KATY INDUSTRIES INC - 10-K Annual Report

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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended: December 31, 1997 Commission file number 1-5558

Katy Industries, Inc.
(Exact name of registrant as specified in its charter)

Delaware 75-1277589
(State of Incorporation) (IRS Employer Identification Number)

6300 S. Syracuse #300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (303) 290-9300

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class) (Name of each exchange on which registered)
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights

Securities registered pursuant to Section 12(g) of the Act: None

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
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 25, 1998, was $82,752,046. On that date 8,280,169
shares of Common Stock, $1.00 par value, were outstanding, the only class of
the registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------

Portions of the definitive Proxy Statement of Katy Industries, Inc. (The
"1998 Proxy Statement") with respect to the 1998 annual meeting of shareholders
are incorporated by reference into Part III of this Form 10-K.

Exhibit index appears on page 48. Report consists of 49 pages.

PART I
------
Item 1. Business
- -----------------

Katy Industries, Inc. ("Katy" or the "Company") was organized as a
Delaware corporation in 1967. In accordance with its recently announced plan
of divestiture and reorganization (the "Plan"), Katy carries on business
through two principal operating groups: Electrical/Electronic and Maintenance
Products. Under the Plan, Katy intends to dispose of its entire previously
reported Machinery Manufacturing Group and, accordingly that group has been
reported as "Discontinued operations" in the Statements of Consolidated
Operations. The other businesses to be disposed of under the Plan comprise
only a portion of Katy's previously reported Distribution and Service Group and
one of Katy's equity investments. The operations of these businesses have
been reported as "Equity in income of other operations to be disposed of" in
the 1997 Statement of Consolidated Operations. Katy also has an equity
investment in one other company. Each Katy subsidiary has its own management
and the head of each subsidiary is responsible for the business and affairs of
that company. Nevertheless, each enterprise operates within a framework of
broad policies and corporate goals established by Katy's corporate management,
which is responsible for overall planning, financial management, acquisitions,
dispositions, and other related administrative and corporate matters.

Management continuously reviews each of its businesses. As a result of
these ongoing reviews management may determine to sell certain companies and
intends to augment certain businesses with acquisitions. Any acquisitions
would be funded through current cash balances, available lines of credit and/or
new borrowings.

As a result of recent acquisitions and dispositions and a continuing
management focus on its Electrical/Electronic and Maintenance Products
businesses, Katy's operating groups were realigned and renamed and the business
units reclassified during 1997. Selected restated operating data for each
operating group is incorporated herein by reference to "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in
Part II, Item 7. Information regarding foreign and domestic operations and
export sales is incorporated herein by reference to Note 12 to Consolidated
Financial Statements of Katy included in Part II, Item 8. Set forth below is
information about Katy's operating groups and investments and about Katy's
business in general:

Electrical/Electronic Group
- ---------------------------

The group's principal business is the manufacture, distribution, packaging
and sale of consumer electric corded products, electrical/electronic
accessories, and the distribution of electronic components and nonpowered hand
tools. The group accounted for 75% of the Company's consolidated sales in
1997. The manufacturer of electric corded products is the only business in
this group that experiences seasonal sales trends. All of the businesses in
the group have a number of competitors, some of which are larger and have
greater financial resources. The four business units comprising this group are
described below:

GC Electronics. GC Electronics, acquired by Katy in April of 1995, is
headquartered in Rockford, Illinois, and has a sourcing office in Taiwan. GC
Electronics is a leading value-added distributor of electronic and electrical
parts and accessories. In addition the company produces a full line of home
entertainment component parts and service technician products.

GC Thorsen. GC Thorsen, acquired by Katy in April of 1995, is
headquartered in Rockford, Illinois, and has a sourcing office in Taiwan.
GC Thorsen is a leading value-added distributor of nonpowered hand tools.

Waldom Electronics, Inc. Waldom, located in Chicago, Illinois, is a
leading master distributor of high quality, brand name electronic and
electrical components, and loudspeakers and their components. Waldom
distributes primarily to the electronic, automotive and communication
industries.

Woods Industries, Inc. Woods, which was acquired by Katy in December of
1996, is headquartered in Carmel, Indiana and has additional warehousing,
distribution and manufacturing facilities in Jasonville, Loogootee, Mooresville
and Worthington, Indiana, Sparks, Nevada, and London, Ontario, Canada. Woods
manufactures and distributes consumer electric corded products and supplies
electrical/electronic accessories. These products are sold to retailers
principally located in the United States and Canada.

Maintenance Products Group
- --------------------------

The group's principal business is the manufacture, distribution, packaging
and sale of sanitary maintenance supplies, abrasives and stains. The group
accounted for 25% of the Company's consolidated sales in 1997. The
manufacturer of stain is the only business in this group that experiences
seasonal sales trends. All have a number of competitors, some of which are
larger and have greater financial resources. The four business units comprising
this group are described below:

Glit/Microtron Abrasives. Glit/Microtron, headquartered in Wrens,
Georgia, also has a manufacturing facility in Pineville, North Carolina, and a
sales office in Mississauga, Ontario, Canada. Glit/Microtron manufactures
nonwoven floor maintenance pads, scouring pads and sponges, and specialty
abrasive products for cleaning and finishing. Products are sold primarily to
the sanitary maintenance, restaurant supply and consumer markets. In addition,
Glit/Microtron manufactures a line of wood sanding products which are sold
through retail stores across the United States and Canada. Consumer products
are marketed under the brand names Hannah's Helper and Kleenfast through
supermarkets and drug and variety stores.

Gemtex Abrasives. Gemtex, which was acquired by Katy in August of 1995, is
headquartered in Etobicoke, Ontario, Canada and has an additional manufacturing
plant in Buffalo, New York. Gemtex is a manufacturer of fibre disk and
distributor of coated abrasives for the automotive, industrial and retail
markets.

Duckback Products, Inc. Located in Chico, California, Duckback is a
manufacturer of high-tech exterior transparent stains, coatings and water
repellents. These products are sold under the trade names Superdeck,
Supershade and Fightback.

Loren Products. Loren, which was acquired by Katy in August of 1997, is
headquartered in Lawrence, Massachusetts. Loren is a manufacturer and
distributor of cleaning and abrasive products for the industrial markets and
building products for the consumer markets. Loren markets its institutional
products under the brand names of Brillo and Boraxo, as well as some private
label products.

Discontinued Operations
- -----------------------

The group's business is the manufacture of machinery for the cookie
sandwich, food processing and wood working industries. Other businesses in the
group manufacture testing and recording devices for the transportation
industry, and another produces gauging and control systems for the metalworking
industry. Note that the group's sales are excluded from the Statements of
Consolidated Operations for all periods presented therein; see Note 3 to
Consolidated Financial Statements for further discussion. The companies in
this group do not experience seasonal sales trends. All the companies in this
group have a number of competitors, some of which are larger and have greater
financial resources. The five business units comprising this group are
described below:

Airtronics. Airtronics, which is located in Elgin, Illinois, supplies the
metalworking industry with engineered gauging and control systems. In
addition, Airtronics rebuilds and resells centerless grinding machines.

Beehive Machinery , Inc. Located in Sandy, Utah, Beehive is a leading
manufacturer in the specialized field of mechanical meat and food separation
equipment for the food processing industry. Approximately 50% of Beehive's
sales are made outside the United States. On July 14, 1997, the Company
completed its divestiture of Beehive. See Note 2 to Consolidated Financial
Statements for further discussion.

Bach-Simpson, Ltd. Bach Simpson is a manufacturer of transportation test
and monitoring system equipment, speed indicators, fuel gauges and specialized
diagnostic and testing products. Primary markets served are the railroad and
general industrial markets. Bach Simpson is located in London, Ontario,
Canada.

Diehl Machines, Inc. Diehl, located in Wabash, Indiana, is a pioneer in
the production of ripsaws, veneer splicers, automatic lathes and moulders.
Primary customers are in the millwork industry and manufacturers of doors,
windows, cabinets and furniture.

Peters Machinery Company. Peters, which designs and manufactures
proprietary machinery for producing cookie and cracker sandwiches, is located
in Chicago, Illinois. Approximately 70% of Peters' sales are made outside the
United States.

Other Operations to be Disposed Of
- ----------------------------------

These business lines operate cold storage facilities, operate a waste-to-
energy facility, provide specialty metal products to a wide range of high-tech
industries, and harvest shrimp. Note that the sales of these operations are
excluded from the 1997 Statement of Consolidated Operations, see Note 3 to
Consolidated Financial Statements for further discussion. The companies in
this group do not experience seasonal sales trends. All of these companies
have a number of competitors, with the exception of Savannah Energy Systems
Company, some of which are larger and have greater financial resources. The
four businesses comprising the other operations to be disposed of are described
below:

Bee Gee Holding Company, Inc. This company harvests shrimp off the coast
of South America. Katy's investment in this company is an equity investment.
See Note 5 to Consolidated Financial Statements.

C.E.G.F. (USA), Inc. This 95% owned company is headquartered in Plant
City, Florida, and operates refrigeration and cold storage facilities in Plant
City, Florida and in Houston, Texas. The facilities serve the needs of a
variety of firms in the frozen food, grocery and seafood industries.

Hamilton Precision Metals, Inc. Hamilton, located in Lancaster,
Pennsylvania, rerolls a wide range of precision metal strip and foil for the
medical, electronics, aerospace and computer industries. The company's products
are used in a wide range of high-tech applications.

Savannah Energy Systems Company. Savannah Energy owns and operates a
waste-to-energy facility in Savannah, Georgia.

