**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**** **                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**   |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                                |
| **For the quarterly period ended July 2,  2005.** |
| ** **                                             | ** ** | ** **                                                                                                |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission File Number 333-116590**

 

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**MUELLERWATER PRODUCTS, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                     | ** ** | **52-2175259**                       |
|------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  or  organization) | ** ** | (I.R.S. Employer identification No.) |
| ** **                                                       | ** ** | ** **                           |
| **500 West Eldorado St.  Decatur, IL 62522-1808**                |
| (Address of principal executive offices)                         |

 

**(217) 423-4471**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act.) Yes o  No ý

 
| ** **   | ** ** | **Common Stock** | ** ** | **Shares Outstanding As of August 5, 2005** | ** ** |
|--------------|------------|------------------|------------|--------------------------------------------------|------------|
| Class A |       | $0.01 Par Value  |       | 131,208,998                                      |       |
| Class B |       | $0.01 Par Value  |       | 89,343,699                                       |       |

 

 

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**MUELLER WATER PRODUCTS, INC.**

**REPORT ON FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDED JULY 2,2005**

** **

**TABLE OF CONTENTS**

 
| PART I—FINANCIAL INFORMATION                                                              |                                                 |
|-----------------------------------------------------------------------------------------------------|------------------------------------------------------|
| Item 1. Unaudited Financial Statements                                                              |                                                 |
|                                                                                                | Condensed Consolidated Balance Sheets                |   |
|                                                                                                | Condensed Consolidated Statements of Operations      |   |
|                                                                                                | Condensed Consolidated Statements of Cash Flows      |   |
|                                                                                                | Notes to Condensed Consolidated Financial Statements |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |                                                 |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 |                                                 |
| Item 4. Controls and Procedures                                                                     |                                                 |
| PART II—OTHER INFORMATION                                                                 |                                                 |
| Item 6. Exhibits                                                                                    |                                                 |
| Signatures                                                                                          |                                                 |

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**MUELLER WATER PRODUCTS, INC.**

**UNAUDITED CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                           | ** ** | **September 30,  2004**           | ** ** | **July 2,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|
| ** **                                                                                                           | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| **Assets**                                                                                                           |       |                                   |       |                   |       |
| Cash and cash equivalents                                                                                            |       | $                                      | 55.6       |                   | $          | 65.8 |   |
| Receivables, net of allowance for doubtful  accounts of $5.1 and $5.3, respectively                                  |       | 162.0                                  |       | 160.9                  |       |
| Inventories                                                                                                          |       | 260.2                                  |       | 309.7                  |       |
| Income taxes receivable                                                                                              |       | 4.1                                    |       | 0.7                    |       |
| Deferred income taxes                                                                                                |       | 9.0                                    |       | 10.1                   |       |
| Prepaid expenses and other current assets                                                                            |       | 28.9                                   |       | 26.3                   |       |
| Total current assets                                                                                                 |       | 519.8                                  |       | 573.5                  |       |
| Property, plant and equipment, net                                                                                   |       | 186.8                                  |       | 173.5                  |       |
| Goodwill, net                                                                                                        |       | 163.2                                  |       | 163.2                  |       |
| Identifiable intangibles, net                                                                                        |       | 55.2                                   |       | 53.1                   |       |
| Pension intangible                                                                                                   |       | 0.8                                    |       | 0.8                    |       |
| Deferred financing fees, net                                                                                         |       | 37.4                                   |       | 33.5                   |       |
| Deferred income taxes                                                                                                |       | 21.1                                   |       | 28.6                   |       |
| Total assets                                                                                                         |       | $                                      | 984.3      |                   | $          | 1,026.2 |   |
|                                                                                                                 |       |                                   |       |                   |       |
| **Liabilities**                                                                                                      |       |                                   |       |                   |       |
| Accounts payable                                                                                                     |       | $                                      | 52.7       |                   | $          | 50.2 |   |
| Current portion of long-term debt                                                                                    |       | 3.2                                    |       | 3.9                    |       |
| Accrued expenses and other current  liabilities                                                                      |       | 85.9                                   |       | 83.6                   |       |
| Total current liabilities                                                                                            |       | 141.8                                  |       | 137.7                  |       |
| Long-term debt, net of current portion                                                                               |       | 1,036.2                                |       | 1,047.8                |       |
| Accrued pension liability                                                                                            |       | 29.2                                   |       | 33.7                   |       |
| Other long-term liabilities                                                                                          |       | 7.8                                    |       | 3.6                    |       |
| Total liabilities                                                                                                    |       | 1,215.0                                |       | 1,222.8                |       |
| Commitments and contingencies (Note 9)                                                                               |       | —                                 |       | —                 |       |
| Redeemable common stock                                                                                              |       | 1.7                                    |       | 1.7                    |       |
| **Shareholders’ equity**                                                                                        |       |                                   |       |                   |       |
| Common stock:                                                                                                        |       |                                   |       |                   |       |
| Class A, $0.01 par value (400,000,000  shares authorized and 131,208,998 issued)                                |       | 1.3                                    |       | 1.3                    |       |
| Class B, $0.01 par value, convertible,  non-voting (150,000,000 shares authorized and 89,343,699 shares issued) |       | 0.9                                    |       | 0.9                    |       |
| Additional paid-in capital                                                                                           |       | —                                 |       | —                 |       |
| Accumulated deficit                                                                                                  |       | (218.6                                 | )          | (186.7                 | )          |
| Accumulated other comprehensive loss                                                                                 |       | (16.0                                  | )          | (13.8                  | )          |
| Total shareholders’ equity                                                                                      |       | (232.4                                 | )          | (198.3                 | )          |
| Total liabilities and shareholders’ equity                                                                      |       | $                                      | 984.3      |                   | $          | 1,026.2 |   |

