii)   Transfer to Avoid Termination Event. If a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, other than immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist.

If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i).

Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party's policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed.

(iii)   Two Affected Parties. If a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice of such occurrence is given under Section 6(b)(i) to avoid that Termination Event.
 
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(iv)   Right to Terminate.

(1)    If:—

(A)    a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or

(B)    a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Parry is not the Affected Party,

the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there are two Affected Parties, or the Non-affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, if the relevant Termination Event is then continuing, by not more than 20 days notice to the other party, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions.

(2)    If at any time an Illegality or a Force Majeure Event has occurred and is then continuing and any applicable Waiting Period has expired:—

(A)    Subject to clause (B) below, either party may, by not more than 20 days notice to the other party, designate (I) a day not earlier than the day on which such notice becomes effective as an Early Termination Date in respect of all Affected Transactions or (II) by specifying in that notice the Affected Transactions in respect of which it is designating the relevant day as an Early Termination Date, a day not earlier than two Local Business Days following the day on which such notice becomes effective as an Early Termination Date in respect of less than all Affected Transactions. Upon receipt of a notice designating an Early Termination Date in respect of less than all Affected Transactions, the other party may, by notice to the designating party, if such notice is effective on or before the day so designated, designate that same day as an Early Termination Date in respect of any or all other Affected Transactions.

(B)    An Affected Party (if the Illegality or Force Majeure Event relates to performance by such party or any Credit Support Provider of such party of an obligation to make any payment or delivery under, or to compliance with any other material provision of, the relevant Credit Support Document) will only have the right to designate an Early Termination Date under Section 6(b)(iv)(2)(A) as a result of an Illegality under Section 5(b)(i)(2) or a Force Majeure Event under Section 5(b)(ii)(2) following the prior designation by the other party of an Early Termination Date, pursuant to Section 6(b)(iv)(2)(A), in respect of less than all Affected Transactions.

(c)   Effect of Designation.

(i)    If notice designating an Early Termination Date is given under Section 6(a) or 6(b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.

(ii)   Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date will be determined pursuant to Sections 6(e) and 9(h)(ii).
 
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(d)   Calculations; Payment Date.

(i)    Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying (except where there are two Affected Parties) any Early Termination Amount payable and (3) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data.

(ii)   Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable (1) on the day on which notice of the amount payable is effective in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default and (2) on the day which is two Local Business Days after the day on which notice of the amount payable is effective (or, if there are two Affected Parties, after the day on which the statement provided pursuant to clause (i) above by the second party to provide such a statement is effective) in the case of an Early Termination Date which is designated as a result of a Termination Event.

(e)    Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the "Early Termination Amount") will be determined pursuant to this Section 6(e) and will be subject to Section 6(f).

(i)    Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the. Non- defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party.

(ii)    Termination Events. If the Early Termination Date results from a Termination Event:—

(1)    One Affected Party. Subject to clause (3) below, if there is one Affected Party, the Early Termination Amount will be determined in accordance with Section 6(e)(i), except that references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and to the Non-affected Party, respectively.

(2)    Two Affected Parties. Subject to clause (3) below, if there are two Affected Parties, each party will determine an amount equal to the Termination Currency Equivalent of the sum of the Close-out Amount or Close-out Amounts (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions, as the case may be, and the Early Termination Amount will be an amount equal to (A) the sum of (I) one-half of the difference between the higher amount so determined (by party "X") and the lower amount so determined (by party "Y") and (II) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to Y. If the Early Termination Amount is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of the Early Termination Amount to Y.
 
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(3)    Mid-Market Events. If that Termination Event is an Illegality or a Force Majeure Event, then the Early Termination Amount will be determined in accordance with clause (1) or (2) above, as appropriate, except that, for the purpose of determining a Close-out Amount or Close-out Amounts, the Determining Party will:—

(A)    if obtaining quotations from one or more third parties (or from any of the Determining Parry's Affiliates), ask each third party or Affiliate (I) not to take account of the current creditworthiness of the Determining Party or any existing Credit Support Document and (II) to provide mid-market quotations; and

(B)    in any other case, use mid-market values without regard to the creditworthiness of the Determining Party.

(iii)    Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because Automatic Early Termination applies in respect of a party, the Early Termination Amount will be subject to such adjustments as are appropriate and permitted by applicable law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii).

(iv)   Adjustment for Illegality or Force Majeure Event. The failure by a parry or any Credit Support Provider of such party to pay, when due, any Early Termination Amount will not constitute an Event of Default under Section 5(a)(i) or 5(a)(iii)(l) if such failure is due to the occurrence of an event or circumstance which would, if it occurred with respect to payment, delivery or compliance related to a Transaction, constitute or give rise to an Illegality or a Force Majeure Event. Such amount will (1) accrue interest and otherwise be treated as an Unpaid Amount owing to the other party if subsequently an Early Termination Date results from an Event of Default, a Credit Event Upon Merger or an Additional Termination Event in respect of which all outstanding Transactions are Affected Transactions and (2) otherwise accrue interest in accordance with Section 9(h)(ii)(2).

(v)    Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and, except as otherwise provided in this Agreement, neither parry will be entitled to recover any additional damages as a consequence of the termination of the Terminated Transactions.

(f)    Set-Off. Any Early Termination Amount payable to one party (the "Payee") by the other party (the "Payer"), in circumstances where there is a Defaulting Party or where there is one Affected Party in the case where either a Credit Event Upon Merger has occurred or any other Termination Event in respect of which all outstanding Transactions are Affected Transactions has occurred, will, at the option of the Non-defaulting Party or the Non-affected Party, as the case may be ("X") (and without prior notice to the Defaulting Party or the Affected Party, as the case may be), be reduced by its set-off against any other amounts ("Other Amounts") payable by the Payee to the Payer (whether or not arising under this Agreement, matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation). To the extent that any Other Amounts are so set off, those Other Amounts will be discharged promptly and in all respects. X will give notice to the other party of any set-off effected under this Section 6(f).

For this purpose, either the Early Termination Amount or the Other Amounts (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, in good faith and using commercially reasonable procedures, to purchase the relevant amount of such currency.
 
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If an obligation is unascertained, X may in good faith estimate that obligation and set off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained.

Nothing in this Section 6(f) will be effective to create a charge or other security interest. This Section 6(f) will be without prejudice and in addition to any right of set-off, offset, combination of accounts, lien, right of retention or withholding or similar right or requirement to which any party is at any time otherwise entitled or subject (whether by operation of law, contract or otherwise).

7.
Transfer

Subject to Section 6(b)(ii) and to the extent permitted by applicable law, neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that:—

(a)   a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but -without prejudice to any other right or remedy under this Agreement); and

(b)   a party may make such a transfer of all or any part of its interest in any Early Termination Amount payable to it by a Defaulting Party, together with any amounts payable on or with respect to that interest and any other rights associated with that interest pursuant to Sections 8,9(h) and 11.