Investments, at equity
- ----------------------

Katy has an investment, at equity, in one other company. Schon & Cie, AG
("Schon"), located in Germany, manufactures a wide range of mechanical and
programmable four post, web and flat bed die-cutting equipment and shoe
manufacturing machines. Schon has a number of competitors, some of which are
larger and have greater financial resources. For additional information
related to investments, reference is made to Notes 5 and 14 to Consolidated
Financial Statements in this report, which information is included in Part II,
Item 8.

Customers
- ---------

Katy is dependent upon one customer for approximately 15% of annual sales.
Katy is not dependent on any other single customer for a material portion of
its overall business.

Backlog
- -------

The Company's aggregate backlog position as of the end of 1997 was
$13,200,000. The orders are firm and are expected to be shipped during 1998.

Competition
- -----------

Electrical/Electronics

The Company is subject to strong competition in the industry and markets
they serve. There are numerous other organizations competing for market share
and the industry continues to experience intense price pressures. The Company
believes that it has established itself as a strong provider of quality
products and service in these markets and is able to compete with the price
pressures of larger manufacturers and distributors of similar products.

Maintenance Products

The Company competes for market share with several competitors in this
industry. The Company believes that it has established long standing
relationships with its major customers based on high quality products and
service, while continuing its position of being a low cost provider in this
industry.

Raw Materials
- -------------

Katy's operations have not experienced significant difficulty in obtaining
raw materials, fuels, parts or supplies for their activities during the most
recent fiscal year, but no prediction can be made as to possible future supply
problems or production disruptions resulting from possible shortages.

Employees
- ---------

As of December 31, 1997, Katy employed 1,907 people, of which 1,516
related to the Company's continuing businesses. Approximately 135 employees
of the Company were members of various unions. Katy's labor relations are
generally satisfactory and there have been no strikes in recent years that have
materially affected its operations.

Regulatory and Environmental Matters
- ------------------------------------

Katy does not anticipate that federal, state or local environmental laws
or regulations will have a material adverse effect on its consolidated
operations or financial position. Katy anticipates making additional
expenditures for environmental control facilities during 1998, in accordance
with terms agreed upon with the United States Environmental Protection Agency
and various state environmental agencies. (See Part II, Item 7 - Environmental
and Other Contingencies)

Licenses, Patents and Trademarks
- --------------------------------

The success of Katy's products has not depended on patent and license
protection, but rather on the quality of Katy's products, proprietary
technology, contract performance and the technical competence and creative
ability of Katy's personnel to develop and introduce saleable products.

Research and Development Costs
- ------------------------------

Research and development costs are expensed as incurred and are not
material to Katy's operations.

Item 2. PROPERTIES
- -------------------

As of December 31, 1997, Katy's total building floor area owned or leased
was 2,264,000 square feet, of which 1,109,000 square feet were owned and
1,155,000 square feet were leased. The following table shows by industry
segment a summary of the size (in square feet) and character of the various
facilities included in the above totals together with the location of the
principal facilities.

Industry Segment Owned Leased Total
- ---------------- ----- ------ -----
(in thousands of square feet)

Electrical/Electronic - primarily plant and
office facilities with principal facilities
located in Rockford, Illinois; Taipei, Taiwan;
Chicago, Illinois; and Carmel, Indianapolis,
Jasonville, Loogootee, Mooresville, and
Worthington, Indiana; Sparks, Nevada, and
London, Ontario, Canada 231 697 928

Maintenance Products - primarily
plant and office facilities with principal
facilities located in Chico, California; Wrens,
Georgia; Pineville, North Carolina; Buffalo,
New York; Lawrence, Massachusetts and
Etobicoke, Mississauga, Ontario, Canada 230 445 675

Discontinued Operations - primarily plant and
office facilities with principal facilities located
in Elgin and Chicago, Illinois; Wabash and
Elkhart, Indiana and London, Ontario, Canada 250 0 250

Other Operations to be Disposed Of - primarily plant
and office facilities with principal facilities
located in Plant City, Florida; Houston, Texas;
Lancaster, Pennsylvania and Savannah, Georgia 398 0 398

Corporate - office facilities in Englewood,
Colorado 0 13 13

All properties used in operations are owned or leased and are suitable and
adequate for Katy's operations. It is estimated that approximately 95% of
these properties are being utilized.

Item 3. LEGAL PROCEEDINGS
- --------------------------

Except as set forth below, no cases or legal proceedings are pending
against Katy, other than ordinary routine litigation incidental to Katy and its
businesses and other non-material cases and proceedings.

1. Environmental Claims
--------------------

(a) Administrative Order on Consent - W.J. Smith Wood Preserving Company
and Katy Industries, Inc., U.S. EPA Docket No. RCRA-VI-7003-93-02 and
Texas Water Commission Administrative Enforcement Action.

(b) Notice of Claim - Medford, Oregon.

(c) Demand for Indemnification - Londonderry, New Hampshire.

The "W.J. Smith" case, matter (a) above, originated in the 1980's when
the United States and the State of Texas, through the Texas Water Commission
("TWC"), initiated environmental enforcement actions against W.J. Smith
alleging that certain conditions on the W.J. Smith property (the "Property")
violated environmental laws. Following such enforcement actions, W.J. Smith
engaged in a series of cleanup activities on the W.J. Smith property and
implemented a groundwater monitoring program.

In 1993, TWC referred the entire matter to the United States Environmental
Protection Agency ("USEPA"), which initiated a Unilateral Administrative Order
Proceeding under Section 7003 of the Resource Conservation and Recovery Act
("RCRA") against W.J. Smith and Katy. The proceeding requires certain actions
at the site and 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 USEPA agreed to resolve the proceeding
through an Administrative Order on Consent under Section 7003 of RCRA.
Pursuant to the Order, W.J. Smith is currently implementing a cleanup to
mitigate off-site releases.

Since 1990, the Company has spent in excess of $5,500,000 in undertaking
cleanup and compliance activities in connection with this matter and has
established a reserve, in excess of $2,000,000, for future such activities.
The Company believes that the amount reserved will be adequate; however, total
cleanup and compliance costs cannot be determined at this time.

Concerning matter (b) above, by letter dated August 20, 1993, a claim was
asserted by Balteau Standard, Inc. ("Balteau") against Katy concerning PCB
contamination at the Medford, Oregon facility of the former Standard
Transformer division of American Gage. Balteau demanded that Katy accept
financial responsibility for investigation and cleanup costs incurred as a
result of the PCB contamination. Katy and Balteau agreed to share such costs.
Pursuant to such agreement, Katy paid 65% of the first $2,000,000 of such costs
and agreed to pay 50% of such costs to the extent that they exceed $2,450,000.
Since it executed the cost sharing agreement, Katy has paid approximately
$1,428,000 in cleanup costs. Katy believes the cleanup plan has been
successful and has requested that the Oregon Department of Environmental
Quality inspect and approve the remediation work. Katy has received such
approval with respect to a portion of the cleanup plan. Further monitoring of
groundwater and testing and cleanup of adjacent property may be required before
approval can be obtained with respect to the remainder of the plan. Pending
such approval, the liability of Katy and its subsidiary cannot be determined
at this time.

Concerning matter (c) above, pursuant to an agreement executed in
connection with the sale of assets of JEI Liquidating, Inc., a Katy subsidiary,
Katy has agreed to defend and indemnify the buyer of such assets, Allard
Industries, Inc. ("Allard"), in the case captioned "United States v. Exxon,
et al." in U.S. District Court, D.N.H., consolidated nos. C-92-486; C-93-95-L;
C-94-148-Lcas. The case concerns the disposal of hazardous substances at a
landfill site in Londonderry, New Hampshire, at which JEI Liquidating Inc.
allegedly disposed of hazardous substances from its Manchester, New Hampshire
facility. The case arises under the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"), under which generators and
transporters of hazardous substances are generally held to be jointly and
severally liable for the cleanup of those substances when released into the
environment.

The parties to the litigation have reached a settlement in principle, the
specific terms of which are being negotiated in a Consent Decree. Under the
expected Consent Decree, Allard/Katy will pay approximately $287,000 and
perform no future work at the site, subject to limited re-openers. In
exchange, Allard and Katy will receive a release and contribution protection.
Honeywell Inc., a former owner and operator of JEI Liquidating Inc.'s
Manchester, New Hampshire facility, has agreed in principle to pay $40,000 of
Allard/Katy's settlement under the Consent Decree. Pending entry of the
Consent Decree and receipt of a release, Katy's liability cannot be determined
at this time.

In addition to the claims specifically identified above, the Company and
certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by USEPA, state environmental
agencies and private parties as potentially responsible parties at a number of
waste disposal sites under CERCLA or equivalent state laws, and, as such, may
be liable for the costs of cleanup and other remedial activities at these
sites. The costs involved in these matters are, by nature, difficult to
estimate and subject to substantial change as litigation or negotiations with
the United States, states and other parties proceed. While ultimate liability
with respect to these matters is not easily determinable, the Company believes
that its ultimate liability with respect to such matters will not be material
and has recorded and accrued amounts that it deems reasonable for such
prospective liabilities.

2. "Banco del Atlantico, S.A. v. Woods Industries, Inc., et al.", Civil
Action No. L-96-139 (U.S. District Court, Southern District of Texas).

In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company,
and against certain past and then present officers and directors and former
owners of Woods, alleging that the defendants participated in a violation of
the Racketeer Influenced and Corrupt Organizations Act involving allegedly
fraudulently obtained loans from Mexican banks, including the plaintiff, and
"money laundering" of the proceeds of the illegal enterprise. The plaintiff
also alleges that it made loans to an entity controlled by certain officers and
directors based upon fraudulent representations. The plaintiff seeks to hold
Woods liable for its alleged damage under principles of respondeat superior and
successor liability. The plaintiff is claiming damages in excess of $24,000,000
and is requesting treble damages under the statutes. The defendants have filed
a motion, which has not been ruled on, to dismiss this action on jurisdictional
grounds. Because the litigation is in preliminary stages, it is not possible
at this time for the Company to determine an outcome or reasonably estimate the
range of potential exposure. Katy may have recourse against the former owner
of Woods and others for, among other things, violations of covenants,
representations and warranties under the purchase agreement, and under state,
federal and common law. In addition, the purchase price under the purchase
agreement may be subject to adjustment as a result of the claims made by Banco
del Atlantico. The extent or limit of any such recourse cannot be predicted
at this time.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.

