Exhibit 10.1

 

[EXECUTION COPY]

 

MUELLER GROUP, INC.

500 West Eldorado Street

Decatur, IL 62522-1808

 

Dated as of February 4, 2005

 

To the Lenders party to the
Credit Agreement referred to below

 

Ladies and Gentlemen:

 

Reference is made to the Second Amended and Restated Credit Agreement, dated as
of April 23, 2004 (as amended, supplemented, amended and restated or otherwise
modified from time to time, the “Credit Agreement”), among Mueller Group, Inc.,
a Delaware corporation (the “Borrower”), the various financial institutions from
time to time parties thereto as lenders (the “Lenders”), Credit Suisse First
Boston, acting through its Cayman Islands Branch, as lead arranger and as sole
book runner and as administrative agent (in such capacity, the “Administrative
Agent”) for the Lenders, and JPMorgan Chase Bank and Deutsche Bank Securities
Inc., as Syndication Agents for the Lenders.  Unless otherwise defined in this
limited waiver request (this “Waiver Letter”) or unless the context otherwise
requires, terms used herein shall have the meanings assigned to them in the
Credit Agreement.

 

The Borrower hereby requests that:

 

(a) the Lenders hereby agree to extend the Borrower’s obligation to deliver
quarterly financial statements with respect to the Fiscal Quarter ended
January 1, 2005 and a Compliance Certificate for such Fiscal Quarter pursuant to
clauses (a) and (c) of Section 7.1.1 of the Credit Agreement until 5:00 p.m.
(New York time) on March 31, 2005 (the “Expiration Time”);

 

(b) the Lenders hereby (i) agree to extend the Borrower’s obligation to deliver
annual financial statements with respect to the Fiscal Year ended September 30,
2004 (the “Annual Financial Statements”) and a Compliance Certificate for such
Fiscal Year pursuant to clauses (b) and (c) of Section 7.1.1 of the Credit
Agreement until the Expiration Time and (ii) waive any Default under
Section 8.1.4 of the Credit Agreement arising from the failure to deliver such
Annual Financial Statements and related Compliance Certificate prior to the
Expiration Time; and

 

(c)  the Lenders hereby waive any Default arising under Sections 8.1.2 or 8.1.4
of the Credit Agreement on account of any financial statements of the Borrower
for any period prior to the fourth quarter of the Fiscal Year ended
September 30, 2004, or any Compliance Certificate or other certificate or report
relating to or derived from any such financial statements or the Borrower’s and
its Subsidiaries’ financial performance for any such period, having failed to
comply with any requirement set forth in the Credit Agreement, or any
representation contained therein or with respect thereto not having been true
and correct, or true and correct in all material respects, in each case to the

 

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extent, but only to the extent, that any such financial statements are restated
as contemplated in the Borrower’s press release attached hereto as Annex I;
provided that, as determined on the basis of such restated financial statements,
no violation of any provision of Section 7.2.4 of the Credit Agreement shall
have occurred as at, and for the period ended, June 26, 2004.

 

The Borrower hereby agrees to pay to the Administrative Agent for the account of
each Lender that has delivered its signature page in a manner and before the
time set forth below, a waiver fee in an amount equal to 0.025% of the sum of
(i) the outstanding principal amount of Loans on the date hereof made by such
Lender plus (ii) such Lender’s Percentage of the unused portion of the Revolving
Loan Commitment Amount plus (iii) such Lender’s portion of the Letter of Credit
Outstandings on the date hereof, but payable only to each such Lender that has
delivered (including by way of facsimile) its executed signature page to this
Waiver Letter to the attention of Jason Kanner at Mayer, Brown, Rowe & Maw, LLP,
1675 Broadway, New York, New York 10019, facsimile number: 212-262-1910, at or
prior to 3:00 p.m. (New York time) on February 4, 2005 (the “Execution Date”). 
The foregoing waiver fee shall be payable only if this Waiver Letter shall have
become effective on the Execution Date.

 

This Waiver Letter shall become effective as of the date first above written
upon receipt by the Administrative Agent of (x) counterparts of this Waiver
Letter duly executed by the Borrower and the Required Lenders and (y) the
foregoing waiver fee for the account of each Lender executing this Waiver Letter
on or prior to the Execution Date.