Any purported transfer that is not in compliance with this Section 7 will be void.

8.
Contractual Currency

(a)   Payment in the Contractual Currency. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the "Contractual Currency"). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in good faith and using commercially reasonable procedures in converting the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess.

(b)   Judgments. To the extent permitted by applicable law, if .any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgment or order of another court for the payment of any amount described in clause (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purpose of such judgment or order and the rate of exchange at which such party is able, acting in good faith and using
 
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commercially reasonable procedures in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party.

(c)   Separate Indemnities. To the extent permitted by applicable law, the indemnities in this Section 8 constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement.

(d)   Evidence of Loss. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made.

9.
Miscellaneous

(a)   Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud.

(b)   Amendments. An amendment, modification or waiver in respect of this Agreement will only be effective if in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system.

(c)   Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction.

(d)   Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law.

(e)   Counterparts and Confirmations.

(i)    This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission and by electronic messaging system), each of which will be deemed an original.

(ii)   The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation will be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes, by an exchange of electronic messages on an electronic messaging system or by an exchange of e-mails, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex, electronic message or e-mail constitutes a Confirmation.

(f)    No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege.

(g)   Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement.
 
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(h)
Interest and Compensation.

(i)    Prior to Early Termination. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction:—

(1)    Interest on Defaulted Payments. If a party defaults in the performance of any payment obligation, it will, to the extent permitted by applicable law and subject to Section 6(c), pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as the overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment (and excluding any period in respect of which interest or compensation in respect of the overdue amount is due pursuant to clause (3)(B) or (C) below), at the Default Rate.

(2)    Compensation for Defaulted Deliveries. If a party defaults in the performance of any obligation required to be settled by delivery, it will on demand (A) compensate the other party to the extent provided for in the relevant Confirmation or elsewhere in this Agreement and (B) unless otherwise provided in the relevant Confirmation or elsewhere in this Agreement, to the extent permitted by applicable law and subject to Section 6(c), pay to the other party interest (before as well as after judgment) on an amount equal to the fair market value of that which was required to be delivered in the same currency as that amount, for the period from (and including) the originally scheduled date for delivery to (but excluding) the date of actual delivery (and excluding any period in respect of which interest or compensation in respect of that amount is due pursuant to clause (4) below), at the Default Rate. The fair market value of any obligation referred to above will be determined as of the originally scheduled date for delivery, in good faith and using commercially reasonable procedures, by the party that was entitled to take delivery.

(3)    Interest on Deferred Payments. If:—

(A)    a party does not pay any amount that, but for Section 2(a)(iii), would have been payable, it will, to the extent permitted by applicable law and subject to Section 6(c) and clauses (B) and (C) below, pay interest (before as well as after judgment) on that amount to the other party on demand (after such amount becomes payable) in the same currency as that amount, for the period from (and including) the date the amount would, but for Section 2(a)(iii), have been payable to (but excluding) the date the amount actually becomes payable, at the Applicable Deferral Rate;

(B)    a payment is deferred pursuant to Section 5(d), the party which would otherwise have been required to make that payment will, to the extent permitted by applicable law, subject to Section 6(c) and for so long as no Event of Default or Potential Event of Default with respect to that party has occurred and is continuing, pay interest (before as well as after judgment) on the amount of the deferred payment to the other party on demand (after such amount becomes payable) in the same currency as the deferred payment, for the period from (and including) the date the amount would, but for Section 5(d), have been payable to (but excluding) the earlier of the date the payment is no longer deferred pursuant to Section 5(d) and the date during the deferral period upon which an Event of Default or Potential Event of Default with respect to that party occurs, at the Applicable Deferral Rate; or

(C)    a party fails to make any payment due to the occurrence of an Illegality or a Force Majeure Event (after giving effect to any deferral period contemplated by clause (B) above), it will, to the extent permitted by applicable law, subject to Section 6(c) and for so long as the event or circumstance giving rise to that Illegality or Force Majeure Event
 
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continues and no Event of Default or Potential Event of Default with respect to that party has occurred and is continuing, pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as the overdue amount, for the period from (and including) the date the party fails to make the payment due to the occurrence of the relevant Illegality or Force Majeure Event (or, if later, the date the payment is no longer deferred pursuant to Section 5(d)) to (but excluding) the earlier of the date the event or circumstance giving rise to that Illegality or Force Majeure Event ceases to exist and the date during the period upon which an Event of Default or Potential Event of Default with respect to that party occurs (and excluding any period in respect of which interest or compensation in respect of the overdue amount is due pursuant to clause (B) above), at the Applicable Deferral Rate.

(4)    Compensation for Deferred Deliveries. If:—

(A)    a party does not perform any obligation that, but for Section 2(a)(iii), would have been required to be settled by delivery;

(B)     a delivery is deferred pursuant to Section 5(d); or

(C)     a party fails to make a delivery due to the occurrence of an Illegality or a Force Majeure Event at a time when any applicable Waiting Period has expired,
 
the party required (or that would otherwise have been required) to make the delivery will, to the extent permitted by applicable law and subject to Section 6(c), compensate and pay interest to the other party on demand (after, in the case of clauses (A) and (B) above, such delivery is required) if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement.

(ii)   Early Termination. Upon the occurrence or effective designation of an Early Termination Date in respect of a Transaction:—

(1)    Unpaid Amounts. For the purpose of determining an Unpaid Amount in respect of the relevant Transaction, and to the extent permitted by applicable law, interest will accrue on the amount of any payment obligation or the amount equal to the fair market value of any obligation required to be settled by delivery included in such determination in the same currency as that amount, for the period from (and including) the date the relevant obligation was (or .would have been but for Section 2(a)(iii) or 5(d)) required to have been performed to (but excluding) the relevant Early Termination Date, at the Applicable Close-out Rate.

(2)    Interest on Early Termination Amounts. If an Early Termination Amount is due in respect of such Early Termination Date, that amount will, to the extent permitted by applicable law, be paid together with interest (before as well as after judgment) on that amount in the Termination Currency, for the period from (and including) such Early Termination Date to (but excluding) the date the amount is paid, at the Applicable Close-out Rate.

(iii)   Interest Calculation. Any interest pursuant to this Section 9(h) will be calculated on the basis of daily compounding and the actual number of days elapsed.
 
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10.
Offices; Multibranch Parties

(a)   If Section 10(a) is specified in the Schedule as applying, each party that enters into a Transaction through an Office other than its head or home office represents to and agrees with the other party that, notwithstanding the place of booking or its jurisdiction of incorporation or organisation, its obligations are the same in terms of recourse against it as if it had entered into the Transaction through its head or home office, except that a party will not have recourse to the head or home office of the other party in respect of any payment or delivery deferred pursuant to Section 5(d) for so long as the payment or delivery is so deferred. This representation and agreement will be deemed to be repeated by each party on each date on which the parties enter into a Transaction.