PART II.
--------

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------

Katy's common stock is traded on the New York Stock Exchange ("NYSE").
The following table sets forth high and low sales prices for the common stock
in composite transactions as reported on the NYSE composite tape for the prior
two years and dividends declared during such periods.

Cash
Dividends
Period High Low Declared
- ------ ---- --- --------
1997
First Quarter $ 16 $ 13 1/2 $.075
Second Quarter 17 1/4 14 1/2 .075
Third Quarter 18 14 15/16 .075
Fourth Quarter 20 3/8 17 3/8 .075

1996
First Quarter $ 13 3/4 $ 9 3/4 $.075
Second Quarter 15 1/8 12 1/2 .075
Third Quarter 14 5/8 10 7/8 .075
Fourth Quarter 14 7/8 10 3/4 .075

Dividends are paid at the discretion of the Board of Directors and are
reviewed on an annual basis.

As of March 25, 1998, there were 907 record holders of the Common Stock
and there were 8,280,169 shares of Common Stock outstanding.

Item 6. SELECTED FINANCIAL DATA
- --------------------------------

Years Ended December 31,
------------------------

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Thousands of dollars, except per share data and ratios)

Net sales $274,033 $156,024 $136,093 $124,928 $138,300
Income (loss) from
continuing operations 9,643 12,763 26,427 (10,551) 3,022

Earnings (loss) per share from
continuing operations - Basic $1.16 $1.53 $2.94 $(1.17) $ .33
Earnings (loss) per share from
continuing operations - Diluted $1.15 $1.53 $2.94 $(1.17) $ .33

Net income (loss)
Continuing segments -
businesses to be retained $ 8,890 $ 4,725 $ 4,069 $ 405 $ 3,294
Unusual items 387 6,685 22,520 (12,864) (1,418)
Operations to be disposed of 366 1,353 (162) 1,908 1,146
Discontinued operations 1,959 953 2,144 1,708 (4,562)
------ ------ ------ ------ ------
Net income (loss) $11,602 $13,716 $28,571 $(8,843) $(1,540)
====== ====== ====== ====== ======

Earnings (loss) per share - Basic
Continuing segments $1.07 $ .57 $ .45 $ .04 $ .36
Unusual items .05 .80 2.51 (1.42) (.16)
Other operations to be
disposed of .04 .16 (.02) .21 .13
Discontinued operations .24 .11 .24 .19 (.50)
Earnings (loss) ---- ---- ---- ---- ----
per common share $1.40 $1.64 $3.18 $(0.98) $(0.17)
==== ==== ==== ==== ====

Earnings (loss) per share - Diluted
Continuing segments $1.06 $ .57 $ .45 $ .04 $ .36
Unusual items .05 .80 2.51 (1.42) (.16)
Other operations to be
disposed of .04 .16 (.02) .21 .13
Discontinued operations .23 .11 .24 .19 (.50)
Earnings (loss) ---- ---- ---- ---- ----
per common share $1.38 $1.64 $3.18 $(0.98) $(0.17)
==== ==== ==== ==== ====

Cash flows from
operating activities 14,422 22,524 7,620 8,418 (1,844)
Total assets [a] 235,573 235,377 225,412 203,142 330,225
Total liabilities and
minority interest 96,402 105,331 95,082 92,364 86,459
Shareholders' equity 139,171 130,046 130,330 110,778 243,766
Long-term debt,
excluding current portion [a] 9,948 8,582 9,346 10,572 4,289
Depreciation and
amortization [a] 4,568 5,505 5,949 6,049 5,716
Capital expenditures 10,699 5,319 9,163 4,105 4,278
Working capital [a] 103,252 107,571 96,425 50,041 175,075
Ratio of debt to
total debt and equity 7.1% 6.6% 15.8% 15.9% 6.7%
Shareholders' equity per share 16.81 15.78 14.94 12.21 27.03
Return on average
shareholders' equity 8.6% 10.5% 23.7% (5.0%) (.6%)

Weighted average common
shares outstanding - Basic 8,272,836 8,339,189 8,984,513 9,031,541 9,017,387
Shareholders of record 907 1,351 1,410 1,471 1,560
Number of employees 1,907 2,049 1,109 1,285 1,506
Cash dividends declared per share $.30 $.30 $.25 $14.1875 $.25

[a] Total assets includes $15,552 of net assets from discontinued operations
and $37,546 of net assets from operations to be disposed of for 1997 and
$18,395 of net assets from discontinued operations for 1996. Long-term debt
includes $9,948 from operations to be disposed of for 1997. Depreciation and
amortization includes $681 and $747 from discontinued operations for 1997 and
1996, respectively. Depreciation and amortization includes $2,392 from other
operations to be disposed of for 1997. Working capital includes $10,588 and
$12,569 of net current assets from discontinued operations for 1997 and 1996,
respectively. Working capital also includes $6,692 of net current assets of
other operations to be disposed of for 1997. See Notes 2 and 3 to Consolidated
Financial Statements.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

Results of Operations
- ---------------------

For purposes of this discussion and analysis section, reference is made to
the table below and the Company's Statements of Consolidated Operations
(included in Part II, Item 8). Pursuant to the Company's recently announced
plan of divestiture and reorganization, Katy now operates two principal
operating groups: Electrical/Electronic and Maintenance Products. Under the
divestiture plan, Katy intends to dispose of its entire previously reported
Machinery Manufacturing Group and, accordingly that group has been reported as
"Discontinued operations" in the Statements of Consolidated Operations. The
other businesses to be disposed of comprise only a portion of Katy's previously
reported Distribution and Service Group and one of Katy's equity investments.
The operations of these businesses have been reported as "Equity in income of
other operations to be disposed of" in the 1997 Statement of Consolidated
Operations. The Electrical/Electronic Group is primarily involved in the
distribution of electrical and electronic components and nonpowered hand tools
and the manufacture, distribution, packaging and sale of consumer electric
corded products. The Maintenance Products Group produces sanitary maintenance
supplies, abrasives and stains for the consumer, maintenance, automotive and
industrial markets. For purposes of discussion and analysis, information for
the discontinued operations and the other operations to be disposed of is
presented below. Discontinued operations, which comprises all of the Company's
previously reported Machinery Manufacturing Group, manufactures machinery for
the cookie sandwich, food processing and wood working industries, manufactures
testing and measuring instruments for the railroad and general industrial
markets, manufactures recording devices for the transportation industry and
manufactures gauging and control systems for the metalworking industry. The
other operations to be disposed of, which comprise only a portion of the
Company's previously reported Distribution and Service Group and one of the
Company's equity investments, provide cold storage services, waste-to-energy
services, produce specialty metal products for a wide range of high-tech
industries, and harvest shrimp. Katy intends to seek additional acquisitions
to grow its Electrical/Electronic and Maintenance Products segments.

The table below and the narrative which follows summarize the key factors in
the year-to-year changes in operating results. The information provided below
has been retroactively restated to reflect Katy's realignment of its operating
units.

Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(Thousands of dollars)
Electrical/Electronic Group
- ---------------------------
Net sales $206,247 $75,448 $47,760
Income from operations 12,347 5,209 1,724
Operating margin 6.0% 6.9% 3.6%
Identifiable assets 99,566 97,280 35,486
Depreciation and amortization (445) 845 803
Capital expenditures 3,905 413 849

Maintenance Products Group
- --------------------------
Net sales $67,786 $56,391 $44,434
Income from operations 6,328 4,794 4,712
Operating margin 9.3% 8.5% 10.6%
Identifiable assets 46,333 31,065 29,665
Depreciation and amortization 1,854 1,745 1,318
Capital expenditures 1,234 1,235 953

Discontinued Operations
- -----------------------
Net sales $31,537 $32,494 $35,176
Income from operations 3,046 1,566 3,828
Operating margin 9.7% 4.8% 10.9%
Identifiable assets 18,486 22,843 25,558
Depreciation and amortization 681 747 697
Capital expenditures 1,252 884 1,275

Other Operations to be Disposed Of
- ----------------------------------
Net sales $21,558 $24,185 $43,899
Income from operations 966 3,607 36
Operating margin 4.5% 14.9% 0.1%
Identifiable assets 44,189 43,510 46,250
Depreciation and amortization 2,392 2,014 2,957
Capital expenditures 4,267 2,605 5,920

Corporate
- ---------
Corporate expenses $ 6,496 $ 5,640 $ 5,761
Identifiable assets 43,818 44,811 88,453
Depreciation and amortization 86 154 174
Capital expenditures 41 182 166

Company
- -------
Net sales [a] $327,128 $188,518 $171,269
Income from operations [a] 16,191 9,536 4,539
Operating margin [a] 4.9% 5.1% 2.7%
Identifiable assets [a] 252,392 239,509 225,412
Depreciation and amortization [a] 4,568 5,505 5,949
Capital expenditures 10,699 5,319 9,163

[a] Company balances include amounts from both "Discontinued Operations" and
"Other Operations to be Disposed of", whereas the Consolidated Financial
Statements classify such amounts as "Discontinued Operations" and "Other
Operations to be Disposed of" for 1997 and "Discontinued Operations" for both
1996 and 1995. See Note 3 to Consolidated Financial Statements for further
discussion.

