Press Release

MIDDLEBURY, CT – August 9, 2004 – Katy Industries, Inc. (NYSE: KT) today reported a loss from continuing operations in the second quarter of 2004 of ($1.2) million [($0.15) per share], versus a loss from continuing operations of ($1.4) million [($0.17) per share], in the second quarter of 2003, as adjusted to exclude restructuring and other non-recurring or unusual items, which are discussed below. Including these items and payment-in-kind dividends on convertible preferred stock, Katy reported a net loss attributable to common shareholders of ($4.7) million [($0.60) per share], in the second quarter of 2004, versus a net loss attributable to common shareholders of ($8.2) million [($0.98) per share], in the same period of 2003. Net sales in the second quarter of 2004 were $100.5 million, down 0.9% compared to the same period in 2003. Earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted to exclude all restructuring and other non-recurring or unusual items, was $3.0 million in the second quarter of 2004, compared to $4.6 million in the same period in 2003. Income (loss) from continuing operations, as adjusted, and EBITDA, as adjusted, are non-GAAP financial measures and are further discussed below.

Katy also reported a loss from continuing operations for the six months ended June 30, 2004 of ($0.5) million [($0.06) per share], versus a loss from continuing operations of ($2.9) million [($0.34) per share], for the six months ended June 30, 2003, as adjusted to exclude restructuring and other non-recurring or unusual items, which are discussed below. Including these items and payment-in-kind dividends on convertible preferred stock, Katy reported a net loss attributable to common shareholders of ($10.0) million [($1.27) per share], for the six months ended June 30, 2004, versus a net loss attributable to common shareholders of ($6.5) million [$0.78 per share], in the same period of 2003. Net sales in the six months ended June 30, 2004 were $200.4 million, up 4.4% compared to the same period in 2003. Earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted to exclude all restructuring and other non-recurring or unusual items, was $8.8 million in the six months ended June 30, 2004, compared to $9.2 million in the same period in 2003.

During the second quarter of 2004, Katy reported income from restructuring and other non-recurring or unusual items of $0.7 million pre-tax [$0.09 per share], including severance, restructuring and related income of $0.1 million, income from the reversal of reserves related to divested businesses of $0.1 million and a gain on the sale of real estate of $0.5 million. Also, during the second quarter of 2004, Katy recorded the impact of paid-in-kind dividends earned on its convertible preferred stock of ($3.5) million [($0.44) per share]. During the second quarter of 2003, Katy reported restructuring and other non-recurring or unusual items of ($3.2) million pre-tax [($0.38) per share], including impairments of long-lived assets of ($1.8) million, severance, restructuring and related costs of ($1.7) million and income from the reversal of reserves related to divested businesses of $0.3 million. Also during the second quarter of 2003, Katy reported income from discontinued operations of $0.3 million, net of tax [$0.04 per share] and the impact of payment-in-kind dividends earned on its convertible preferred stock of ($3.0) million [($0.36) per share]. Details regarding these items are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” accompanying this press release.

For the six months ended June 30, 2004, Katy reported restructuring and other non-recurring or unusual items of ($1.6) million pre-tax [($0.21) per share], including severance, restructuring and related charges of ($1.8) million, costs associated with a proposed financing which Katy chose to abandon of ($0.4) million, income from the reversal of reserves related to divested businesses of $0.1 million and a gain on the sale of real estate of $0.5 million. Also, during the six months ended June 30, 2004, Katy recorded the impact of paid-in-kind dividends earned on its convertible preferred stock of ($6.9) million [($0.88) per share]. During the six months ended June 30, 2003, Katy reported restructuring and other non-recurring or unusual items of ($3.8) million pre-tax [($0.46) per share], including impairments of long-lived assets of ($1.8) million, severance, restructuring and related costs of ($1.9) million, the write-off of unamortized debt costs related to the refinancing of debt in February 2003 of ($1.2) million, income from the reversal of reserves related to divested businesses of $0.3 million and a gain on the sale of real estate of $0.8 million. Also during the six months ended June 30, 2003, Katy reported income from discontinued operations of $1.4 million, net of tax [$0.17 per share], a gain on the early redemption of a preferred interest in a subsidiary of $6.6 million [$0.78 per share] and the impact of payment-in-kind dividends earned on its convertible preferred stock of ($6.0) million [($0.72) per share]. Details regarding these items are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” accompanying this press release.