(b)   If a party is specified as a Multibranch Party in the Schedule, such parry may, subject to clause (c) below, enter into a Transaction through, book a Transaction in and make and receive payments and deliveries with respect to a Transaction through any Office listed in respect of that party in the Schedule (but not any other Office unless otherwise agreed by the parties in writing).

(c)   The Office through which a party enters into a Transaction will be the Office specified for that party in the relevant Confirmation or as otherwise agreed by the parties in writing, and, if an Office for that parry is not specified in the Confirmation or otherwise agreed by the parties in writing, its head or home office. Unless the parties otherwise agree in writing, the Office through which a party enters into a Transaction will also be the Office in which it books the Transaction and the Office through which it makes and receives payments and deliveries with respect to the Transaction. Subject to Section 6(b)(ii), neither party may change the Office in which it books the Transaction or the Office through which it makes and receives payments or deliveries with respect to a Transaction without the prior written consent of the other party.

11.
Expenses

A Defaulting Party will on demand indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, execution fees and Stamp Tax, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection.

12.
Notices

(a)   Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner described below (except that a notice or other communication under Section 5 or 6 may not be given by electronic messaging system or e-mail) to the address or number or in accordance with the electronic messaging system or e-mail details provided (see the Schedule) and will be deemed effective as indicated:—

(i)     if in writing and delivered in person or by courier, on the date it is delivered;

(ii)    if sent by telex, on the date the recipient's answerback is received;

(iii)   if sent by facsimile transmission, on the date it is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine);

(iv)   if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date it is delivered or its delivery is attempted;

(v)    if sent by electronic messaging system, on the date it is received; or
 
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(vi)   if sent by e-mail, on the date it is delivered,

unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication will be deemed given and effective on the first following day that is a Local Business Day.

(b)   Change of Details. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system or e-mail details at which notices or other communications are to be given to it.

13.
Governing Law and Jurisdiction

(a)   Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule.

(b)   Jurisdiction. With respect to any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement ("Proceedings"), each party irrevocably:—

(i)    submits:—

(1)    if this Agreement is expressed to be governed by English law, to (A) the non-exclusive jurisdiction of the English courts if the Proceedings do not involve a Convention Court and (B) the exclusive jurisdiction of the English courts if the Proceedings do involve a Convention Court; or

(2)    if this Agreement is expressed to be governed by the laws of the State of New York, to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City;

(ii)   waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party; and

(iii)   agrees, to the extent permitted by applicable law, that the bringing of Proceedings in any one or more jurisdictions will not preclude the bringing of Proceedings in any other jurisdiction.

(c)   Service of Process. Each party irrevocably appoints the Process Agent, if any, specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any reason any party's. Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days appoint a substitute process agent acceptable to the other parry. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12(a)(i), 12(a)(iii) or 12(a)(iv). Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by applicable law.

(d)   Waiver of Immunities. Each party irrevocably waives, to the extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction or order for specific performance or recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings.
 
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14.      Definitions

As used in this Agreement:—

"Additional Representation" has the meaning specified in Section 3.

"Additional Termination Event" has the meaning specified in Section 5(b).
 
"Affected Party" has the meaning specified in Section 5(b).

"Affected Transactions" means (a) with respect to any Termination Event consisting of an Illegality, Force Majeure Event, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event (which, in the case of an Illegality under Section 5(b)(i)(2) or a Force Majeure Event under Section 5(b)(ii)(2), means all Transactions unless the relevant Credit Support Document references only certain Transactions, in which case those Transactions and, if the relevant Credit Support Document constitutes a Confirmation for a Transaction, that Transaction) and (b) with respect to any other Termination Event, all Transactions.

"Affiliate" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with die person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person.

"Agreement" has the meaning specified in Section l(c).

"Applicable Close-out Rate" means:—

(a)   in respect of the determination of an Unpaid Amount:—

(i)    in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;

(ii)   in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate;

(iii)      in respect of obligations deferred pursuant to Section 5(d), if there is no Defaulting Party and for so long as the deferral period continues, the Applicable Deferral Rate; and

(iv)      in all other cases following the occurrence of a Termination Event (except where interest accrues pursuant to clause (iii) above), the Applicable Deferral Rate; and

(b)   in respect of an Early Termination Amount:—

(i)    for the period from (and including) the relevant Early Termination Date to (but excluding) the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable:—

(1)    if the Early Termination Amount is payable by a Defaulting Party, the Default Rate;

(2)    if the Early Termination Amount is payable by a Non-defaulting Party, the Non-default Rate; and

(3)    in all other cases, the Applicable Deferral Rate; and
 
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(ii)   for the. period from (and including) the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable to (but excluding) the date of actual payment:—

(1)    if a party fails to pay the Early Termination Amount due to the occurrence of an event or circumstance which would, if it occurred with respect to a payment or delivery under a Transaction, constitute or give rise to an Illegality or a Force Majeure Event, and for so long as the Early Termination Amount remains unpaid due to the continuing existence of such event or circumstance, the Applicable Deferral Rate;

(2)    if the Early Termination Amount is payable by a Defaulting Party (but excluding any period in respect of which clause (1) above applies), the Default Rate;

(3)    if the Early Termination Amount is payable by a Non-defaulting Party (but excluding any period in respect of which clause (1) above applies), the Non-default Rate; and

(4)    in all other cases, the Termination Rate.

"Applicable Deferral Rate" means:—

(a)   for the purpose of Section 9(h)(i)(3)(A), the rate certified by the relevant payer to be a rate offered to the payer by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the payer for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market;

(b)   for purposes of Section 9(h)(i)(3)(B) and clause (a)(iii) of the definition of Applicable Close-out Rate, the rate certified by the relevant payer to be a rate offered to prime banks by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the payer after consultation with the other party, if practicable, for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market; and

(c)   for purposes of Section 9(h)(i)(3)(C) and clauses (a)(iv), (b)(i)(3) and (b)(ii)(l) of the definition of Applicable Close-out Rate, a rate equal to the arithmetic mean of the rate determined pursuant to clause (a) above and a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount.

"Automatic Early Termination" has the meaning specified in Section 6(a).

"Burdened Party" has the meaning specified in Section 5(b)(iv).

"Change in Tax Law" means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs after the parties enter into the relevant Transaction.

"Close-out Amount" means, with respect to each Terminated Transaction or each group of Terminated Transactions and a Determining Party, the amount of the losses or costs of the Determining Party that are or would be incurred under then prevailing circumstances (expressed as a positive number) or gains of the Determining Party that are or would be realised under then prevailing circumstances (expressed as a negative number) in replacing, or in providing for the Determining Party the economic equivalent of, (a) the material terms of that Terminated Transaction or group of Terminated Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of that Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in
 
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Section 2(a)(iii)) and (b) the option rights of the parties in respect of that Terminated Transaction or group of Terminated Transactions.

Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result. The Determining Party may determine a Close-out Amount for any group of Terminated Transactions or any individual Terminated Transaction but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates following the Early Termination Date as would be commercially reasonable.

Unpaid Amounts in respect of a Terminated Transaction or group of Terminated Transactions and legal fees and out-of-pocket expenses referred to in Section 11 are to be excluded in all determinations of Close-out Amounts.

In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without limitation, one or more of the following types of information: —

(i)   quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the terms of any relevant documentation, including credit support documentation, between the Determining Party and the third party providing the quotation;

(ii)   information consisting of relevant market data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other relevant market data in the relevant market; or

(iii)      information of the types described in clause (i) or (ii) above from internal sources (including any of the Determining Party's Affiliates) if that information is of the same type used by the Determining Party in the regular course of its business for the valuation of similar transactions.

The Determining Party will consider, taking into account the standards and procedures described in this definition, quotations pursuant to clause (i) above or relevant market data pursuant to clause (ii) above unless the Determining Party reasonably believes in good faith that such quotations or relevant market data are not readily available or would produce a result that would not satisfy those standards. When considering information described in clause (i), (ii) or (iii) above, the Determining Party may include costs of funding, to the extent costs of funding are not and would not be a component of the other information being utilised. Third parties supplying quotations pursuant to clause (i) above or market data pursuant to clause (ii) above may include, without limitation, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information.

Without duplication of amounts calculated based on information described in clause (i), (ii) or (iii) above, or other relevant information, and when it is commercially reasonable to do so, the Determining Party may in addition consider in calculating a Close-out Amount any loss or cost incurred in connection with its terminating, liquidating or re-establishing any hedge related to a Terminated Transaction or group of Terminated Transactions (or any gain resulting from any of them).

Commercially reasonable procedures used in determining a Close-out Amount may include the following:—

(1)      application to relevant market data from third parties pursuant to clause (ii) above or information from internal sources pursuant to clause (iii) above of pricing or other valuation models that are, at the time of the determination of the Close-out Amount, used by the Determining Party in the regular course of its business in pricing or valuing transactions between the Determining Party and unrelated third parties that are similar to the Terminated Transaction or group of Terminated Transactions; and
 
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(2)   application of different valuation methods to Terminated Transactions or groups of Terminated Transactions depending on the type, complexity, size or number of the Terminated Transactions or group of Terminated Transactions.

"Confirmation" has the meaning specified in the preamble.

"consent" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent.

"Contractual Currency" has the meaning specified in Section 8(a).

"Convention Court" means any court which is bound to apply to the Proceedings either Article 17 of the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters or Article 17 of the 1988 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters.

"Credit Event Upon Merger"has the meaning specified in Section 5(b).

"Credit Support Document" means any agreement or instrument that is specified as such in this Agreement.

"Credit Support Provider"has the meaning specified in the Schedule.

"Cross-Default" means the event specified in Section 5(a)(vi).

"Default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1 % per annum.

"Defaulting Party" has the meaning specified in Section 6(a).

"Designated Event" has the meaning specified in Section 5(b)(v).

"Determining Party" means the party determining a Close-out Amount.

"Early Termination Amount" has the meaning specified in Section 6(e).

"Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iv).

"electronic messages" does not include e-mails but does include documents expressed in markup languages, and "electronic messaging system" will be construed accordingly.

"English law" means the law of England and Wales, and "English" will be construed accordingly.

"Event of Default" has the meaning specified in Section 5(a) and, if applicable, in the Schedule.

"Force Majeure Event" has the meaning specified in Section 5(b).

"General Business Day"' means a day on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits).

"Illegality" has the meaning specified in Section 5(b).
 
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"Indemnifiable Tax" means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document).

"law" includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority), and "unlawful" will be construed accordingly.

"Local Business Day" means (a) in relation to any obligation under Section 2(a)(i), a General Business Day in the place or places specified in the relevant Confirmation and a day on which a relevant settlement system is open or operating as specified in the relevant Confirmation or, if a place or a settlement system is not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) for the purpose of determining when a Waiting Period expires, a General Business Day in the place where the event or circumstance that constitutes or gives rise to the Illegality or Force Majeure Event, as the case may be, occurs, (c) in relation to any other payment, a General Business Day in the place where the relevant account is located and, if different, in the principal financial centre, if any, of the currency of such payment and, if that currency does not have a single recognised principal financial centre, a day on which the settlement system necessary to accomplish such payment is open, (d) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), a General Business Day (or a day that would have been a General Business Day but for the occurrence of an event or circumstance which would, if it occurred with respect to payment, delivery or compliance related to a Transaction, constitute or give rise to an Illegality or a Force Majeure Event) in the place specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (e) in relation to Section 5(a)(v)(2), a General Business Day in the relevant locations for performance with respect to such Specified Transaction.

"Local Delivery Day" means, for purposes of Sections 5(a)(i) and 5(d), a day on which settlement systems necessary to accomplish the relevant delivery are generally open for business so that the delivery is capable of being accomplished in accordance with customary market practice, in the place specified in the relevant Confirmation or, if not so specified, in a location as determined in accordance with customary market practice for the relevant delivery.

"Master Agreement" has the meaning specified in the preamble.

"Merger Without Assumption" means the event specified in Section 5(a)(viii).

"Multiple Transaction Payment Netting" has the meaning specified in Section 2(c).

"Non-affected Party" means, so long as there is only one Affected Party, the other party.

"Non-default Rate" means the rate certified by the Non-defaulting Party to be a rate offered to the Non-defaulting Party by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such bank to be selected in good faith by the Non-defaulting Party for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market.

"Non-defaulting Party" has the meaning specified in Section 6(a).

"Office" means a branch or office of a party, which may be such party's head or home office.

"Other Amounts" has the meaning specified in Section 6(f).
 
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"Payee" has the meaning specified in Section 6(f).

"Payer" loss the meaning specified in Section 6(f).

"Potential Event of Default" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default.

"Proceedings" has the meaning specified in Section 13(b).

"Process Agent" has the meaning specified in the Schedule.

"rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the Contractual Currency.

"Relevant Jurisdiction" means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organised, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made.

"Schedule" has the meaning specified in the preamble.

"Scheduled Settlement Date" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction.

"Specified Entity" has the meaning specified in the Schedule.

"Specified Indebtedness" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money.