1997 Compared to 1996
- ---------------------

The Electrical/Electronic Group sales increased $130,799,000 or 173%. The
increased sales were primarily due to the acquisition of Woods effective
December 1996, offset partially by lower volumes in the distribution of
electronic and electrical parts and accessories.

Operating income for the group increased $7,138,000 or 137%. The increase was
primarily attributable to the increased sales volume associated with the
acquisition of Woods, offset partially by lower margins in the distribution of
electronic parts, accessories, components and nonpowered hand tool businesses.
Lower margins in the above areas were a result of competitive pressure on
selling prices and higher than expected material costs. Increased margins in
the electric corded products and supplies business as a result of lower copper
prices further contributed to the increased operating income.

Sales for the Maintenance Products Group increased $11,395,000 or 20%. The
increase in sales was primarily associated with the acquisition of Loren
Products, effective August 1997. Various sales promotions in the sanitary
maintenance and stain businesses further contributed to the improvement.

Operating income for the group increased $1,534,000 or 32%. The improvement
was primarily due to increased sales and increased margins in the sanitary
maintenance business, complemented by the Loren acquisition, effective August
1997. Lower selling, general and administrative costs as a percentage of sales
within the stain business further contributed to the increase.

Identifiable assets for the group increased during the year mainly as a result
of the acquisition of Loren, effective August 1997.

Sales for Discontinued Operations decreased $957,000 or 3%. The decrease in
sales was primarily a result of the disposition of Beehive effective July 1997,
partially offset by increased sales in both the cookie sandwich and gauging and
control system businesses.

Operating income for the group increased $1,480,000. Improved margins in wood
processing machinery, cookie sandwich machinery, gauging and control systems,
food separation equipment for the food processing industry, and testing and
recording devices for the transportation industry were the primary reasons for
the increase. Increased margins were a result of successful cost saving
measures and favorable product mix in the wood processing and gauging and
control system businesses. Lower selling, general and administrative costs as
a percentage of sales for the wood processing and cookie sandwich businesses
further contributed to the increase in operating income.

Identifiable assets decreased during the year mainly due to the disposition of
Beehive in July of 1997.

Sales for the other operations to be disposed of decreased $2,627,000 or 11%.
The decrease was primarily a result of decreased volume in the specialty metals
and waste energy businesses, balanced partially by increased volume in the cold
storage facility business.

Operating income for the group decreased $2,641,000 or 73%. The decrease was
a result of lower sales volume in the previously mentioned businesses coupled
with lower margins in the specialty metals, waste energy facility and cold
storage facility businesses. These lower margins were a result of unfavorable
product mix. Higher selling, general and administrative expenses as a
percentage of sales in each of the above mentioned areas also contributed to
the decrease in operating income.

Corporate expenses increased $856,000 or 15%. This increase was mainly a
result of greater insurance costs and salary and compensation increases for
1997 as compared to 1996.

Identifiable assets at Corporate decreased slightly during the year mainly due
to lower cash levels at year end.

Although the results of these operating groups can be significantly affected by
the strength of the general economy, the Company believes that it has
positioned itself well in segments that can be expanded both externally through
acquisitions particularly in the electrical/electronic and maintenance products
areas, and internally through new products, operational improvements and
increased market penetrations.

Following is a discussion concerning other factors that affected the Company's
net income.

Gross profit from continuing operations increased $28,834,000 as gross margins
decreased to 28% from 30% in 1996 while selling, general and administrative
expenses increased $24,625,000 in 1997 compared to the prior year. The
increase in gross profit and slight decrease in gross margin is attributable
to assuming a full year of operations from Woods, which essentially is a higher
volume lower margin business than the existing businesses of the Company.
The increase in selling, general and administrative expenses is primarily due
to the increase in sales volumes during 1997, offset partially by lower
selling, general and administrative costs as a percentage of sales in the
Maintenance Products Group.

Interest expense decreased $833,000 from 1996 primarily as a result of
reclassifying the operations of C.E.G.F. (USA), Inc., including interest
expense, into the line item "Equity in income of other operations to be
disposed of" in the 1997 Statement of Consolidated Operations. Interest income
decreased $1,196,000 during 1997 due to the Company maintaining less average
cash and cash equivalent balances during 1997 compared to 1996.

Other, net in 1997 was income of $900,000 versus income of $1,074,000 in 1996.
The decrease was a result of the Company receiving settlements from various
insurance companies associated with environmental issues in the prior year.

Income from continuing consolidated operations before income taxes decreased to
$14,565,000 in 1997 from $20,966,000 in 1996. This decrease relates primarily
to the gain on sale of Union Pacific stock recognized in 1996, offset partially
by increased operating income from both the Electrical/Electronic and the
Maintenance Products Groups.

Provision for income taxes was $4,922,000 or an effective tax rate of 33.8% in
1997, and $7,639,000 or an effective rate of 36.4% in 1996. The effective tax
rate in 1997 reflects the benefits obtained from the Woods acquisition
effective December 1996.

Equity in income of unconsolidated affiliates increased $636,000 in 1997
primarily due to Bee Gee Holding Company improving upon an unfavorable year in
1996. Note that the income from this equity investment has been included within
the line item "Equity in income of other operations to be disposed of" on the
Statement of Consolidated Operations for 1997. See Note 5 to Consolidated
Financial Statements.

1996 Compared to 1995
- ---------------------

The Electrical/Electronic Group sales increased $27,688,000 or 58%. The
increased sales were primarily due to the acquisition of GC Thorsen effective
March 31, 1995, which provided an additional increase due to having a full year
of operations and increased market penetration during 1996. The acquisition of
Woods, effective December 1996, also contributed to the group's increase.

Operating income for the group increased $3,485,000 or 202%. Improved margins,
a full year of operations at GC Thorsen and operating income generated at Woods
during December 1996 were the primary reasons for the improvement.

The increase in identifiable assets for the group was due mainly to the
acquisition of Woods in December 1996.

Sales for the Maintenance Products Group increased $11,957,000 or 27%. The
increased sales was a result of experiencing a full year of sales from Gemtex,
which was acquired in August 1995, and increased sales throughout product lines
from existing businesses.

Operating income for the group increased $82,000 or 2%. The minor improvement
was due to a full year of operations at Gemtex. Operating income remained
relatively comparable to the prior year for the remaining businesses in the
group.

Sales for Discontinued Operations decreased $2,682,000 or 8%. The decrease was
primarily due to lower volumes in wood processing machinery, gauging and
control systems, and testing and recording devices for the transportation
industry. The decrease was partially offset by increased sales in the cookie
sandwich business.

Operating income for the group decreased $2,262,000 or 59%. The decrease was
primarily due to both lower volumes in the above mentioned businesses and lower
margins in each of the groups' businesses.

Sales for the other operations to be disposed of decreased $19,714,000 or 45%.
The deconsolidation of the Schon Group and the disposition of B. M. Root
during 1995 were the primary reasons for the decrease.

Operating income for the group increased $3,571,000. Losses at the Schon
Group during 1995 were the primary factor in this improvement during the year.

Corporate expenses in 1996 decreased slightly from 1995 primarily due to lower
legal and audit fees.

Identifiable assets at Corporate decreased during the year mainly due to lower
cash levels at year end, as a result of the Woods acquisition in December of
1996.

Although the results of these operating groups can be significantly affected by
the strength of the general economy, the Company believes that it has
positioned itself well in segments that can be expanded both externally through
acquisitions particularly in the electrical/electronic and maintenance products
areas, and internally through new products, operational improvements and
increased market penetrations.

Following is a discussion concerning other factors that affected the Company's
net income.

Gross profit increased $9,479,000 as gross margins improved to 30% from 28% in
1995 while selling, general and administrative expenses increased $1,064,000 in
1996 compared to the prior year. The increase in gross profit and increase in
gross margin percentage was due to the acquisition of GC Thorsen effective
March 1995, which provided an additional increase due to having a full year of
operations and increased market penetration during 1996, the result of
experiencing a full year of operations from Gemtex, which was acquired in
August 1995 and the acquisition of Woods, effective December 1996. The
increase in selling, general and administrative expenses is mainly due to the
increase in sales volumes during 1996.

Interest expense decreased $1,324,000 from 1995 as the Company had no
outstanding short-term borrowings and lower long-term debt. Borrowings in 1995
were incurred in connection with the GC Thorsen acquisition. Interest income
increased $1,463,000 during 1996 due to the Company maintaining higher average
cash and cash equivalent balances during 1996 compared to 1995.

During 1996, the Company sold 250,000 shares of Union Pacific Corporation
common stock and 97,938 shares of Union Pacific Resources Corporation common
stock, resulting in a pre-tax gain of $10,612,000. During 1995, the Company
sold 248,566 shares of Union Pacific Corporation common stock, resulting in a
pre-tax gain of $7,675,000. Also in 1995, the Company sold one-half of its 75%
interest in Schon. In connection with the sale, the Company recorded a gain
of $4,920,000 reflecting the reversal of previously recorded losses of Schon.

Other, net in 1996 was income of $1,074,000 versus income of $4,890,000 in
1995. In 1995, the Company received settlements from various insurance
companies in the amount of $2,846,000 in settlement of claims associated with
environmental issues. During 1996 the Company recognized $304,000 of income
due to similar settlements. During 1996, the Company recognized approximately
$150,000 of dividend income as compared to $650,000 for 1995.

Income from continuing consolidated operations before income taxes increased to
$20,966,000 in 1996 from $14,729,000 in 1995. The $6,237,000 increase was
primarily the result of a larger gain on the sale of Union Pacific stock in
1996 than in 1995, complemented with increased operating income from both the
Electrical/Electronic Group and the Other Operations to be Disposed Of.