 

This Waiver Letter is a Loan Document executed pursuant to the Credit Agreement
and shall be construed, administered and applied in accordance with all of the
terms and provisions of the Credit Agreement.

 

The Borrower acknowledges and agrees that (a) except as expressly modified by
this Waiver Letter, the Credit Agreement and each other Loan Document shall
remain unchanged and shall continue in full force and effect in accordance with
their terms, and this Waiver Letter shall be limited to the express provisions
modified hereby and to this occasion alone and (b) no waiver or approval by any
Lender hereunder shall (i) be applicable to subsequent transactions or (ii)
require any other waiver (whether similar or dissimilar to the waivers granted
by this Waiver Letter).  This Waiver Letter may be executed in separate
counterparts, each of which shall be deemed to be an original and all of which
shall constitute together but one and the same Waiver Letter.  Delivery of an
executed counterpart of a signature page to this Waiver Letter by facsimile
shall be effective as delivery of a manually executed counterpart of this Waiver
Letter.

 

Please return an executed copy of this Waiver Letter to the Administrative Agent
to evidence your approval to the limited waivers and amendments described above.

 

 

MUELLER GROUP, INC.

 

 

 

 

 

By:

/s/

 

 

 

 

Dale B. Smith

 

 

 

Title:

 President and Chief
 Executive Officer

 

 

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THE UNDERSIGNED LENDER HEREBY
AGREES TO THE TERMS ABOVE

 

 

 

 

 

 

 

 

[INSERT NAME OF LENDER]

 

 

 

 

 

By:

 

 

 

 

Title:

 

 

 

 

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ANNEX I

 

MUELLER WATER PRODUCTS, INC.

500 West Eldorado Street, Decatur, Illinois 62522

FOR IMMEDIATE RELEASE

 

CONTACT:                               Walt Smith, Treasurer

wsmith@muellerflo.com

(217) 425-7320

 

Mueller Water Products, Inc. Announces Preliminary Financial Highlights for 2004
Fiscal
Year, Further Update on Accounting Investigation, Restatement of Prior Period
Financials
Management Change and Proposed Waiver under Credit Facility

 

Decatur, Illinois, January 28, 2005 / —Mueller Water Products, Inc. (the
“Company”) today announced preliminary financial highlights for fiscal 2004 and
an update on its accounting investigation, including a restatement of prior
period financials and management changes, and its intent to seek a waiver under
its credit facility.

 

Preliminary Financial Highlights for Fiscal Year 2004

 

The Company reported the following preliminary and unaudited financial
highlights for the fiscal year ended September 30, 2004, which reflect the
currently expected impact of the restatements described below.  Investors should
note that the information presented is estimated and is subject to adjustment in
connection with the completion of the Company’s financial statements and related
audit.

 

Net sales for the fiscal year ended September 30, 2004 are estimated to be
approximately $1,040 million, an increase of over $100 million compared to net
sales for the fiscal year ended September 30, 2003.   The increase in net sales
was driven primarily by continued strength and stability in the U.S. residential
construction market and increased spending by municipalities on water
infrastructure, replacement, repairs and upgrades for our water and
infrastructure products segment, and by improved economic conditions in the U.S.
non-residential construction market for our piping components segment.

 

Our EBITDA for the fiscal year ended September 30, 2004 is estimated to be
approximately $200 million.  A reconciliation of EBITDA to net income determined
in accordance with GAAP is set forth in a table below.  This increase of
approximately $35 million compared to 2003 restated EBITDA was driven primarily
by increases in sales volumes and prices across our various product lines and,
for our piping components segment, by the Star acquisition, and was partially
offset by increases in raw materials prices.

 

Our operating income for the fiscal year ended September 30, 2004 is estimated
to be approximately $115 million, an increase of approximately $20 million
compared to our restated operating income for the fiscal year ended
September 30, 2003.  This increase was driven

 

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primarily by increases in sales volumes and prices across our various product
lines and, for our piping components segment, by the Star acquisition, and was
partially offset by increases in raw materials prices and a stock compensation
charge of approximately $20 million incurred in connection with the
April recapitalization.

 

Net income for the fiscal year ended September 30, 2004 is estimated to be
relatively flat at approximately $35 million, and includes a pre-tax stock
compensation charge of approximately $20 million incurred in 2004 and higher
interest expense principally as a result of the April recapitalization.