"Specified Transaction" means, subject to the Schedule, (a) any transaction (including an agreement with respect to any such transaction) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is not a Transaction under this Agreement but (i) which is a rate swap transaction, swap option, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option, credit protection transaction, credit swap, credit default swap, credit default option, total return swap, credit spread transaction, repurchase transaction, reverse repurchase transaction, buy/sell-back transaction, securities lending transaction, weather index transaction or forward purchase or sale of a security, commodity or other financial instrument or interest (including any option with respect to any of these transactions) or (ii) which is a type of transaction that is similar to any transaction referred to in clause (i) above that is currently, or in the future becomes, recurrently entered into in the financial markets (including terms and conditions incorporated by reference in such agreement) and which is a forward, swap, future, option or other derivative on one or more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic indices or measures of economic risk or value, or other benchmarks against which payments or deliveries are to be made, (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation.

"Stamp Tax" means any stamp, registration, documentation or similar tax.

"Stamp Tax Jurisdiction" has the meaning specified in Section 4(e).
 
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"Tax" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax.

"Tax Event" has the meaning specified in Section 5(b).

"Tax Event Upon Merger" has the meaning specified in Section 5(b).

"Terminated Transactions" means, with respect to any Early Termination Date, (a) if resulting from an Illegality or a Force Majeure Event, all Affected Transactions specified in the notice given pursuant to Section 6(b)(iv), (b) if resulting from any other Termination Event, all Affected Transactions and (c) if resulting from an Event of Default, all Transactions in effect either immediately before the effectiveness of the notice designating that Early Termination Date or, if Automatic Early Termination applies, immediately before that Early Termination Date.

"Termination Currency" means (a) if a Termination Currency is specified in the Schedule and that currency is freely available, that currency, and (b) otherwise, euro if this Agreement is expressed to be governed by English law or United States Dollars if this Agreement is expressed to be governed by the laws of the State of New York.

"Termination Currency Equivalent" means, in respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the "Other Currency"), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Close-out Amount is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties.

"Termination Event" means an Illegality, a Force Majeure Event, a Tax Event, a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event.

"Termination Rate" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts.

"Threshold Amount" means the amount, if any, specified as such in the Schedule.

"Transaction" has the meaning specified in the preamble.

"Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii) or due but for Section 5(d)) to such parry under Section 2(a)(i) or 2(d)(i)(4) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date, (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii) or 5(d)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered and (c) if the Early Termination Date results from an Event of Default, a Credit Event Upon Merger or an Additional Termination Event in respect of which all outstanding Transactions are Affected Transactions, any Early Termination Amount due prior to such Early Termination Date and which remains unpaid as of such Early Termination Date, in each case together with any amount of interest accrued or other
 
ISDA® 2002
27

compensation in respect of that obligation or deferred obligation, as the case may be, pursuant to Section 9(h)(ii)(l) or (2), as appropriate. The fair market value of any obligation referred to in clause (b) above will be determined as of the originally scheduled date for delivery, in good faith and using commercially reasonable procedures, by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it will be the average of the Termination Currency Equivalents of the fair market values so determined by both parties.

"Waiting Period" means:—

(a)   in respect of an event or circumstance under Section 5(b)(i), other than in the case of Section 5(b)(i)(2) where the relevant payment, delivery or compliance is actually required on the relevant day (in which case no Waiting Period will apply), a period of three Local Business Days (or days that would have been Local Business Days but for the occurrence of that event or circumstance) following the occurrence of that event or circumstance; and

(b)   in respect of an event or circumstance under Section 5(b)(ii), other than in the case of Section 5(b)(ii)(2) where the relevant payment, delivery or compliance is actually required on the relevant day (in which case no Waiting Period will apply), a period of eight Local Business Days (or days that would have been Local Business Days but for the occurrence of that event or circumstance) following the occurrence of that event or circumstance.

IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document.

Bank of America, N.A.
    
Katy Industries, Inc.
             
             
             
             
By:
   
 /s/ Donald M. Caiazza
  
By:
   
/s/ Michael C. Paul
 
Name:
Donald M. Caiazza
    
Name:
Michael C. Paul
 
Title:
Senior Vice President
    
Title:
Treasurer
 
Date:
  August 11, 2005    
Date:
August 15, 2005
 
ISDA® 2002
28

ISDA®
International Swaps and Derivatives Association, Inc.

SCHEDULE
to the
2002 Master Agreement

dated as of August 11, 2005 between

BANK OF AMERICA, N.A.,
a national banking association
organized and existing under the laws of the United States of America,

("Party A")

and

KATY INDUSTRIES, INC.,
a corporation
organized and existing under the laws of the State of Delaware,

("Party B")

PART 1: Termination Provisions

(a)
"Specified Entity" means in relation to Party A for the purpose of Sections 5(a)(v), 5(a)(vi), 5(a)(vii) and 5(b)(v):

None;

"Specified Entity" means in relation to Party B for the purpose of Sections 5(a)(v), 5(a)(vi), 5(a)(vii) and 5(b)(v):

None.

(b)
"Specified Transaction " will have the meaning specified in Section 14.

(c)
The "Cross-Default" provisions of Section 5(a)(vi) (as amended in Part 5(d))
will apply to Party A and
will apply to Party B.

In connection therewith, "Specified Indebtedness" will not have the meaning specified in Section 14, and such definition shall be replaced by the following: "any obligation in respect of the payment of moneys (whether present or future, contingent or otherwise, as principal or surety or otherwise), except that such term shall not include obligations in respect of deposits received in the ordinary course of a party's banking business."
 
29

"Threshold Amount" means with respect to Party A an amount equal to three percent (3%) of the Shareholders' Equity of Bank of America Corporation and with respect to Party B, $1,000,000.00.

With respect to Party B, any "Event of Default" (as such term is defined in the Credit Agreement) shall be an Event of Default under this Agreement.

"Credit Agreement" means the Amended and Restated Loan Agreement dated as of April 13, 2004, by and among Party A, other lenders party thereto and Party B (as amended, extended, supplemented or otherwise modified in writing from time to time).

"Shareholders' Equity" means with respect to an entity, at any time, the sum (as shown in the most recent annual audited financial statements of such entity) of (i) its capital stock (including preferred stock) outstanding, taken at par value, (ii) its capital surplus and (iii) its retained earnings, minus (iv) treasury stock, each to be determined in accordance with generally accepted accounting principles.

(d)
The "Credit Event Upon Merger" provisions of Section 5(b)(v)
will apply to Party A
will apply to Party B.

(e)
The "Automatic Early Termination" provision of Section 6(a)
will not apply to Party A
will not apply to Party B.

(f)
"Termination Currency" means United States Dollars.

(g)
Additional Termination Event will apply.

