Katy also reported a net loss for the year ended December 31, 2006 of ($1.7) million [($0.21) per diluted share], versus a net loss of ($2.9) million [($0.36) per diluted share], for the year ended December 31, 2005, as adjusted to exclude restructuring and other non-recurring or unusual items, which are discussed below.  Including these items, Katy reported a net loss for the year ended December 31, 2006 of ($12.0) million [($1.50) per diluted share], versus a net loss of ($13.2) million [($1.66) per diluted share], in the same period of 2005.  The operating income, as adjusted to exclude all restructuring and other non-recurring or unusual items, was $4.1 million [1.0% of net sales] for the year ended December 31, 2006, compared to operating income, as adjusted, of $0.7 million [0.2% of net sales] in the same period in 2005.  Net income (loss), as adjusted, and operating income (loss), as adjusted, are non-GAAP financial measures.  Details regarding these items are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” accompanying this press release. 

During the fourth quarter of 2006, Katy reported restructuring and other non-recurring or unusual items of ($0.7) million pre-tax [($0.08) per diluted share], including a loss from discontinued operations of ($2.4) million offset by the reversal of certain severance, restructuring and related costs of $1.7 million recognized in prior periods.  During the fourth quarter of 2005, Katy reported restructuring and other non-recurring or unusual items of ($2.6) million pre-tax [($0.32) per diluted share], including the impairment of long-lived assets of ($2.1) million, loss from discontinued operations of ($0.9) million and severance, restructuring and related costs of ($0.2) million.  These charges were offset by Katy recording income of $0.6 million from its equity investment in Sahlman Holding Company, Inc.

For the year ended December 31, 2006, Katy reported restructuring and other non-recurring or unusual items of ($7.0) million pre-tax [($0.88) per diluted share], including costs of ($0.8) million related to the cumulative effect of a change in accounting principle for the implementation of SFAS No. 123R, Accounting for Stock-Based Compensation, and loss from discontinued operations of ($6.3) million offset by the reversal of certain severance, restructuring and related costs of $0.1 million recognized in prior periods.  For the year ended December 31, 2005, Katy reported restructuring and other non-recurring or unusual items of ($6.9) million pre-tax [($0.87) per diluted share], including the loss from discontinued operations of ($2.3) million, impairment of long-lived assets of ($2.1) million, non-cash stock option expense related to the acceleration of vesting of options of ($2.0) million and severance, restructuring and related costs of ($1.1) million.  These charges were offset by Katy recording income of $0.6 million from its equity investment in Sahlman Holding Company, Inc.

Financial highlights for the fourth quarter of 2006, as compared to the same period in the prior year, included:

·        Net sales in the fourth quarter of 2006 were $110.5 million, down $3.2 million compared to the same period in 2005 primarily due to weaker sales in the Maintenance Products Group.  Overall, the decrease of 3% resulted from lower volumes of 17% offset by higher pricing of 13% and favorable currency translation of 1%.  Lower net sales in the Maintenance Products Group resulted from our decision to exit certain unprofitable business lines within our United States consumer plastics business unit.  Net sales in our Electrical Products Group was comparable to the prior year as volume reductions were nearly offset by price increases implemented throughout 2006.

·        Gross margins were 11.1% in the fourth quarter of 2006, versus 12.7% in the fourth quarter of 2005.  Our margin performance was negatively impacted by higher product costs, primarily in the Electrical Products Group, many of which were not passed on through price increases.  However, our margins were positively impacted by continued production efficiencies gained in our Abrasives unit over the past twelve months as well as the liquidation of inventory, valued at last-in first-out.

·        Selling, general and administrative expenses were $2.6 million lower in the fourth quarter of 2006.  These costs represented 9.6% of net sales in the fourth quarter of 2006, which is lower than 11.7% of net sales for the same period of 2005.  The reduction in these expenses primarily relates to lower costs on our self-insurance programs as well as the favorable impact from headcount reductions made throughout 2006 within the entire organization.

·        Loss from operations of discontinued businesses for the year ended December 31, 2006 includes the United Kingdom consumer plastics business, the Metal Truck Box division and the partnership interest related to Savannah Energy Systems Company (“SESCO”).  The Metal Truck Box division and SESCO were sold during the second quarter of 2006. On November 27, 2006, Katy sold the United Kingdom consumer plastics business, excluding real estate holdings, for approximately $3.0 million.  The Company incurred a $2.2 million loss on the sale of discontinued business during the fourth quarter of 2006. In the third quarter of 2006, the Company reflected the United Kingdom consumer plastics business as an asset held for sale which resulted in a $3.2 million impairment charge that was reflected within loss on sale of discontinued businesses. 

·        Debt at December 31, 2006 was $56.9 million [57% of total capitalization], versus $57.7 million [51% of total capitalization] at December 31, 2005.  The increase in the ratio of debt to total capitalization was principally due to the lower stockholders’ equity which resulted from the net loss reflected in 2006.  Cash on hand at December 31, 2006 was $7.4 million, versus $8.4 million at December 31, 2005.

·         Katy was in compliance with the amended covenants in the Bank of America Credit Agreement at December 31, 2006.  On March 8, 2007, Katy obtained an amendment to the Bank of America Credit Agreement (the Eighth Amendment).  The Eighth Amendment eliminates the Fixed Charge Coverage Ratio for the remaining life of the agreement and adjusts the Minimum Availability such that Katy’s eligible collateral must exceed the sum of its outstanding borrowings and letters of credit under the Revolver Credit Facility by at least $5 million from the effective date of the Eighth Amendment through September 29, 2007 and by at least $7.5 million through December 31, 2007.  Thereafter, the Minimum Availability required will be $5 million for the first three quarters of each fiscal year and $7.5 million for the last quarter of each fiscal year.

If Katy is unable to comply with the terms of the amended covenants, it could seek to obtain further amendments and pursue increased liquidity through additional debt financing and/or the sale of assets.  Katy believes that given its strong working capital base, additional liquidity could be obtained through additional debt financing, if necessary.  However, there is no guarantee that such financing could be obtained.  In addition, Katy is continually evaluating alternatives relating to the sale of excess assets and divestitures of certain of its business units.  Asset sales and business divestitures present opportunities to provide additional liquidity by de-leveraging our financial position.

"Over the past year, our Abrasives business unit drove the overall improvement in our Maintenance Products group with its productivity,” said Anthony T. Castor III, Katy’s President and Chief Executive Officer.  “However, the Electrical Products group continues to be impacted by unprecedented increases in the price of copper that were not able to be passed effectively to its customer base,” added Mr. Castor.

Non-GAAP Financial Measures