 

The accompanying notes are an integral partof the financial statements.

 

3

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**MUELLER WATER PRODUCTS, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
| ** **                                                 | ** ** | **Three months ended**                 | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **June 26, 2004**                 | ** ** | **July 2, 2005** | ** ** |
| ** **                                                 | ** ** | **(restated)**                         | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| Net sales                                                  |       | $                                      | 289.1      |   | $ | 296.9 |   |
| Cost of sales                                              |       | 204.5                                  |       | 200.2 |   |
| Gross profit                                               |       | 84.6                                   |       | 96.7 |   |
| Selling, general and administrative expense                |       | 46.8                                   |       | 47.8 |   |
| Stock compensation expense                                 |       | 20.9                                   |       | — |   |
| Facility rationalization, restructuring and  related costs |       | —                                 |       | — |   |
| Operating income                                           |       | 16.9                                   |       | 48.9 |   |
| Interest expense and early repayment costs                 |       | (21.7                                  | )          | (23.4 | ) |
| Interest income                                            |       | 0.1                                    |       | 0.4 |   |
| Income before income taxes                                 |       | (4.7                                   | )          | 25.9 |   |
| Income tax expense                                         |       | (5.3                                   | )          | 9.9 |   |
| Net income                                                 |       | $                                      | 0.6        |   | $ | 16.0 |   |

 
| ** **                                                 | ** ** | **Nine months ended**                  | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **June 26, 2004**                 | ** ** | **July 2, 2005** | ** ** |
| ** **                                                 | ** ** | **(restated)**                         | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| Net sales                                                  |       | $                                      | 745.6      |   | $ | 838.2 |   |
| Cost of sales                                              |       | 535.7                                  |       | 577.7 |   |
| Gross profit                                               |       | 209.9                                  |       | 260.5 |   |
| Selling, general and administrative expense                |       | 125.4                                  |       | 139.1 |   |
| Stock compensation expense                                 |       | 21.2                                   |       | — |   |
| Facility rationalization, restructuring and  related costs |       | 0.9                                    |       | 1.6 |   |
| Operating income                                           |       | 62.4                                   |       | 119.8 |   |
| Interest expense and early repayment costs                 |       | (42.1                                  | )          | (68.0 | ) |
| Interest income                                            |       | 0.5                                    |       | 1.0 |   |
| Income before income taxes                                 |       | 20.8                                   |       | 52.8 |   |
| Income tax expense                                         |       | 4.9                                    |       | 20.9 |   |
| Net income                                                 |       | $                                      | 15.9       |   | $ | 31.9 |   |

 

The accompanying notes are an integral partof the financial statements.