“We were hurt by rising prices for some of our key raw materials and experienced inefficiencies in certain of our facilities due to consolidation efforts,” said C. Michael Jacobi, Katy Industries’ President and Chief Executive Officer. “These cost increases were partially offset by continued expense containment and the benefit of lower costs due to our ongoing restructuring efforts,” added Mr. Jacobi.

Gross margins were 13.2% in the second quarter of 2004, a decrease of 50 basis points from the second quarter of 2003. The higher cost of materials, which could not be passed on through price increases, and manufacturing inefficiencies related to the consolidation of our abrasives facilities were offset partially by the favorable impact of restructuring, cost containment and lower depreciation. Selling, general and administrative expenses were $1.1 million lower than the second quarter of 2003. These costs represented 14.2% of sales in the second quarter of 2004, a significant improvement from the same period of 2003, when these costs represented 15.1% of sales.

Interest expense was $0.2 million lower in the second quarter of 2004 versus the same period of 2003, primarily a result of lower levels of borrowings. Debt at June 30, 2004 was $62.3 million [39% of total capitalization], versus $68.1 million [40% of total capitalization] at June 30, 2003. Cash on hand at June 30, 2004 was $5.7 million, versus $6.7 million at June 30, 2003.

Liquidity was negatively impacted during the six months ended June 30, 2004, as Katy used free cash flow of $27.8 million versus the $18.5 million of free cash flow used during the six months ended June 30, 2003. The increased use of free cash flow during the first half of 2004 was primarily attributable to higher inventories resulting from early purchasing of certain materials in advance of scheduled cost increases, increased material prices and planned builds in connection with manufacturing facility closures. The Company expects these liquidity trends to reverse in the second half of the year. Free cash flow, a non-GAAP financial measure, is discussed further below.

Katy expects to substantially complete its restructuring program in 2004. Capital expenditures, and severance, restructuring and related costs for these initiatives are expected to be in the range of $1.5 million to $2.0 million for the remainder of the year. Katy has completed the sales of its non-core businesses, Duckback Products, Inc. on September 16, 2003 and GC/Waldom Electronics, Inc. on April 2, 2003. The results of these businesses have been classified as discontinued operations as of and for the three and six month periods ended June 30, 2003. There was no discontinued operations activity for the three and six month periods ended June 30, 2004.

Payment-in-kind dividends on convertible preferred stock will end in December 2004, or upon the conversion of the convertible preferred stock, whichever is sooner.

To provide transparency about measures of Katy’s financial performance which management considers most relevant, we supplement the reporting of Katy’s consolidated financial information under GAAP with certain non-GAAP financial measures, including income (loss) from continuing operations, as adjusted; EBITDA, as adjusted; and free cash flow. Details regarding these measures and reconciliations of these non-GAAP measures to comparable GAAP measures are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” and “Statements of Cash Flows” accompanying this press release. These measures should not be considered in isolation or as an alternative to measures determined in accordance with GAAP. Katy believes the presentation of these measures is nonetheless useful to investors for the following reasons:

Income (Loss) from Continuing Operations, as adjusted. Income (loss) from continuing operations, as adjusted, is income (loss) from Katy’s continuing operations that excludes restructuring and other non-recurring and unusual items. Katy believes that its presentation of this measure provides useful information to management and investors regarding certain financial and business trends relating to its results of operations.

EBITDA, as adjusted. EBITDA, as adjusted, is calculated as earnings before interest, taxes, depreciation and amortization, excluding discontinued operations and unusual items such as severance, restructuring and related costs, impairments of long-lived assets, and other non-recurring items. Katy believes that EBITDA, as adjusted, is useful to report because it (i) is used extensively on an internal basis, acting as a primary metric for operating performance measurement, (ii) is the prime measure of operating results used by the lenders in Katy’s bank group when evaluating Katy’s performance and (iii) provides a link between profitability and operating cash flow. The presentation of EBITDA, as adjusted, enables investors to view Katy’s performance in a manner similar to the method used by management.