The following Additional Termination Events shall apply:

 
(i)
In the event that at any time prior to the termination of any Transaction hedging obligations under the Credit Agreement, Party A's obligation to lend under the Credit Agreement is terminated (a "Collateral Event"), Party B shall within three General Business Days of a Collateral Event (a) execute an ISDA Credit Support Annex, or provide other credit support, to secure the exposure of Party A, in form and substance satisfactory to Party A in its sole discretion or (b) transfer its rights and obligations under this Agreement to another party that is acceptable to Party A. Failure to take either action mentioned in the preceding sentence to the satisfaction of Party A shall constitute an Additional Termination Event under this Agreement with Party B being the sole Affected Party;

 
(ii)
In the event that at any time prior to the termination of any Transaction hedging obligations under the Credit Agreement, Party A (in accordance with the terms of the Credit Agreement) voluntarily sells, assigns or otherwise disposes of its obligation to lend and be a party to the Credit Agreement (a "Credit Event"), Party A shall within three General Business Days of a Collateral Event transfer its rights and obligations under this Agreement to another party that is acceptable to Party B. Failure to take such action mentioned in the preceding sentence to the satisfaction of Party B shall constitute an Additional Termination Event under this Agreement with Party A being the sole Affected Party; and
 
30

 
(iii)
It shall be an Additional Termination Event hereunder, with respect to which Party B shall be the sole Affected Party, if the payment obligations of Party B hereunder are specifically subordinated to Party B's obligations to the lenders under the Credit Agreement or any new or other credit agreement to which Party B is a party.

 
PART 2: Tax Representations

(a)
Payer Tax Representations. For the purpose of Section 3(e) of this Agreement, Party A and Party B will make the following representation:

It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 9(h) of this Agreement) to be made by it to the other party under this Agreement. In making this representation, it may rely on (i) the accuracy of any representations made by the other party pursuant to Section 3(f) of this Agreement, (ii) the satisfaction of the agreement contained in Section 4(a)(i) or 4(a)(iii) of this Agreement and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of this Agreement and (iii) the satisfaction of the agreement of the other party contained in Section 4(d) of this Agreement, except that it will not be a breach of this representation where reliance is placed on clause (ii) above and the other party does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position.

(b)
Payee Tax Representations. For the purpose of Section 3(f) of this Agreement, Party A and Party B will make the following representations specified below, if any:

 
(i)
The following representations will apply to Party A:

Party A is a national banking association created or organized under the laws of the United States of America and the federal taxpayer identification number is 94-1687665.

 
(ii)
The following representations will apply to Party B:

Party B is a corporation created or organized under the laws of the State of Delaware and the federal taxpayer identification number is75-l277589.
 
31

PART 3: Agreement to Deliver Documents

For the purpose of Section 4(a)(i) and (ii) of this Agreement, each party agrees to deliver the following documents:

(a)
Tax forms, documents or certificates to be delivered are:

Party required to deliver document
  
Form/Document/Certificate
  
Date by which to be delivered
               
         
Party A and Party B 
  
Internal Revenue Service Form W-9 
  
Upon execution and delivery of this Agreement 
 
32

(b)
Other documents to be delivered are:

Party required to deliver document
  
Form/Document/Certificate
  
Date by which to be delivered
  
Covered by Section 3(d) Representation
                    
             
Party A 
  
Annual Report of Bank of America Corporation containing audited, consolidated financial statements certified by independent certified public accountants and prepared in accordance with generally accepted accounting principles in the country in which such party is organized 
  
To be made available on www.bankofameric a.com/investor/ as soon as available and in any event within 90 days after the end of each fiscal year of Party A 
  
Yes 
             
Party B 
  
Annual Report of Party B and of any Credit Support Provider thereof containing audited, consolidated financial statements certified by independent certified public accountants and prepared in accordance with generally accepted accounting principles in the country in which such party and such Credit Support Provider is organized 
  
Upon request 
  
Yes 
             
Party A 
  
Quarterly Financial Statements of Bank of America Corporation containing unaudited, consolidated financial statements of such party's fiscal quarter prepared in accordance with generally accepted accounting principles in the country in which such party is organized 
  
To be made available on www.bankofameric a.com/investor/ as soon as available and in any event within 30 days after the end of each fiscal quarter of Party A 
  
Yes 
 
33

Party required to deliver document
  
Form/Document/Certificate
  
Date by which to be delivered
  
Covered by Section 3(d) Representation
                    
             
Party B 
  
Quarterly Financial Statements of Party B and any Credit Support Provider thereof containing unaudited, consolidated financial statements of such party's fiscal quarter prepared in accordance with generally accepted accounting principles in the country in which such party and such Credit Support Provider is organized 
  
Upon request 
  
Yes 
             
Party A and Party B 
  
Certified copies of all corporate, partnership or membership authorizations, as the case may be, and any other documents with respect to the execution, delivery and performance of this Agreement and any Credit Support Document 
  
Upon execution and delivery of this Agreement 
  
Yes 
             
Party A and Party B 
  
Certificate of authority and specimen signatures of individuals executing this Agreement and any Credit Support Document 
  
Upon execution and delivery of this Agreement and thereafter upon request of the other party 
  
Yes 
 
34

PART 4: Miscellaneous

(a)
Address for Notices. For the purpose of Section 12(a) of this Agreement:

Address for notice or communications to Party A:

Bank of America, N. A.
Sears Tower
233 South Wacker Drive, Suite 2800
Chicago, IL 60606
Attention: Swap Operations
Telephone No.:
Facsimile No.:

With a copy to:

Bank of America, N.A.
100 Federal St., MA5-100-12-04
Boston, Massachusetts 02110
Attention: Capital Markets Documentation

 
Address for notice or communications to Party B:

Katy Industries, Inc.
765 Straits Turnpike - suite 2000
Middlebury, CT 06762 


(b)
Process Agent. For the purpose of Section 13(c):

Party A appoints as its Process Agent: Not applicable.

Party B appoints as its Process Agent: Not applicable.

(c)
Offices. The provisions of Section 10(a) will apply to this Agreement.

(d)
Multibranch Party. For the purpose of Section 10(b) of this Agreement:

Party A is a Multibranch Party and may enter into a Transaction through its Charlotte, North Carolina, Chicago, Illinois, San Francisco, California, New York, New, York, Boston, Massachusetts or such other Office as may be agreed to by the parties in connection with a Transaction.

Party B is not a Multibranch Party.
 
35

(e)
Calculation Agent. The Calculation Agent is Party A; provided, that if an Event of

Default with respect to Party A as the Defaulting Party has occurred and is continuing, the Calculation Agent shall be a Reference Market-maker selected by Party B and acceptable to Party A.

(f)
Credit Support Document. Details of any Credit Support Document:

Each of the following, as amended, extended, supplemented or otherwise modified in writing from time to time, is a "Credit Support Document":

Not applicable.

(g)
Credit Support Provider.

Credit Support Provider means in relation to Party A: Not applicable.

Credit Support Provider means in relation to Party B: Not applicable.

(h)
Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York (without reference to its conflict of laws provisions, except for Sections 5-1401 and 5-1402 of the New York General Obligations Law).