 

Consolidated net cash provided by operating activities, as measured under GAAP,
for the fiscal year ended September 30, 2004 is estimated to be approximately
$80 million, an increase of approximately $15 million from the fiscal year ended
September 30, 2003.

 

Investigation Update

 

As previously announced, on January 10, 2005, an independent investigation of
alleged accounting improprieties at Mueller Water Products, Inc. (the “Company”)
was concluded and a report was made to the Audit Committee by the independent
law firm retained by the Committee to conduct the investigation.  The Company
made the following announcements today concerning the investigation and related
events.

 

The report identified several areas requiring financial review by the Company
principally concerning the excess and obsolete (E&O) inventory reserve matters
discussed below, the capitalization of costs relating to a project that should
have been expensed in prior periods, the accrual of reserves for this project
without identifying support for such accruals and the timing of recognition of
revenue with regard to full truckload shipments that were not immediately
dispatched to customers by certain freight carriers used by the Company.  The
Company also has identified some additional annual and interim out-of-period
items in the course of finalizing the 2004 financial statements.  In addition,
the Company determined that the value it assigned to stock compensation in
connection with the April 2004 recapitalization should be revised.  The
Company’s management and Audit Committee determined yesterday that the Company’s
financial statements for fiscal years 2002 and 2003 and interim  periods of
fiscal year 2004 should no longer be relied upon.  This determination has been
discussed with the Company’s independent registered public accounting firm.  The
Company will present its restated financial statements for fiscal years 2002 and
2003 as part of its Annual Report on Form 10-K for 2004.  The Company will also
restate its interim periods for fiscal years 2004 and 2003 to, among other
things, reflect a higher non-cash stock compensation charge in the third quarter
of fiscal year 2004.  Based upon current information, the Company preliminarily
estimates that the impact of the restatements will be to reduce operating income
and pretax income in 2002 by approximately $2.0 million, and in 2003 by
approximately $3.0 million, and to increase operating income and pretax income
in 2004 by approximately $5.0 million.

 

The investigation report did not identify any fraud or intentional misconduct by
the Company or any of its employees.  However, the report identified:
deficiencies in the Company’s internal

 

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controls; a failure to establish, document or properly train personnel with
respect to certain accounting policies; a lack of understanding and proper
application of certain accounting policies by Company personnel; a lack of
sufficient technical expertise and understanding of SEC and accounting rules by
financial reporting personnel; an approach by personnel at the Company’s Henry
Pratt Company subsidiary to establishing E&O inventory reserves that was at
least negligent; and a failure by the Company’s senior financial management to
exercise proper diligence over and supervise the Henry Pratt E&O matters,
including a lack of appreciation of the impact of such issues on management
certifications and management representation letters (or the significance of
such certifications and letters) or the need to promptly inform the Company’s
independent registered public accounting firm of such issues.  The Company’s
Board of Directors has adopted the recommendations of the investigation report,
which are designed to remedy these deficiencies.  The Company’s independent
registered public accounting firm has advised the Company that certain of the
Company’s control deficiencies represent reportable conditions that collectively
are considered material weaknesses.

 

As part of the Company’s response to the report, Tom Fish, who has served since
August 1999 as the President of Anvil International, Inc., the Company’s piping
systems product segment, has been appointed interim Chief Financial Officer of
the Company.  Prior to that position, Mr. Fish had been Vice President of
Finance and Administration for a predecessor of the Company from 1992 to 1996. 
Mr. Fish replaces Darrell Jean, who is currently engaged in discussions with the
Company about alternative management positions at the Company.

 

The Company expects that completion of the financial statements and annual
reports by the Company and Mueller Group will continue to be delayed to permit
Mr. Fish to review and approve the Company’s work to-date and be in a position
to certify the financial statements as required by the Sarbanes-Oxley Act.  The
Company anticipates that it will be in a position to file the annual reports
within the next 30-60 days, but there can be no assurances that the financial
statements will be completed during such time.