Provision for income taxes was $7,639,000 or an effective rate of 36.4% in
1996, and $2,511,000 or an effective rate of 17.0% in 1995. The 1995 effective
tax rate reflects the fact that the gains on the Schon sale were not tax
effected, since the losses had not previously provided a tax benefit.

Equity in income of unconsolidated affiliates decreased $14,773,000 in 1996 due
to the gain in 1995 recognized on the sale of Syroco, Inc. by Syratech, and the
tax benefit realized from the reversal of taxes previously provided on Katy's
share of Syratech's income, which is no longer required because of the sale of
WSC Liquidating and Katy's holdings of Syratech stock.

Liquidity and Capital Resources
- -------------------------------

Combined cash and cash equivalents decreased $4,012,000 to $22,327,000 on
December 31, 1997, from $26,339,000 on December 31, 1996, mostly due to the
Loren acquisition. Current ratios were 2.83 to 1.00 and 2.96 to 1.00 at
December 31, 1997 and 1996, respectively. Working capital decreased $4,319,000
to $103,252,000 on December 31, 1997, from $107,571,000 on December 31, 1996.
This decrease is primarily attributable to the previously mentioned cash and
cash equivalents decrease in 1997.

On January 2, 1996, Katy's board authorized the Company to repurchase an
additional 500,000 shares of Katy common stock, bringing the total
authorization to 900,000 shares. Katy repurchased 352,200 of its common shares
in 1995, 509,800 in 1996 and 38,000 in 1997, thereby completing the repurchase
program.

Katy has authorized and expects to commit approximately $18,681,000, of
which $9,276,000 will be expended by the Company's ongoing operations, for
capital projects in 1998, exclusive of acquisitions, if any, and expects to
meet these capital expenditure requirements through the use of available cash
and internally generated funds. The Company continues to search for appropriate
acquisition candidates, and may obtain all or a portion of the financing for
future acquisitions through its new unsecured $80 million credit agreement
agented by Bank of America.

At December 31, 1997, Katy had short and long-term indebtedness of
$10,628,000, secured by assets of its cold storage company. Total debt was 7.1%
of total debt and equity at December 31, 1997. This debt has been classified
within the line item "Net assets of other operations to be disposed of" on the
Consolidated Balance Sheet. See Note 6 to Consolidated Financial Statements
for further discussion.

Management continuously reviews each of its businesses. As a result of
these ongoing reviews, management may determine to sell certain companies and
may augment its remaining businesses with acquisitions. When sales do occur,
management anticipates that funds from these sales will be used for general
corporate purposes or to fund acquisitions. Acquisitions may also be funded
through cash balances, available lines of credit and future borrowings. See
Notes 2 and 3 to Consolidated Financial Statements for further discussion.

New Accounting Pronouncements
- -----------------------------

In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans and
standardizes the disclosure requirements to the extent practicable. This
statement is effective for the Company's financial statements for the year
ending December 31, 1998. The Company does not expect the adoption of SFAS 132
to materially impact the financial statement presentation.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This statement is
effective for the Company's financial statements for the year ending December
31, 1998. The Company does not expect the adoption of SFAS 131 to materially
impact the financial statement presentation.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income in financial statements. Under this statement, all components of
comprehensive income shall be reported in the financial statements for the
period in which they are recognized. This statement divides comprehensive
income into net income and other comprehensive income. Other comprehensive
income shall be classified separately into foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The accumulated balance of other
comprehensive income shall be reported in the equity section of the balance
sheet separately from retained earnings and additional paid-in-capital. This
statement is effective for the Company's financial statements for the year
ending December 31, 1998 and the Company does not expect the adoption of SFAS
130 to materially impact the financial statement presentation.

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
This statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly held common stock or
potential common stock. This statement replaces the presentation of primary
EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully diluted EPS, diluted EPS
reflects the potential dilution of securities that could share in the earnings.
This statement is effective for the Company's financial statements for the year
ended December 31, 1997 and has been adopted, resulting in the restatement of
earnings per share for all prior periods. Details regarding Earnings Per Share
are disclosed at Note 4 to Consolidated Financial Statements.

Environmental and Other Contingencies
- -------------------------------------

In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company,
and against certain past and then present officers and directors and former
owners of Woods, alleging that the defendants participated in a violation of
the Racketeer Influenced and Corrupt Organizations Act involving allegedly
fraudulently obtained loans from Mexican banks, including the plaintiff, and
"money laundering" of the proceeds of the illegal enterprise. The plaintiff
also alleges that it made loans to an entity controlled by certain officers and
directors based upon fraudulent representations. The plaintiff seeks to hold
Woods liable for its alleged damage under principles of respondeat superior and
successor liability. The plaintiff is claiming damages in excess of
$24,000,000 and is requesting treble damages under the statutes. The
defendants have filed a motion, which has not been ruled on, to dismiss this
action on jurisdictional grounds. Because the litigation is in preliminary
stages, it is not possible at this time for the Company to determine an outcome
or reasonably estimate the range of potential exposure. Katy may have recourse
against the former owner of Woods and others for, among other things,
violations of covenants, representations and warranties under the purchase
agreement, and under state, federal and common law. In addition, the purchase
price under the purchase agreement may be subject to adjustment as a result of
the claims made by Banco del Atlantico. The extent or limit of any such
recourse cannot be predicted at this time.

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. It can take up to 10 years from the date of the injury to reach a
final outcome for such 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, 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.

The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, 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.
The means of determining allocation among PRPs is generally set forth in a
written agreement entered into by the PRPs at a particular site. An allocation
share assigned to a PRP is often based on the PRP's volumetric contribution of
waste to a site. Under the federal Superfund statute, parties are held to be
jointly and severally liable, thus subjecting them to potential individual
liability for the entire cost of cleanup at the site. The Company is also
involved in remedial response and voluntary environmental cleanup at a number
of other sites which are not currently the subject of any legal proceedings
under Superfund, including certain of its current and formerly owned
manufacturing facilities. 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 indicated environmental liabilities in the aggregate
amount of approximately $4,405,000 at December 31, 1997. The ultimate cost
will depend on a number of factors and the amount currently accrued represents
management's best current estimate of the total cost to be incurred. The
Company expects this amount to be substantially paid over the next one to four
years.

The most significant environmental matters in which the Company is
currently involved are as follows:

1. In 1993, the United States Environmental Protection Agency ("USEPA")
initiated a Unilateral Administrative Order Proceeding under Section
7003 of the Resource Conservation and Recovery Act ("RCRA") against
W.J. Smith and Katy. The proceeding requires certain actions at the
site and 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 USEPA agreed to
resolve the proceeding through an Administrative Order on Consent under
Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is currently
implementing a cleanup to mitigate off-site releases.

2. During 1995, the Company reached agreement with the Oregon Department
of Environmental Quality ("ODEQ") as to a cleanup plan for PCB
contamination at the Medford, Oregon facility of the former Standard
Transformer division of American Gage. The plan called for the Company
to provide a trust fund of $1,300,000 to fund cleanup costs at the
site. These funds were expended in 1995. The plan also called for the
present occupants of the site, Balteau Standard, Inc. to provide the
next $450,000 of cost, with any additional costs to be shared equally
between the two parties. Balteau Standard has paid the next $450,000
and the parties are now sharing equally in cleanup costs. Katy
believes the cleanup plan has been successful and has requested that
the ODEQ inspect and approve the remediation work. Katy has received
such approval with respect to a portion of the cleanup plan. Further
monitoring of groundwater and testing and cleanup of adjacent property
may be required before approval can be obtained with respect to the
remainder of the plan. Pending such approval, the liability of Katy
and its subsidiary cannot be determined at this time.

3. Pursuant to an agreement executed in connection with the sale of assets
of JEI Liquidating, Inc., a Katy subsidiary, Katy has agreed to defend
and indemnify the buyer of such assets, Allard Industries, Inc.
("Allard"), in the case captioned "United States v. Exxon, et al." in
U.S. District Court, D.N.H., consolidated nos. C-92-486; C-93-95-L;
C-94-148-Lcas. The case concerns the disposal of hazardous substances
at a landfill site in Londonderry, New Hampshire, at which JEI
Liquidating Inc. allegedly disposed of hazardous substances from its
Manchester, New Hampshire facility. The case arises under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), under which generators and transporters of hazardous
substances are generally held to be jointly and severally liable for
the cleanup of those substances when released into the environment.
The parties to the litigation have reached a settlement in principle,
the specific terms of which are being negotiated in a Consent Decree.
Under the expected Consent Decree, Allard/Katy will pay approximately
$287,000 and perform no future work at the site, subject to limited
re-openers. In exchange, Allard and Katy will receive a release and
contribution protection. Honeywell Inc., a former owner and operator
of JEI Liquidating Inc.'s Manchester, New Hampshire facility, has
agreed in principle to pay $40,000 of Allard/Katy's settlement under
the Consent Decree. Pending entry of the Consent Decree and receipt
of a release, Katy's liability cannot be determined at this time.

Although management believes that these actions individually and in the
aggregate are not likely to have a material adverse effect on the Company,
further costs could be significant and will be recorded as a charge to
operations when such costs become probable and reasonably estimable.

Other
- -----

Katy's 1998 operating plan of the continuing segments indicates a slight
improvement in results compared to those reported in 1997. However, the plan
reflects lower results in the first and second quarter of 1998 from continuing
segments compared to the year earlier periods. The plan for the third and
fourth quarter of 1998 exceed the year earlier periods and allows for an
improved year to year result. The plan allows for possible loss of business in
the early part of 1998 in the Electrical/Electronic segment due to numerous
product line reviews required by our customers.

The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. This
could result in a system failure or cause disruption to operations.