 

4

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**MUELLER WATER PRODUCTS, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine months ended**     | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                         | ** ** | **June 26,  2004**   | ** ** | **July 2,  2005** | ** ** |
| ** **                                                                         | ** ** | **(restated)**            | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**           | ** ** |
| ** **                                                                         | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating activities**                                           |       |                      |       |   |   |
| Net income                                                                         |       | $                         | 15.9       |   | $ | 31.9 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                      |       |   |   |
| Depreciation                                                                       |       | 34.3                      |       | 32.7 |   |
| Amortization of intangibles and tooling                                            |       | 15.2                      |       | 4.1 |   |
| Unrealized gain on interest rate swaps                                             |       | (10.4                     | )          | (4.2 | ) |
| Accretion on senior discount notes and  amortization of bond discount              |       | 2.4                       |       | 14.1 |   |
| Write-off of deferred financing fees                                               |       | 7.0                       |       | — |   |
| All other adjustments                                                              |       | 7.2                       |       | (3.8 | ) |
| Changes in assets and liabilities, net of  the effects of acquisitions:            |       |                      |       |   |   |
| Receivables                                                                        |       | (16.7                     | )          | 1.1 |   |
| Inventories                                                                        |       | (9.1                      | )          | (49.5 | ) |
| Accounts payable and accrued expenses                                              |       | (3.7                      | )          | (4.8 | ) |
| All other changes, net                                                             |       | 8.7                       |       | 9.6 |   |
| Net cash provided by operating activities                                          |       | 50.8                      |       | 31.2 |   |
| **Cash flows from investing activities**                                           |       |                      |       |   |   |
| Purchase of property, plant and equipment                                          |       | (17.4                     | )          | (20.8 | ) |
| Acquisition of businesses, net of cash  acquired                                   |       | (19.8                     | )          | — |   |
| Net cash used in investing activities                                              |       | (37.2                     | )          | (20.8 | ) |
| **Cash flows from financing activities**                                           |       |                      |       |   |   |
| Proceeds from short-term borrowings                                                |       | 9.2                       |       | — |   |
| Payment of short-term borrowings                                                   |       | (9.2                      | )          | — |   |
| Proceeds from long-term debt                                                       |       | 1,070.1                   |       | — |   |
| Payment of long-term debt, including  capital lease obligations                    |       | (604.4                    | )          | (2.4 | ) |
| Redemption of preferred stock                                                      |       | (106.5                    | )          | — |   |
| Payment of deferred financing fees                                                 |       | (34.5                     | )          | — |   |
| Dividends paid (excluding amounts paid to  optionholders)                          |       | (386.6                    | )          | — |   |
| Net cash used in financing activities                                              |       | (61.9                     | )          | (2.4 | ) |
| Effect of exchange rate changes on cash                                            |       | 0.2                       |       | 2.2 |   |
| Increase (decrease) in cash and cash  equivalents                                  |       | (48.1                     | )          | 10.2 |   |
| **Cash and cash equivalents**                                                      |       |                      |       |   |   |
| Beginning of period                                                                |       | 71.4                      |       | 55.6 |   |
| End of period                                                                      |       | $                         | 23.3       |   | $ | 65.8 |   |

 

The accompanying notes are an integral partof the financial statements.

 

5

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**MUELLER WATER PRODUCTS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**THREE AND NINE MONTHS ENDED JUNE 26,2004 AND JULY 2, 2005**

**(UNAUDITED)**

 

**1.****             Basisof Presentation**

 

Mueller Water Products, Inc. (formerly Mueller Holdings (N.A.), Inc.)(“Mueller Water” or the “Company”) is the parent company of Mueller Group, Inc.(“Group”). The accompanying unaudited condensed consolidated financialstatements of Mueller Water have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information. Accordingly, the unaudited condensed consolidatedfinancial statements and notes do not contain certain information included inthe Company’s annual financial statements. In the opinion of management, allnormal and recurring adjustments that are considered necessary for a fairfinancial statement presentation have been made. Operating results for thethree and nine months ended July 2, 2005 are not necessarily indicative ofthe results that may be expected for the fiscal year ended September 30,2005. The consolidated financial statements should be read in conjunction withthe audited consolidated financial statements for the year ended September 30,2004 as found in the Company’s Annual Report on Form 10-K.