Free Cash Flow. Free cash flow is defined by Katy as cash flow from operations less capital expenditures and cash dividends paid. Katy believes that free cash flow is useful to management and investors in measuring cash generated that is available for repayment of debt obligations, investment in growth through acquisitions, new business development and stock repurchases.

This press release may contain various forward-looking statements. The forward-looking statements are based on the beliefs of the company’s management, as well as assumptions made by, and information currently available to, the company’s management. Additionally, the forward-looking statements are based on Katy’s current expectations and projections about future events and trends affecting the financial condition of its business. The forward-looking statements are subject to risks and uncertainties, detailed from time to time in Katy’s filings with the SEC, that may lead to results that differ materially from those expressed in any forward-looking statement made by the company or on its behalf. Katy undertakes no obligation to revise or update such statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Katy Industries, Inc. is a diversified corporation with interests primarily in Maintenance Products and Electrical Products.

KATY INDUSTRIES, INC. SUMMARY OF OPERATIONS - UNAUDITED
(In thousands, except percentages and per share data)


	Three Months Ended							$		%

		June 30,			June 30,			Change		Change
		2004			2003			Inc/(Dec)		Inc/(Dec)


Net sales	$	100,522		$	101,461		$	(939	)	(0.9	%)
Cost of goods sold		87,261			87,512			(251	)	(0.3	%)

Gross profit		13,261			13,949			(688	)	(4.9	%)
Selling, general and administrative expenses		14,240			15,353			(1,113	)	(7.2	%)
Impairments of long-lived assets		-			1,800			(1,800	)	(100.0	%)
Severance, restructuring and related (income) charges		(109	)		1,713			(1,822	)	(106.4	%)

Operating loss		(870	)		(4,917	)		4,047		82.3	%
Equity in income of equity method investment		-			156			(156	)	(100.0	%)
Gain on sale of assets		549			50			499		998.0	%
Interest expense		(997	)		(1,186	)		189		15.9	%
Other, net		144			448			(304	)	(67.9	%)

Loss before provision for income taxes		(1,174	)		(5,449	)		4,275		78.5	%
Provision for income taxes		(109	)		(102	)		(7	)	(6.9	%)

Loss from continuing operations		(1,283	)		(5,551	)		4,268		76.9	%
Income from operations of discontinued businesses (net of tax)		-			545			(545	)	(100.0	%)
Loss on sale of discontinued businesses		-			(196	)		196		100.0	%

Net loss		(1,283	)		(5,202	)		3,919		75.3	%
Payment-in-kind (PIK) dividends on convertible preferred stock		(3,462	)		(3,011	)		(451	)	(15.0	%)

Net loss attributable to common stockholders	$	(4,745	)	$	(8,213	)	$	3,468		42.2	%


(Loss) income per share of common stock - basic and diluted:

Loss from continuing operations	$	(0.16	)	$	(0.66	)	$	0.50		75.8	%
Payment-in-kind (PIK) dividends on convertible preferred stock		(0.44	)		(0.36	)		(0.08	)	(22.2	%)

Loss from continuing operations attributable to common stockholders		(0.60	)		(1.02	)		0.42		41.2	%
Discontinued operations (net of tax)		-			0.04			(0.04	)	(100.0	%)

Net loss attributable to common stockholders	$	(0.60	)	$	(0.98	)	$	0.38		38.8	%


Weighted average common shares outstanding - basic and diluted		7,870			8,342

KATY INDUSTRIES, INC. SUMMARY OF OPERATIONS - UNAUDITED
(In thousands, except percentages and per share data)


	Six Months Ended						$			%

		June 30,			June 30,			Change			Change
		2004			2003			Inc/(Dec			Inc/(Dec)


Net sales	$	200,417		$	191,913		$	8,504			4.4	%
Cost of goods sold		170,526			163,679			6,847			4.2	%