In 1996, the Company initiated a process of reviewing its systems to
determine whether the year 2000 would have a significant impact on the Company.
The review process has indicated that all systems are either year 2000
compliant or will be within the next year. As a result of this review process,
management has determined that the year 2000 issue will not pose significant
operational problems for its computer systems and accordingly, all costs
associated with this conversion are being expensed as incurred.

Some of the statements in this Form 10-K, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareholders in the course of presentations about the
Company and conference calls following earning releases, constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

MANAGEMENT REPORT

Katy Industries, Inc. management is responsible for the fair presentation and
consistency of all financial data included in this Annual Report in accordance
with generally accepted accounting principles. Where necessary, the data
reflect management's best estimates and judgements.

Management also is responsible for maintaining an internal control structure
with the objective of providing reasonable assurance that Katy's assets are
safeguarded against material loss from unauthorized use or disposition and that
authorized transactions are properly recorded to permit the preparation of
accurate financial data. Cost-benefit judgements are an important
consideration in this regard. The effectiveness of internal controls is
maintained by: (1) personnel selection and training; (2) division of
responsibilities; (3) establishment and communication of policies; and
(4) ongoing internal review programs and audits. Management believes that
Katy's system of internal controls is effective and adequate to accomplish the
above described objectives.

/S/ John R. Prann, Jr.
- ----------------------
John R. Prann, Jr.
President and Chief Executive Officer

/S/ Stephen P. Nicholson
- ------------------------
Stephen P. Nicholson
Vice President, Finance and Chief Financial Officer

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
KATY INDUSTRIES, INC.

We have audited the accompanying consolidated balance sheets of Katy
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related statements of consolidated operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Katy Industries, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Denver, Colorado
January 27, 1998

KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS
------

As of December 31, 1997 1996
---- ----
(Thousands of dollars)

CURRENT ASSETS:

Cash and cash equivalents - Note 1 $ 22,327 $ 26,339
Accounts receivable, trade, net of allowance
for doubtful accounts of $708 and $1,012 47,914 46,379
Notes and other receivables, net of allowance
for doubtful notes of $410 and $329 2,263 1,896
Inventories - Note 1 53,369 58,247
Deferred income taxes - Note 10 13,233 14,331
Other current assets 3,167 2,663
Net current assets of
discontinued operations - Note 3 10,588 12,569
Net current assets of
other operations to be disposed of - Note 3 6,692 -
------- -------

Total current assets 159,553 162,424
------- -------

OTHER ASSETS:
Investments, at equity,
in unconsolidated affiliates - Note 5 - 6,382
Investment in waste-to-energy facility - Note 9 - 11,058
Notes receivable, net of allowance for
doubtful notes of $2,500 and $2,500 1,106 1,219
Cost in excess of net assets of
businesses acquired - Note 2 8,544 6,365
Miscellaneous - Notes 2, 7 and 14 9,993 5,026
Net noncurrent assets of
discontinued operations - Note 3 4,964 5,826
Net noncurrent assets of
other operations to be disposed of - Note 3 30,854 -
------- -------

Total other assets 55,461 35,876
------- -------

PROPERTIES - Note 1:
Land and improvements 894 3,173
Buildings and improvements 12,433 26,236
Machinery and equipment 22,073 32,846
------- -------
35,400 62,255
Accumulated depreciation (14,841) (25,178)
------- -------

Net properties 20,559 37,077
------- -------

$235,573 $235,377
======= =======

See Notes to Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES
-----------

As of December 31, 1997 1996
---- ----
(Thousands of dollars)
CURRENT LIABILITIES:

Accounts payable $24,354 $18,745
Accrued compensation 2,289 2,932
Accrued expenses - Note 1 28,801 31,276
Accrued interest and taxes 236 623
Current maturities, long-term debt - Note 6 - 657
Dividends payable 621 620
------- -------

Total current liabilities 56,301 54,853
------- -------

LONG-TERM DEBT, less current maturities - Note 6 - 8,582
------- -------

OTHER LIABILITIES - Note 7 10,666 9,518
------- -------

EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net - Note 2 6,902 8,517
------- -------

DEFERRED INCOME TAXES - Note 10 22,533 23,861
------- -------

COMMITMENTS AND CONTINGENCIES - Notes 6, 11 and 13

SHAREHOLDERS' EQUITY - Note 8:
Common stock, $1 par value; authorized
25,000,000 shares; issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 51,127 51,117
Foreign currency translation and other adjustments (2,276) (1,778)
Retained earnings 102,194 93,099
Treasury stock, at cost, 1,542,197
and 1,582,942 shares (21,696) (22,214)
------- -------

Total shareholders' equity 139,171 130,046
------- -------

$235,573 $235,377
======= =======

See Notes to Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS

For the years ended December 31, 1997 1996 1995
---- ---- ----
(Thousands of dollars except per share amounts)

Net sales $274,033 $156,024 $136,093
Cost of goods sold 197,633 108,458 98,006
------- ------- -------
Gross profit 76,400 47,566 38,087
Selling, general and administrative expenses (64,221) (39,596) (38,532)
Equity in income of
other operations to be disposed of - Note 3 539 - -
Interest expense (236) (1,069) (2,393)
Interest income 1,183 2,379 916
Gain on sales of
marketable securities - Notes 1 and 14 - 10,612 6,841
Reversal of previously recorded
losses - Note 2 and 14 - - 4,920
Other, net 900 1,074 4,890
------- ------- -------

Income before provision for income taxes 14,565 20,966 14,729

Provision for income taxes - Note 10 (4,922) (7,639) (2,511)
------- ------- -------

Income from operations before equity in
income (loss) of unconsolidated affiliates 9,643 13,327 12,218

Equity in income (loss) of unconsolidated
affiliates (net of tax) - Note 5
Income (loss) from continuing operations - (564) 1,920
Income from discontinued operations - - 678
Gain on sale of Syroco, Inc. - Note 5 - - 4,904
Tax benefit from sale of investment in
Syratech - Note 5 - - 6,707
------- ------- -------
Total - (564) 14,209
------- ------- -------

Income from continuing operations 9,643 12,763 26,427

Discontinued operations - Note 3:
Income from operations of
discontinued businesses (net of tax) 1,959 953 2,144
------- ------- -------

Net income $ 11,602 $ 13,716 $ 28,571
======= ======= =======

Earnings per share of common stock
- Basic (Note 4):
Income from continuing operations $ 1.16 $ 1.53 $ 2.94
Discontinued operations .24 .11 .24
------- ------- -------
Net income $ 1.40 $ 1.64 $ 3.18
======= ======= =======

Earnings per share of common stock
- Diluted (Note 4):
Income from continuing operations $ 1.15 $ 1.53 $ 2.94
Discontinued operations .23 .11 .24
------- ------- -------
Net income $ 1.38 $ 1.64 $ 3.18
======= ======= =======

Dividends paid per share of common stock $ .30 $ .2875 $ .25
======= ======= =======

See Notes to Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY

Common Stock Foreign
------------ Additional Currency Unrealized
Number Par Paid-in and Other Holding Retained Treasury
of Shares Value Capital Adjustments Gains Earnings Stock
--------- ----- ---------- ----------- ---------- -------- --------
(Thousands of dollars)

Balance, January 1, 1995 9,821,329 $9,821 $51,111 $2,676 $4,426 $55,587 $(12,843)

Net income - - - - - 28,571 -
Common stock dividends - - - - - (2,233) -
Foreign currency translation adjustments - Note 8 - - - (4,316) - - -
Purchase of Treasury Shares - Note 8 - - - - - - (3,341)
Unrealized holding gains adjustment - Note 1 - - - - 871 - -
--------- ------ ------- ------ ------ ------- --------
Balance, December 31, 1995 9,821,329 9,821 51,111 (1,640) 5,297 81,925 (16,184)

Net income - - - - - 13,716 -
Common stock dividends - - - - - (2,499) -
Foreign currency translation adjustments - Note 8 - - - 3 - - -
Issuance of shares under
Stock Purchase Plan - Note 8 875 1 6 (141) - (43) 337
Purchase of Treasury Shares - Note 8 - - - - - - (6,367)
Unrealized holding gains adjustment - Note 1 - - - - (5,297) - -
--------- ------ ------- ------ ------ ------- --------
Balance, December 31, 1996 9,822,204 9,822 51,117 (1,778) - 93,099 (22,214)

Net income - - - - - 11,602 -
Common stock dividends - - - - - (2,481) -
Foreign currency translation adjustments - Note 8 - - - (174) - - -
Issuance of shares under
Stock Option Plan - Note 8 - - (31) - - (26) 295
Other issuance of shares - Note 8 - - 41 (324) - - 876
Purchase of Treasury Shares - Note 8 - - - - - - (653)
--------- ------ ------- ------ ------ ------- --------
Balance, December 31, 1997 9,822,204 $9,822 $51,127 $(2,276) $ - $102,194 $(21,696)
========= ====== ======= ====== ====== ======= ========

See Notes to Consolidated Financial Statements.