 

**2.****             Restatements**

 

In November 2004, the Company’s Audit Committee was notified ofalleged potential accounting improprieties concerning the Company’s accountingfor inventory reserves and certain questions concerning revenue recognition.The Audit Committee appointed an independent law firm to investigate theallegations. The law firm delivered a report that identified several areasrequiring financial review by the Company principally concerning accounting forexcess and obsolete (E&O) inventory, the capitalization of costs relatingto a project that should have been expensed in prior periods, the accrual ofreserves for this project without identifying support for such accruals and thetiming of recognition of revenue with regard to full truckload shipments thatwere not immediately dispatched to customers by certain freight carriers usedby the Company. The Company also identified some additional annual and interimitems recorded in incorrect periods in the course of finalizing the 2004financial statements. In addition, the Company determined that the value itassigned to stock compensation in connection with its April 2004recapitalization should be revised. As a result of these findings, the Companyrestated its annual and interim financial statements. For more specificinformation about prior period restatements, see Notes 2 and 21 of theCompany’s Audited Consolidated Financial Statements for the year ended September 30,2004 as found in Form 10-K for such fiscal year (File No. 333-116590).

 

The interim financial statements for the three and nine months ended June 26,2004 were restated for the following items:

 

*Inventory valuation adjustments*

 

The Company determined that certain reports utilized in the assessmentand establishment of excess and obsolete provisions were inaccurate and thatcertain items were erroneously eliminated from the provision. The interimfinancial statements were restated to reflect the decrease in inventory valueand increase in cost of goods sold to reflect an adjustment to properly recordthe provision for excess and obsolete inventory reserves.

 

*Stock-based compensation*

 

The Company determined that the compensation expense recorded in April 2004in connection with the Company’s recapitalization did not properly reflect thecurrent fair value of the Company’s common stock.  The financial statements for the three monthsand nine months ended June 26, 2004 were restated to record stockcompensation expense based on the fair value of the common stock issued.

 

*Warrants*

 

The Company determined that the fair value of the Company’s commonstock used to measure the consideration for warrants attached to the Company’s14 3⁄4% senior discount notes due 2014 did not reflect the stock’s current fairvalue.  The financial statements for thethree months and nine months ended June 26, 2004 were restated to reflectthe appropriate fair value of the common stock which resulted in an increase inadditional paid-in capital and a decrease in amounts ascribed to long-term

 

6

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debt for the warrants issued asa unit with the senior discount notes. The adjusted value of the warrants was recorded as debt discount, andresulted in an increase in interest expense associated with amortization ofthis debt discount over the life of the senior discount notes.

 

*Research and development costs*

 

The Company purchased certain inventory and tooling for a developmentproject that was initially recorded in inventory and capitalized to the extentsuch cost related to tooling. Since there were no alternative future uses forthese items, they should have been recorded as an expense as they were incurred,and no expense should have been recorded in 2004 interim periods. The interimfinancial statements were restated to reflect this as a research anddevelopment expense (Selling, General & Administrative) in the properperiods.

 

*Revenue recognition adjustments*

 

Revenues related to certain full-truckload customer shipments that werenot immediately dispatched to customers by certain freight carriers used by theCompany originally recognized should have been deferred until such time as thetrucks were dispatched and the products delivered to the customers. The interimfinancial statements were restated to reflect the recognition of revenue in theproper periods.

 

*Inventory journal entries*

 

Unauthorized journal entries were recorded, which increased the valueof inventory inappropriately. The interim financial statements were restated toreduce the inventory value and increase cost of goods sold.

 

*Intercompany profit elimination*

 

There was an error, which initially arose in the first quarter of 2004,in the estimated amount of intercompany profit elimination recorded during theinterim periods in the year ended September 30, 2004.