Gross profit		29,891			28,234			1,657			5.9	%
Selling, general and administrative expenses		28,988			30,171			(1,183	)		(3.9	%)
Impairments of long-lived assets		-			1,800			(1,800	)		(100.0	%)
Severance, restructuring and related charges		1,789			1,941			(152	)		(7.8	%)

Operating loss		(886	)		(5,678	)		4,792			84.4	%
Equity in loss of equity method investment		-			(211	)		211			100.0	%
Gain on sale of assets		549			803			(254	)		(31.6	%)
Interest expense		(1,797	)		(3,613	)		1,816			50.3	%
Other, net		(231	)		444			(675	)		(152.0	%)

Loss before provision for income taxes		(2,365	)		(8,255	)		5,890			71.4	%
Provision for income taxes		(699	)		(75	)		(624	)		(832.0	%)

Loss from continuing operations before distributions on preferred
interest of subsidiary		(3,064	)		(8,330	)		5,266			63.2	%
Distributions on preferred interest of subsidiary		-			(123	)		123			100.0	%

Loss from continuing operations		(3,064	)		(8,453	)		5,389			63.8	%
Income from operations of discontinued businesses (net of tax)		-			1,603			(1,603	)		(100.0	%)
Loss on sale of discontinued businesses		-			(196	)		196			100.0	%

Net loss		(3,064	)		(7,046	)		3,982			56.5	%
Gain on early redemption of preferred interest of subsidiary		-			6,560			(6,560	)		(100.0	%)
Payment-in-kind dividends on convertible preferred stock		(6,924	)		(6,025	)		(899	)		(14.9	%)

Net loss attributable to common stockholders	$	(9,988	)	$	(6,511	)	$	(3,477	)		(53.4	%)


(Loss) income per share of common stock - basic and diluted:

Loss from continuing operations	$	(0.39	)	$	(1.01	)	$	0.62			61.4	%
Gain on early redemption of preferred interest of subsidiary		-			0.78			(0.78	)		(100.0	%)
Payment-in-kind (PIK) dividends on convertible preferred stock		(0.88	)		(0.72	)		(0.16	)		(22.2	%)

Loss from continuing operations attributable to common stockholders		(1.27	)		(0.95	)		(0.32	)		(33.7	%)
Discontinued operations (net of tax)		-			0.17			(0.17	)		(100.0	%)

Net loss attributable to common stockholders	$	(1.27	)	$	(0.78	)	$	(0.49	)		(62.8	%)


Weighted average common shares outstanding - basic and diluted		7,877			8,352


Other Information:

Working capital, excluding current maturities of long-term debt	$	66,853		$	55,366		$	11,487			20.7	%

Long-term debt, including current maturities	$	62,308		$	68,096		$	(5,788	)		(8.5	%)

Stockholders' equity	$	99,071		$	104,263		$	(5,192	)		(5.0	%)

Capital expenditures	$	5,704		$	4,742		$	962			20.3	%

KATY INDUSTRIES, INC. RECONCILIATIONS OF GAAP RESULTS
TO RESULTS EXCLUDING CERTAIN UNUSUAL ITEMS - UNAUDITED
(In thousands, except percentages and per share data)
	Three Months Ended


		June 30,			June 30,
		2004			2003

Reconciliation of loss from continuing operations to loss from
continuing operations, as adjusted
Loss from continuing operations	$	(1,283	)	$	(5,551	)
Unusual items:
Impairments of long-lived assets		-			1,800
Severance, restructuring and related (income) charges		(109	)		1,713
Income from reversal of reserves related to divested businesses (included in other, net) and
gain on sale of real estate		(609	)		(349	)
Adjustment to reflect a more normalized effective tax rate excluding unusual items		828			970

Loss from continuing operations, as adjusted	$	(1,173	)	$	(1,417	)


Loss from continuing operations, as adjusted per share
Loss from continuing operations per share	$	(0.16	)	$	(0.66	)
Unusual items per share		(0.09	)		0.38
Adjustment to reflect a more normalized effective tax rate excluding unusual items per share		0.10			0.11