 

Waiver under Credit Facility

 

Mueller Group will seek a waiver until March 31, 2005 under its credit facility
with regard to the delay in providing its lenders with Mueller Group’s 2004
audited financial statements and the restatement.  In addition, because Mueller
Group will be unable to file quarterly reports until it has completed its annual
report on Form 10-K, Mueller Group also will seek a waiver so that its quarterly
financials for the quarter ended January 1, 2005 may be provided and filed at
the same time as the 2004 annual financials or shortly thereafter.  Failure to
file the Annual Reports on Form 10-K by January 13, 2005 constituted defaults
under the Company’s indenture and Mueller Group’s indentures.  The Company is
not seeking waivers from its bondholders at this time.  The Company and Mueller
Group will endeavor to remedy any defaults by filing the Forms 10-K and
subsequent Forms 10-Q within the applicable grace periods under these debt
instruments.

 

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Use of Non-GAAP Financial Information/EBITDA

 

EBITDA is defined as net income (loss) plus income tax expense, interest expense
and early debt repayment costs (not net of interest income), depreciation and
amortization expense and stock compensation charges that were non-cash or
incurred in connection with our April recapitalization. We present EBITDA
because we consider it an important supplemental measure of our performance
since it measures our operating performance before interest expense and early
debt repayment costs (which are subject to significant variation in prior years
due to changes in our capital structure). A tabular reconciliation of EBITDA to
net income for the year ended September 30, 2004 is set forth below.  The
non-GAAP financial information should be considered in addition to, and not as a
substitute for, the financial information provided and presented in accordance
with GAAP.  Other companies in our industry may calculate EBITDA differently
than we do, limiting its usefulness as a comparative measure. EBITDA has
limitations as an analytical tool, and you should not consider it in isolation,
or as a substitute for analysis of our results as reported under GAAP.

 

RECONCILIATION OF PRELIMINARY ESTIMATED EBITDA TO U.S. GAAP NET INCOME

(In millions, unaudited)

 

 

 

Year ended

 

 

 

September 30,

 

 

 

2004

 

 

 

 

 

GAAP Net Income

 

$

35

 

Income Taxes

 

15

 

Interest and Early Debt Repayment

 

65

 

Depreciation and Amortization

 

65

 

Stock Compensation

 

20

 

EBITDA

 

$

200

 

 

About Mueller Water Products, Inc.

 

Mueller Water Products, Inc. is a leading North American manufacturer of a broad
range of flow control products for use in water distribution, water and
wastewater treatment facilities, gas distribution systems and piping systems and
maintains a large installed base of products, including approximately
three million fire hydrants and eight million iron gate valves in the United
States. We operate through two business units: our water infrastructure products
segment, a leading manufacturer of hydrants, valves and other products for use
in water and gas distribution systems; and our piping systems products segment,
a leading manufacturer of fittings, pipe hangers and other products for use in
piping systems applications.  Our products are sold to a wide variety of
end-users, including municipalities, publicly and privately owned water and
wastewater utilities, gas utilities and construction contractors.

 

Forward-Looking Statements

 

The statements made in this press release that are not statements of historical
fact are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E

 

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of the Securities Exchange Act of 1934.  A forward-looking statement is usually
identified by our use of certain terminology including “believes,” “expects,
“may,” “will,” “should,” “seeks,” “anticipates” or “intends” or by discussions
of strategy or intentions.  A number of factors could cause our actual results,
performance, achievements or industry results to be very different from the
results, performance or achievements expressed or implied by those
forward-looking statements. These factors include, but are not limited to: the
competitive environment in our industry in general and in the sectors of the
flow control product industry in which we compete; economic conditions in
general and in the sectors of the flow control product industry in which we
compete; changes in, or our failure to comply with, federal, state, local or
foreign laws and government regulations; liability and other claims asserted
against our company; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; our significant indebtedness;
changes in our acquisition and capital expenditure plans; technology shifts away
from our technological strengths; and unforeseen interruptions with our largest
customers.

 

In addition, forward-looking statements depend upon assumptions, estimates and
dates that may not be correct or precise and involve known and unknown risks,
uncertainties and other factors. Given these uncertainties, you are warned not
to rely on the forward-looking statements. We are not undertaking any obligation
to update these factors or to publicly announce the results of any changes to
our forward-looking statements due to future events or developments.

 

 

For investor inquiries, please call Walt Smith, Treasurer (217-425-7320).

 

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