KATY INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS

For the years ended December 31, 1997 1996 1995
---- ---- ----
(Thousands of dollars)
Cash flows from operating activities:
Net income $11,602 $13,716 $28,571
Depreciation and amortization 4,568 5,505 5,949
(Gain) loss on sale of assets (653) 160 (150)
Disposition of portion of investment in subsidiary - - (7,920)
Gain on marketable security transactions - (10,612) (6,841)
Equity in (income) loss of
unconsolidated affiliates - 564 (14,209)
Deferred income taxes 1,287 6,239 (819)
Changes in assets and liabilities,
net of acquisition/disposition of subsidiaries:
Receivables (5,528) 9,547 (13,919)
Inventories 2,996 (1,983) 1,191
Other current assets (553) (373) 10,819
Accounts payable and accrued liabilities 682 (44) 5,280
Other, net 21 (195) (332)
------- ------- -------
Net cash flows from operating activities 14,422 22,524 7,620
------- ------- -------

Cash flows from investing activities:
Proceeds from sale of assets 1,487 1,205 43,032
Collections of notes receivable and
receivable from sale of business 451 13,211 1,168
Proceeds from sales of marketable securities - 18,681 15,550
Proceeds from sale of subsidiary 5,493 - -
Payments for purchase of subsidiaries,
net of cash acquired (12,788) (42,648) (30,416)
Capital expenditures - Note 1 (8,654) (5,319) (9,163)
------- ------- -------
Net cash flows from investing activities (14,011) (14,870) 20,171
------- ------- -------

Cash flows from financing activities:
Notes payable activity, net - (14,193) 12,529
Proceeds from issuance of long-term debt - Note 1 - - 2,852
Principal payments on long-term debt (657) (1,019) (2,403)
Payments of dividends (2,481) (2,452) (2,233)
Purchase of treasury shares (653) (6,367) (3,341)
Other 359 - -
------- ------- -------
Net cash flows from financing activities (3,432) (24,031) 7,404
------- ------- -------

Effect of exchange rate changes on cash - (3) 31
------- ------- -------

Net increase (decrease) in
cash and cash equivalents (3,021) (16,380) 35,226

Cash and cash equivalents at beginning of year 27,321 43,701 8,475
------- ------- -------

Cash and cash equivalents at end of year 24,300 27,321 $43,701
=======

Cash of discontinued operations and
other operations to be disposed of 1,973 982
------- -------

Cash and cash equivalents of continuing operations $22,327 $26,339
======= =======

See Notes to Consolidated Financial Statements.

Note 1. SIGNIFICANT ACCOUNTING POLICIES:

Consolidation Policy - The financial statements include, on a consolidated
basis, the accounts of Katy Industries, Inc. and subsidiaries in which it has a
greater than 50% interest, collectively "Katy" or the "Company". All
significant intercompany accounts, profits and transactions have been
eliminated in consolidation. Investments in affiliates which are not majority
owned and where the Company does not exercise significant control are reported
using the equity method.

As part of the continuous evaluation of its operations, Katy has acquired
and disposed of a number of its operating units in recent years. Those which
affected the Consolidated Financial Statements for each of the three year
periods ended December 31, 1997, 1996, and 1995 are described in Note 2.

There are no restrictions on the payment of dividends by consolidated
subsidiaries to Katy. Katy's consolidated retained earnings as of December 31,
1997 include $5,670,000 of undistributed earnings of 50% or less owned
investments accounted for by the equity method. No dividends have been paid by
any of these unconsolidated affiliates to Katy.

Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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.
Significant estimates used by management in the preparation of these financial
statements include the valuation of accounts receivable, the carrying value of
inventories, the useful lives and recoverability of property, plant and
equipment and cost in excess of net assets of businesses acquired, potential
product liability and workers compensation claims, and environmental claims as
discussed in Note 13.

Cash and Cash Equivalents - Cash equivalents consist of highly liquid
investments with original maturities of three months or less and total
$22,327,000 and $26,339,000, as of December 31, 1997 and 1996, respectively,
which approximates their fair value. The Company places its temporary cash
investments in quality financial institutions. As such, the Company believes
no significant concentration of credit risk exists with respect to these cash
investments.

Supplemental Cash Flow Information - Details regarding noncash investing
and financing activities are disclosed in Notes 1, 2, 5 and 8. Cash paid
during the year for interest and income taxes is as follows:

1997 1996 1995
---- ---- ----
(Thousands of dollars)

Interest $1,076 $1,143 $2,231
===== ===== =====
Income taxes $3,694 $3,445 $2,646
===== ===== =====

Marketable Securities - During 1996, the Company sold its remaining
investment in Union Pacific common stock and Union Pacific Resources common
stock for total proceeds of $18,681,000 resulting in a pre-tax gain of
$10,612,000. During 1996, unrealized holding gains, net of income taxes,
included in shareholders' equity decreased $5,297,000. During 1995, unrealized
holding gains, net of income taxes, included in shareholders' equity increased
$871,000.

Notes and Other Receivables - The carrying value of notes and other
receivables approximates their fair value.

Inventories - Inventories are stated at the lower of cost, determined by
the first-in, first-out method, or market. The components of inventories are:

December 31,
------------
1997 1996
---- ----
(Thousands of dollars)

Raw materials $ 6,654 $13,101
Work in process 1,496 3,050
Finished goods 45,219 42,096
------ ------
$53,369 $58,247
====== ======

Cost in Excess of Net Assets Acquired - In connection with certain
acquisitions, the Company recorded an intangible asset for the cost of the
acquisition in excess of the fair value of the net assets acquired. This
intangible asset is being amortized using the straight-line method over periods
ranging from 10 to 20 years.

Excess of Acquired Net Assets Over Cost - In connection with the
acquisition of Woods Industries, Inc., the Company recorded negative goodwill
for the excess of the fair value of the net assets acquired over the cost of
the acquisition. Negative goodwill is being amortized using the straight-line
method over a period of 5 years.

Properties - Properties 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) and leased machines (lease
period) using straight-line, accelerated or composite methods; and leasehold
improvements using the straight-line method over the remaining lease period.
Management periodically reviews the carrying value of its long-lived assets for
impairment and adjusts the carrying value and/or amortization period of such
assets whenever events or changes in circumstances warrant. During 1997, the
Company incurred additional debt of $2,045,000 relating to capital equipment,
which is classified as non-cash investing and financing for purposes of the
Statement of Consolidated Cash Flows.

Impairment of Assets - Long-lived assets are reviewed for impairment if
events or circumstances indicate the carrying amount of these assets may not be
recoverable. If this review indicates that the carrying value of these assets
will not be recoverable, based on future net cash flows from the use of the
asset, the carrying value is reduced to fair value.

Accrued Expenses - The components of accrued expenses are:

December 31,
------------
1997 1996
---- ----
(Thousands of dollars)

Accrued insurance $ 6,538 $ 7,553
Accrued EPA costs 4,355 5,266
Other accrued expenses 17,908 18,457
------ ------
$28,801 $31,276
====== ======

Fair Value of Financial Instruments - Where the fair values of Katy's
financial instrument assets and liabilities differ from their carrying value or
Katy is unable to establish the fair value without incurring excessive costs,
appropriate disclosures have been given in the Notes to Consolidated Financial
Statements. All other financial instrument assets and liabilities not
specifically addressed are believed to be carried at their fair value in the
accompanying Consolidated Balance Sheets.

New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information". This
statement establishes standards for the way public business enterprises report
information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement is effective for the Company's financial statements
for the year ending December 31, 1998 and the Company does not expect the
adoption of SFAS 131 to materially impact the financial statement presentation.

In June 1997, the Financial Accounting Standards Board issued Statement
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income in financial statements. Under this statement, all components of
comprehensive income shall be reported in the financial statements for the
period in which they are recognized. This statement divides comprehensive
income into net income and other comprehensive income. Other comprehensive
income shall be classified separately into foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The accumulated balance of other
comprehensive income shall be reported in the equity section of the balance
sheet separately from retained earnings and additional paid-in-capital. This
statement is effective for the Company's financial statements for the year
ending December 31, 1998 and the Company does not expect the adoption of SFAS
130 to materially impact the financial statement presentation.

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
This statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly held common stock or
potential common stock. This statement replaces the presentation of primary
EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully diluted EPS, diluted EPS
reflects the potential dilution of securities that could share in the earnings.
This statement is effective for the Company's financial statements for the year
ended December 31, 1997 and has been adopted, resulting in the restatement of
earnings per share for all prior periods. Details regarding Earnings Per Share
are disclosed at Note 4.

Revenue Recognition - Sales are recognized upon shipment of products to
customers or when services are performed.

Reclassifications - Certain amounts from prior years have been
reclassified to conform to the 1997 financial statement presentation.

Note 2. ACQUISITIONS AND DISPOSITIONS

Acquisitions
------------

On August 6, 1997, the Company purchased Loren Products ("Loren"). Loren
is a manufacturer and distributor of cleaning and abrasive products for the
industrial markets and building products for the consumer markets. The
estimated purchase price, including acquisition costs was $12,788,000. The
acquisition has been accounted for under the purchase method, and accordingly,
the estimated cost in excess of the net assets acquired of approximately
$2,650,000 has been recorded as cost in excess of net assets of business
acquired in the Consolidated Balance Sheet and is being amortized over twenty
years. In addition, Katy has recorded intangible assets of approximately
$4,790,000, consisting of customer lists, trademarks and tradenames, and
accumulated work force. These intangible assets are being amortized over
periods ranging from 7 1/2 to 20 years. The purchase price for Loren is
preliminary and adjustments may be recorded through August 1998. The accounts
of Loren have been included in the Company's Consolidated Financial Statements
from the acquisition date.

On December 2, 1996, the Company purchased all of the outstanding shares
of common stock of Woods Industries, Inc., ("Woods"). Woods is a manufacturer
and distributor of electrical corded products as well as electrical and
electronic passive components. The estimated purchase price, including
acquisition costs, was $45,100,000. The purchase price was paid in cash, of
which $3,250,000 was funded through a borrowing against the Company's unsecured
line of credit at The Northern Trust Company. The acquisition has been
accounted for under the purchase method, and accordingly, the estimated excess
of acquired net assets over cost of approximately $8,605,000 has been recorded
as excess of acquired net assets over cost in the Consolidated Balance Sheet
and is being amortized over five years. The accounts of Woods have been
included in the Company's Consolidated Financial Statements from the
acquisition date.