(i)
Netting of Payments. Unless the parties otherwise so agree, "Multiple Transaction Payment Netting" will apply for the purpose of Section 2(c) of this Agreement, starting as of the date of this Agreement, within the following group of Transactions, and not otherwise:

FX Transactions (as defined in the FX Definitions) and Currency Option Transactions (as defined in the FX Definitions) (but excluding payments with respect to option premiums and cash settled options); and

Transactions (as defined in the 1993 Commodity Derivatives Definitions, published by the International Swaps and Derivatives Association, Inc.) (but excluding payments with respect to option premiums).

(j)
"Affiliate" will have the meaning specified in Section 14 of this Agreement.

(k)
Absence of Litigation. For the purpose of Section 3(c): "Specified Entity" means in relation to Party A, none;

"Specified Entity" means in relation to Party B, any Affiliate of Party B.

(l)
No Agency. The provisions of Section 3(g) will apply to this Agreement.
 
36

(m)
Additional Representation will apply. For the purpose of Section 3 of this Agreement, each of the following will constitute an Additional Representation:

Relationship Between Parties. Each party will be deemed to represent to the other party on the date on which it eaters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction):

 
(A)
Non-Reliance. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisors as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction, it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party will be deemed to be an assurance or guarantee as to the expected results of that Transaction.

 
(B)
Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction.

 
(C)
Status of Parties. The other party is not acting as a fiduciary for or an advisor to it in respect of that Transaction.

 
(D)
Eligible Contract Participant. It is an "eligible contract participant" as defined in Section la(12) of the U.S. Commodity Exchange Act, 7 U.S.C. Section la(12).

(n)
Recording of Conversations. Each party (i) consents to the recording of telephone conversations between the trading, marketing and other relevant personnel of the parties in connection with this Agreement or any potential Transaction and (ii) agrees, to the extent permitted by applicable law, that recordings may be submitted in evidence in any Proceedings.

PART 5: Other Provisions

(a)
Delivery of Confirmations. For each Transaction entered into hereunder, Party A shall promptly send to Party B a Confirmation (which may be via facsimile transmission). Party B agrees to respond to such Confirmation within two Local Business Days, either confirming agreement thereto or requesting a correction of any error(s) contained therein. Failure by Party A to send a Confirmation or of Party B to respond within such period shall not affect the validity or enforceability of such Transaction. Absent manifest error, there shall be a presumption that the terms contained in such Confirmation are the terms of the Transaction.

(b)
Furnishing Specified Information. Section 4(a)(iii) is hereby amended by inserting "promptly upon the earlier of (1)" in lieu of the word "upon" at the beginning thereof and inserting "or (2) such party learning that the form or document is required" before the word "any" on the first line thereof.
 
37

(c)
Waiver of Right to Trial by Jury. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY CREDIT SUPPORT DOCUMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(d)
Cross Default. Section 5(a)(vi) of this Agreement is hereby amended adding the following after the semicolon at the end thereof:

"provided, however, that notwithstanding the foregoing (but subject to any provision to the contrary contained in any such agreement or instrument), an Event of Default shall not occur under either (1) or (2) above if the default, event of default or other similar condition or event referred to in (1) or the failure to pay referred to in (2) is caused not (even in part) by the unavailability of funds but is caused solely due to a technical or administrative error which has been remedied within three Local Business Days after notice of such failure is given to the party."

(e)
2002 Master Agreement Protocol. Annexes 1 to 18 and Section 6 of the ISDA 2002 Master Agreement Protocol as published by the International Swaps and Derivatives Association, Inc. on July 15, 2003 are incorporated into and apply to this Agreement. References in those definitions and provisions to any ISDA Master Agreement will be deemed to be references to this Master Agreement.

(f)
Consent to Disclosure. Party B consents to Party A effecting such disclosure as Party A may deem appropriate to enable Party A to transfer Party B's records and information to process and execute Party B's instructions, or in pursuance of Party A's or Party B's commercial interest, to any of its Affiliates. For the avoidance of doubt, Party B's consent to disclosure includes the right on the part of Party A to allow access to any intended recipient of Party B's information, to the records of Party A by any means.

(g)
USA PATRIOT Act Notice. Party A hereby notifies Party B .that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies Party B, which information includes the name and address of Party B and other information that will allow Party A to identify Party B in accordance with the Act.

PART 6: Additional Terms for Foreign Exchange and Foreign Exchange Option Transactions

(a)
Incorporation of Definitions. The 1998 FX and Currency Option Definitions (the "FX Definitions"), published by the International Swaps and Derivatives Association, Inc., the Emerging Markets Traders Association and The Foreign Exchange Committee, are hereby incorporated by reference with respect to FX Transactions (as defined in the FX Definitions) and Currency Option Transactions (as defined in the FX Definitions). Terms defined in the FX Definitions shall have the same meanings in this Part 6.

(b)
Scope. Unless otherwise agreed in writing by the parties, each FX Transaction and Currency Option Transaction entered into between the parties before, on or after the date of this Agreement shall be a Transaction under this Agreement and shall be part of, subject to and governed by this Agreement. FX Transactions and Currency Option Transactions shall be part of, subject to and governed by this Agreement even if the Confirmation in respect
 
38

thereof does not state that such FX Transaction or Currency Option Transaction is subject to or governed by this Agreement or does not otherwise reference this Agreement.

(c)
Premium Netting. If, on any date, and unless otherwise mutually agreed by the parties, Premiums would otherwise be payable hereunder in the same Currency between the same respective offices of the parties, then, on such date, each party's obligation to make payment of such Premiums will be automatically satisfied and discharged and, if the aggregate Premiums that would otherwise have been payable by such office of one party exceeds the aggregate Premiums that would otherwise have been payable by such office of the other party, replaced by an obligation upon the party by whom the larger aggregate Premiums would have been payable to pay the other party the excess of the larger aggregate Premiums over the smaller aggregate Premiums, and if the aggregate Premiums are equal, no payment shall be made.

IN WITNESS WHEREOF, the parties have executed this Schedule by their duly authorized officers as of the date hereof.

BANK OF AMERICA, N.A.
  
KATY INDUSTRIES, INC.
     
 /s/ Donald M. Caiazza
  
/s/ Michael C. Paul
Name:  Donald M. Caiazza
  
Name:  Michael C. Paul
Title:    Senior Vice President
  
Title:    Treasurer
 
39
 

To:
Katy Industries, Inc.
  
 
765 Straits Turnpike
  
 
Middlebury 
 
 
CT 06762 USA
  
     
     
     
From:
Bank of America, N. A.
  
 
233 South Wacker Drive - Suite 2800
  
 
Chicago
  
 
Illinois 60606
  
 
U.S.A.
  