Loss from continuing operations, as adjusted per share	$	(0.15	)	$	(0.17	)


Weighted average shares outstanding - basic and diluted		7,870			8,342


EBITDA, as adjusted:

Net loss	$	(1,283	)	$	(5,202	)
Interest expense		997			1,186
Provision for income taxes		109			102
Depreciation and amortization		3,907			5,741

EBITDA		3,730			1,827

Add back:
Income from operations of discontinued businesses, net of tax		-			(545	)
Loss on sale of discontinued businesses		-			196
Impairments of long-lived assets		-			1,800
Severance, restructuring and related (income) charges		(109	)		1,713
Income from reversal of reserves related to divested businesses (included in other, net) and
gain on sale of real estate		(609	)		(349	)

EBITDA, as adjusted	$	3,012		$	4,642

EBITDA, as adjusted, as a % of sales		3.0	%		4.6	%

KATY INDUSTRIES, INC. RECONCILIATIONS OF GAAP RESULTS
TO RESULTS EXCLUDING CERTAIN UNUSUAL ITEMS - UNAUDITED
(In thousands, except percentages and per share data)
	Six Months Ended


		June 30,			June 30,
		2004			2003

Reconciliation of loss from continuing operations to loss from
continuing operations, as adjusted
Loss from continuing operations	$	(3,064	)	$	(8,453	)
Unusual items:
Impairments of long-lived assets		-			1,800
Severance, restructuring and related charges		1,789			1,941
Write-off of unamortized debt costs (included in interest expense)		-			1,172
Costs associated with abandoned financing (included in other, net)		435			-
Income from reversal of reserves related to divested businesses (included in other, net) and
gain on sale of real estate		(609	)		(1,102	)
Adjustment to reflect a more normalized effective tax rate excluding unusual items		984			1,764

Loss from continuing operations, as adjusted	$	(465	)	$	(2,878	)


Loss from continuing operations, as adjusted per share
Loss from continuing operations per share	$	(0.39	)	$	(1.01	)
Unusual items per share		0.21			0.46
Adjustment to reflect a more normalized effective tax rate excluding unusual items per share		0.12			0.21

Loss from continuing operations, as adjusted per share	$	(0.06	)	$	(0.34	)


Weighted average shares outstanding - basic and diluted		7,877			8,352


EBITDA, as adjusted:

Net loss	$	(3,064	)	$	(7,046	)
Interest expense		1,797			3,613
Provision for income taxes		699			75
Depreciation and amortization		7,709			11,155

EBITDA		7,141			7,797

Add back:
Distributions on preferred interest of subsidiary		-			123
Income from operations of discontinued businesses, net of tax		-			(1,603	)
Loss on sale of discontinued businesses		-			196
Impairments of long-lived assets		-			1,800
Severance, restructuring and related charges		1,789			1,941
Costs associated with abandoned financing (included in other, net)		435			-
Income from reversal of reserves related to divested businesses (included in other, net) and
gain on sale of real estate		(609	)		(1,102	)

EBITDA, as adjusted	$	8,756		$	9,152

EBITDA, as adjusted, as a % of sales		4.4	%		4.8	%

KATY INDUSTRIES, INC. BALANCE SHEETS - UNAUDITED
(In thousands)

Assets	June 30,			December 31,			June 30,
Current assets:	2004			2003			2003

Cash	$	5,684		$	6,748		$	6,673
Accounts receivable, net		61,007			65,197			61,303
Inventories, net		68,116			53,545			57,953
Other current assets		4,847			1,658			1,782
Current assets of discontinued operations (a)		-			-			5,185
Total current assets		139,654			127,148			132,896


Other assets:
Goodwill		10,215			10,215			10,543
Intangibles, net		21,647			22,399			25,270
Other		10,427			10,352			18,126
Non-current assets of discontinued operations (a)		-			-			974
Total other assets		42,289			42,966			54,913


Property and equipment		150,092			149,634			158,438
Less: accumulated depreciation		(83,778	)		(78,040	)		(78,536	)