The following unaudited pro forma information has been prepared assuming
the acquisition of Woods had occurred at the beginning of the respective
periods. The pro forma information includes adjustments for (1) the
elimination of Woods' depreciation due to the write-down of plant and equipment
pursuant to purchase accounting, (2) the elimination of Woods' amortization due
to the write-down of cost in excess of businesses acquired pursuant to purchase
accounting, (3) the amortization of the estimated excess of acquired net assets
over cost recorded pursuant to purchase accounting, (4) elimination of Woods'
interest expense as all debt is repaid on date of purchase pursuant to the
purchase agreement, (5) the increase in interest expense for the year ended
December 31, 1995 due to assumed borrowings at applicable rates for the
purchase price (for the year ended December 31, 1996, Katy's cash position
would have made borrowing unnecessary), (6) decrease in interest income due to
use of cash for the purchase price, and (7) the estimated related income tax
effects. The pro forma financial information is presented for informational
purposes only and may not be indicative of the results of operations as they
would have been had the transaction been effected on the assumed dates nor is
it necessarily indicative of the results of operations which may occur in the
future.

Years ended December 31,
------------------------

1996 1995
---- ----
(Thousands of dollars)

Net sales $301,863 $283,510
Income from operations 17,736 7,010
Net income 18,538 32,788
Earnings per share - Basic and Diluted 2.22 3.65

On August 10, 1995, the Company purchased the assets of Gemtex Company
Limited and its United States affiliate, Gemtex Abrasives, Inc. (considered
together as "Gemtex"). Gemtex is a manufacturer and distributor of coated
abrasives for the automotive, industrial and retail markets. The purchase
price approximated net book value. The acquisition has been accounted for
under the purchase method. The accounts of Gemtex have been included in the
Company's Consolidated Financial Statements from the acquisition date.
This acquisition does not materially impact the Company's results of operations
or financial position.

Effective March 31, 1995, the Company purchased all of the outstanding
shares of common stock of GC Thorsen, Inc., ("GC Thorsen"), a value added
distributor of electronic and electrical parts and accessories, and nonpowered
hand tools. The purchase price, including acquisition costs, was $24,076,000
in cash, of which $19,500,000 was financed through the Company's bank line of
credit. The acquisition has been accounted for under the purchase method, and
accordingly, the excess of the purchase price over the fair value of the net
assets acquired of approximately $3,553,000 is being amortized over 20 years.
The accounts of GC Thorsen have been included in the Company's Consolidated
Financial Statements from the acquisition date.

As part of its 1991 purchase of substantially all of the net operating
assets of the stain business of Sinecure Financial Corp. (formerly Duckback
Industries, Inc.), the Company was obligated to pay to the seller additional
purchase price amounts which were contingent upon the attainment of certain
earnings levels during the period from the date of acquisition to September 30,
1994. During 1995, the Company paid $1,787,000 to Sinecure, to complete the
Company's obligation under the earnout provision of the purchase agreement.
Goodwill relating to this acquisition is being amortized over 10 years.

Dispositions
------------

On July 14, 1997, the Company completed its divestiture of the Beehive
division of Hamilton Precision Metals, Inc., for approximately $6,000,000 and
the assumption of certain liabilities of Beehive. Beehive is one of the
businesses that comprise the discontinued operations (see Note 3).
Accordingly, the gain on disposal has been deferred pending the disposal of all
of the discontinued operations, at which time the Company expects to recognize
a net gain.

On April 4, 1996, the Company sold substantially all of the assets of its
Walsh Press subsidiary for net proceeds of $1,125,000 which included net cash
of $721,000 and a note receivable of $404,000, resulting in a nominal loss.
The note receivable portion of the consideration is a noncash investing
transaction. The Consolidated Financial Statements include Walsh Press'
results of operations through that date. Sales of this subsidiary were
$151,000 and $680,000 and operating losses were $37,000 and $49,000 for 1996
and 1995, respectively.

In December 1995, the Company concluded the sale of its Moldan Filters
operation for net proceeds of $2,808,000, which included net cash of $1,350,000
and accounts and notes receivable of $1,458,000, resulting in a nominal gain.
The notes receivable portion of the consideration is a noncash investing
transaction. The effective date of sale was December 28, 1995; therefore, the
Consolidated Financial Statements include results of operations through that
date. Sales of this unit were $4,592,000 and the operating loss was $892,000
in 1995.

On August 25, 1995, the Company sold the assets and business of the
Laboratory Equipment Division of its Bach Simpson Limited operation for net
proceeds of $900,000 in cash, resulting in a nominal loss. This operation was
not material to Katy and, accordingly, its sale does not significantly affect
Katy's consolidated financial position or results of operations.

On June 30, 1995, the Company concluded the irrevocable sale of one-half
of its 75% interest (90,000 shares) in Schon. The sale was made on the basis
of a contingent price, whereby the Company will receive two thirds of the
amount ultimately realized by the purchasers in any future sale of such shares
or, under some circumstances, the Company will be entitled to find a buyer for
two-thirds of such shares and receive the proceeds of the sale thereof. With
the reduction in its ownership interest and influence, the Company began
reporting its continuing investment in Schon using the equity method of
accounting for this minority owned subsidiary effective June 30, 1995. With
the change to the equity method, the Company will not record future losses of
Schon, and will only record income when the Company's equity becomes positive.
In connection with the sale, in the second quarter of 1995, the Company
recorded a gain of $4,920,000 reflecting the reversal of previously recorded
losses of Schon and a deferred tax asset of $3,000,000. The Company's
investment in Schon is recorded at zero as of December 31, 1997 and 1996.
See Note 5.

On June 14, 1995, the Company sold its B.M. Root operation for net
proceeds of $700,000 in cash, resulting in a nominal gain. The Consolidated
Financial Statements include results of operations through that date. Sales
of this unit were $1,416,000 and operating income was $103,000 in 1995.

Note 3. DISCONTINUED OPERATIONS AND OTHER OPERATIONS TO BE DISPOSED OF

On December 31, 1997, the Board of Directors approved a plan to dispose of
the Company's previously reported Machinery Manufacturing segment. The
businesses included as "Discontinued operations" are Airtronics, Inc., Beehive,
Bach-Simpson, Ltd, Diehl Machines, Inc., and Peters Machinery Company.
Although the Company is in the initial stages of this plan, the Company
believes that the businesses will be fully divested at a net gain and the plan
completed during the year ending December 31, 1998. The expected manner of
disposition for these businesses is to sell the net assets of each of these
operations.

The historical operating results have been segregated as "Discontinued
operations" on the accompanying Consolidated Statements of Operations for all
periods presented. The related assets and liabilities have been separately
identified on the December 31, 1997 and 1996 Consolidated Balance Sheets as
"Net current assets or Net noncurrent assets of discontinued operations".
Discontinued operations have not been segregated on the Consolidated Statements
of Cash Flows.

Selected financial data for the discontinued operations, in thousands, is
summarized as follows:

For the Year Ended December 31,
1997 1996 1995
---- ---- ----
(In thousands, except per share amounts)

Net sales $31,537 $32,494 $35,176

Income before income taxes $ 3,110 $ 1,513 $ 3,403
Income taxes 1,151 560 1,259
------ ------ ------
Net income $ 1,959 $ 953 $ 2,144
====== ====== ======

Net income per share - Basic $ .24 $ .11 $ .24
====== ====== ======

Net income per share - Diluted $ .23 $ .11 $ .24
====== ====== ======

In connection with the previously mentioned divestiture plan, the Board of
Directors also approved the disposal of a portion of the Company's previously
reported Distribution and Service segment and one of the Company's equity
investments. These businesses are reported as "Other operations to be disposed
of" and include C.E.G.F. (USA), Inc., Hamilton Precision Metals, Inc., Savannah
Energy Systems Company and the Company's equity investment in Bee Gee Holding
Company, Inc. Although the Company is in the initial stages of this plan, the
Company believes that the businesses will be fully divested at a net gain and
the plan completed during the year ending December 31, 1998.

The historical operating results have been segregated as "Equity in income
of other operations to be disposed of" on the accompanying Consolidated
Statement of Operations for 1997. The related assets and liabilities have been
separately identified on the December 31, 1997 Consolidated Balance Sheet as
"Net current assets or Net noncurrent assets of other operations to be disposed
of".

Selected financial data for other operations to be disposed of, is
summarized as follows:

For the Year Ended December 31,
1997 1996 1995
---- ---- ----
(In thousands, except per share amounts)

Net sales $21,558 $24,185 $43,899

Income (loss) before income taxes $ 539 $ 2,479 $ (257)
Income taxes (benefit) 173 1,126 (95)
------ ------ ------
Net income (loss) $ 366 $ 1,353 $ (162)
====== ====== ======

Net income (loss) per share - Basic $ .04 $ .16 $ (.02)
====== ====== ======

Net income (loss) per share - Diluted $ .04 $ .16 $ (.02)
====== ====== ======

Net assets held for sale for "other operations to be disposed of" and
"discontinued operations" are carried at cost, which does not exceed estimated
net realizable value, as follows:

December 31, 1997
----
(In thousands)

Other Operations to be Disposed Of
- ----------------------------------
Current assets $9,038
Current liabilities (2,346)
------
Net current assets of other operations to be disposed of $6,692
======

Noncurrent assets $41,649
Noncurrent liabilities (10,795)
------
Net noncurrent assets of other operations to be disposed of $30,854
======

December 31, 1997 1996
---- ----
(In thousands)

Discontinued Operations
- -----------------------
Current assets $14,202 $16,661
Current liabilities (3,614) (4,092)
------ ------
Net current assets of discontinued operations $10,588 $12,569
====== ======

Noncurrent assets $ 5,027 $ 5,865
Noncurrent liabilities (63) (39)
------ ------
Net noncurrent assets of discontinued operations $ 4,964 $ 5,826