Department:
Swaps Operations
  
     
Fax:
    
     
Date:
16th August 2005
  



Dear Sir/Madam,

The purpose of this letter agreement is to confirm the terms and conditions of the Transaction entered into between Katy Industries, Inc. and Bank of America, N.A. (each a "party" and together "the parties") on the Trade Date specified below (the "Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below (the "Agreement").

The definitions and provisions contained in the 2000 ISDA Definitions, as published by the International Swaps and Derivatives Association, Inc., (the "Definitions") are incorporated into this Confirmation. In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern.

This Confirmation supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of 11th August 2005, as amended and supplemented from time to time, between the parties. All provisions contained in the Agreement govern this Confirmation except as expressly modified below.

In this Confirmation "Party A" means Bank of America, N.A. and "Party B" means Katy Industries, Inc..
 

General Terms:
 
The terms of the particular Transaction to which this Confirmation relates are as follows:
 
Notional Amount: 
As per Schedule A attached hereto. 
   
Trade Date: 
15th August 2005 
   
Effective Date: 
17th August 2005 
   
Termination Date: 
17th August 2007, subject to adjustment in accordance with the Modified Following Business Day Convention 
   
   
Fixed Amounts: 
  
 
  
Fixed Rate Payer: 
Party B 
   
Delayed Payment: 
Applicable, 9 Business Days after each Fixed Rate Payer Period End Date 
   
Fixed Rate Payer 
  
Period End Dates: 
The 23rd of each Month, commencing on 23rd August 2005 and ending on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention 
   
Fixed Rate: 
4.49000 per cent 
   
Fixed Rate Day
 
Count Fraction: 
Actual/360 
   
   
Floating Amounts: 
  
   
Floating Rate Payer: 
Party A 
 
  
Floating Rate Payer
 
Payment Dates: 
The 23rd of each Month, commencing on 23rd August 2005 and ending on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention 
   
Floating Rate for initial
 
Calculation Period: 
to be determined 
   
Floating Rate Option: 
USD-LIBOR-BBA 
   
 
 
Designated Maturity: 
1 Month provided that Linear Interpolation will apply to the initial Calculation Period and to the final Calculation Period 
   
Spread: 
None 
   
Floating Rate Day
  
Count Fraction: 
Actual/360 
   
Reset Dates: 
First day of each Calculation Period 
   
Business Days: 
New York and London 
 
  
Calculation Agent: 
Party A 
 
Recording of Conversations:
 
Each party to this Transaction acknowledges and agrees to the tape recording of conversations between the parties to this Transaction whether by one or other or both of the parties or their agents, and that any such tape recordings may be submitted in evidence in any Proceedings relating to the Agreement and/or this Transaction.
 

 
Account Details: 
    
     
Account for payments to 
    
Party A:  
  
USD
 
Pay to:
 
 
ABA#:
 
 
For Account of :
 
 
Account Number :
 
 
Swift Code:
 
     
Account for payments to 
    
Party B:  
  
USD
   
As advised under separate cover 
Offices: 
    
     
The Office of Party A for this 
    
Transaction is:
Charlotte - NC, United States 
 
Please send reset notices to fax no.
     
The Office of Party B for this 
    
Transaction is:
Middlebury - CT, United States 
 

Please confirm that the foregoing correctly sets forth the terms and conditions of our agreement by returning via telecopier an executed copy of this Confirmation to the attention of Global FX and Derivative Operations
 
   
Accepted and confirmed as of the date first written:
  
Bank of America, N.A.
  
Katy Industries, Inc.
  
       
/s/ Dave Walker       
Dave Walker
     
Senior Vice President
      
Authorised Signatory
  
By:  /s/ Michael C. Paul
  
   
Name:   Michael C. Paul
  
   
Title:  Treasurer
  
 
 
 
SCHEDULE A

Calculation Period scheduled to commence on: 
Currency Amount: 
   
17th August 2005 
USD 25,000,000.00 
   
23rd August 2005 
USD 25,000,000.00 
   
23rd September 2005 
USD 25,000,000.00 
   
23rd October 2005 
USD 25,000,000.00 
   
23rd November 2005 
USD 25,000,000.00 
   
23rd December 2005 
USD 25,000,000.00 
   
23rd January 2006 
USD 25,000,000.00 
   
23rd February 2006 
USD 25,000,000.00 
   
23rd March 2006 
USD 25,000,000.00 
   
23rd April 2006 
USD 25,000,000.00 
   
23rd May 2006 
USD 25,000,000.00 
   
23rd June 2006 
USD 25,000,000.00 
   
23rd July 2006 
USD 25,000,000.00 
 
 
23rd August 2006 
USD 15,000,000.00 
   
23rd September 2006 
USD 15,000,000.00 
   
23rd October 2006  
USD 15,000,000.00 
   
23rd November 2006 
USD 15,000,000.00 
   
23rd December 2006 
USD 15,000,000.00 
   
23rd January 2007 
USD 15,000,000.00 
   
23rd February 2007 
USD 15,000,000.00 
   
23rd March 2007 
USD 15,000,000.00 
   
23rd April 2007 
USD 15,000,000.00 
   
23rd May 2007 
USD 15,000,000.00 
   
23rd June 2007 
USD 15,000.000.00 
   
23rd July 2007 
USD 15,000,000.00 
   
 
 
EX-31.1 3 ex31-1.htm SECTION 302 CERTIFICATION - ANTHONY T. CASTOR III Section 302 Certification - Anthony T. Castor III
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony T. Castor III, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Katy Industries, Inc. (the “registrant”);
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
[Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E];
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
       
 
 Date: November 15, 2005
By:
/s/ Anthony T. Castor III
Anthony T. Castor III
President and Chief Executive Officer
EX-31.2 4 ex31-2.htm SECTION 302 CERTIFICATION - AMIR ROSENTHAL Section 302 Certification - Amir Rosenthal
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

        I, Amir Rosenthal, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Katy Industries, Inc. (the “registrant”);
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
[Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E];
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
Date: November 15, 2005
By:
/s/ Amir Rosenthal
Amir Rosenthal
Chief Financial Officer
EX-32.1 5 ex32-1.htm SECTION 906 CERTIFICATION - ANTHONY T. CASTOR III Section 906 Certification - Anthony T. Castor III
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Katy Industries, Inc. (the “Company”) for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony T. Castor III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



By /s/ Anthony T. Castor III
Anthony T. Castor III
President and Chief Executive Officer
November 15, 2005
 
 
 
 
A signed original of this written statement or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to Katy Industries, Inc. and will be retained by Katy Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request
 EX-32.2 6 ex32-2.htm SECTION 906 CERTIFICATION - AMIR ROSENTHAL Section 906 Certification - Amir Rosenthal
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Katy Industries, Inc. (the “Company”) for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Amir Rosenthal, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ Amir Rosenthal
Amir Rosenthal
Chief Financial Officer
November 15, 2005



A signed original of this written statement or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to Katy Industries, Inc. and will be retained by Katy Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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