Property and equipment, net		66,314			71,594			79,902


Total assets	$	248,257		$	241,708		$	267,711



Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	29,503		$	37,259		$	28,526
Accrued expenses		43,298			46,450			47,033
Current maturities of long-term debt		2,857			2,857			2,857
Revolving credit agreement		43,022			36,000			51,000
Current liabilities of discontinued operations (a)		-			-			1,971


Total current liabilities		118,680			122,566			131,387

Long-term debt, less current maturities		16,429			806			14,239
Other liabilities		14,077			16,044			17,770
Non-current liabilities of discontinued operations (a)		-			-			52
Total liabilities		149,186			139,416			163,448



Stockholders' equity
Convertible preferred stock		100,431			93,507			86,721
Common stock		9,822			9,822			9,822
Additional paid-in capital		33,508			40,441			47,236
Accumulated other comprehensive income (loss)		2,296			2,387			(127	)
Accumulated deficit		(24,201	)		(21,137	)		(18,819	)
Treasury stock		(22,785	)		(22,728	)		(20,570	)
Total stockholders' equity		99,071			102,292			104,263


Total liabilities and stockholders' equity	$	248,257		$	241,708		$	267,711


(a) Amounts include assets and liabilities of Duckback Products, Inc.

KATY INDUSTRIES, INC. STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands, except percentages)


	Six Months Ended							$		%

		June 30,			June 30,			Change		Change
		2004			2003			Inc/(Dec)		Inc/(Dec)

Cash flows from operating activities:
Net loss	$	(3,064	)	$	(7,046	)
Income from discontinued operations		-			(1,407	)

Loss from continuing operations		(3,064	)		(8,453	)
Depreciation and amortization		7,709			11,155
Impairment of long-lived assets		-			1,800
Write-off and amortization of debt issuance costs		535			1,766
Gain on sale of assets		(549	)		(803	)
Equity in loss of equity method investment		-			211

		4,631			5,676

Changes in operating assets and liabilities:
Accounts receivable		4,175			(908	)
Inventories		(14,704	)		365
Other assets		(3,274	)		(380	)
Accounts payable		(7,870	)		(9,001	)
Accrued expenses		(3,071	)		(8,498	)
Other liabilities		(1,959	)		243

		(26,703	)		(18,179	)


Net cash used in continuing operations		(22,072	)		(12,503	)
Net cash used in discontinued operations		-			(1,243	)

Net cash used in operating activities		(22,072	)		(13,746	)		(8,326	)	(61	%)


Cash flows from investing activities:
Capital expenditures of continuing operations		(5,704	)		(4,659	)
Capital expenditures of discontinued operations		-			(83	)
Acquisition of subsidiary, net of cash acquired		-			(1,161	)
Collections of notes receivable from sales of subsidiaries		-			930
Proceeds from sale of subsidiaries, net		-			7,451
Proceeds from sale of assets		5,533			1,914

Net cash (used in) provided by investing activities		(171	)		4,392			(4,563	)	(104	%)


Cash flows from financing activities:
Net borrowings on revolving loans		7,022			6,249
Proceeds of term loans		18,152			20,000
Repayments of term loans		(2,529	)		(2,904	)
Direct costs associated with debt facilities		(1,296	)		(1,415	)
Redemption of preferred interest of subsidiary		-			(9,840	)
Repayment of real estate and chattel mortgages		-			(700	)
Repurchases of common stock		(75	)		(342	)

Net cash provided by financing activities		21,274			11,048			10,226		93	%


Effect of exchange rate changes on cash and cash equivalents		(95	)		137

Net (decrease) increase in cash and cash equivalents		(1,064	)		1,831
Cash and cash equivalents, beginning of period		6,748			4,842

Cash and cash equivalents, end of period	$	5,684		$	6,673		$	(989	)	(15	%)


Reconciliation of Free Cash Flow to GAAP Results:
Free Cash Flow
Net cash used in operating activities	$	(22,072	)	$	(13,746	)
Capital expenditures of continuing operations		(5,704	)		(4,659	)
Capital expenditures of discontinued operations		-			(83	)

	$	(27,776	)	$	(18,488	)