 

*Deferred financing fees*

 

Previously expensed financing fees associated with an amendment to oursenior credit facility in the first quarter of 2004 should have beencapitalized and amortized over the remaining term of the facility.

 

*Income tax effect of adjustments*

 

As a result of the aforementioned adjustments, the income taxprovisions in the interim financial statements for fiscal 2004 were alsorevised.  Additionally, the Companychanged the classification of $3.7 million of tax obligations previouslypresented as part of non-current deferred tax assets as other long-termliabilities on the June 26, 2004 balance sheet.

 

The following tables set forth the effects of the adjustments discussedabove on the Statements of Operations for the three and nine months ended June 26,2004:

 
| ** **                                  | ** ** | **Three Months Ended  6/26/04** | ** ** | **Nine Months Ended  6/26/04** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **(dollars  in millions)**                  | ** ** | **As previously  reported**     | ** ** | **As restated**                | ** ** | **As previously  reported** | ** ** | **As restated** | ** ** |
| Net sales                                   |       | $                               | 288.7      |                           | $          | 289.1 |   | $ | 743.6 |   | $ | 745.6 |   |
| Cost of sales                               |       | 205.7                           |       | 204.5                          |       | 533.7 |   | 535.7 |   |
| Gross profit                                |       | 83.0                            |       | 84.6                           |       | 209.9 |   | 209.9 |   |
| Selling, general and administrative expense |       | 47.6                            |       | 46.8                           |       | 126.6 |   | 125.4 |   |
| Stock compensation expense                  |       | 15.5                            |       | 20.9                           |       | 15.8 |   | 21.2 |   |
| Facility rationalization and related costs  |       | —                          |       | —                         |       | 0.9 |   | 0.9 |   |
| Operating income                            |       | 19.9                            |       | 16.9                           |       | 66.6 |   | 62.4 |   |
| Interest expense and early repayment costs  |       | (20.8                           | )          | (21.7                          | )          | (42.0 | ) | (42.1 | ) |
| Interest income                             |       | 0.1                             |       | 0.1                            |       | 0.5 |   | 0.5 |   |
| Income before income taxes                  |       | (0.8                            | )          | (4.7                           | )          | 25.1 |   | 20.8 |   |
| Income tax expense                          |       | (3.8                            | )          | (5.3                           | )          | 6.6 |   | 4.9 |   |
| Net income                                  |       | $                               | 3.0        |                           | $          | 0.6 |   | $ | 18.5 |   | $ | 15.9 |   |

 

7

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| **(dollars  in millions)**             | ** ** | **Three Months  Ended  6/26/04** | ** ** | **Nine Months  Ended  6/26/04** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Net income, as previously reported     |       | $                                | 3.0        |                            | $          | 18.5 |   |
| Increased (decreased) pretax earnings: |       |                             |       |                            |       |
| Inventory valuation adjustments        |       | (0.1                             | )          | (0.2                            | )          |
| Research & development costs  |       | 0.8                              |       | 1.2                             |       |
| Revenue recognition adjustments        |       | 0.1                              |       | 0.6                             |       |
| Inventory journal entries              |       | 1.1                              |       | 0.9                             |       |
| Stock-based compensation               |       | (5.4                             | )          | (5.4                            | )          |
| Warrants                               |       | (0.1                             | )          | (0.1                            | )          |
| Intercompany profit elimination        |       | 0.5                              |       | (1.3                            | )          |
| Deferred financing fees                |       | (0.8                             | )          | —                          |       |
| Total pre-tax adjustments              |       | (3.9                             | )          | (4.3                            | )          |
| Income tax effect of adjustments       |       | 1.5                              |       | 1.7                             |       |
| Net income, as restated                |       | $                                | 0.6        |                            | $          | 15.9 |   |

 
| ** **                 | ** ** | **Three Months Ended  6/26/04** | ** ** | **Nine Months Ended  6/26/04** | ** ** |
|----------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **(dollars  in millions)** | ** ** | **As previously  reported**     | ** ** | **As restated**                | ** ** | **As previously  reported** | ** ** | **As restated** | ** ** |
| Net sales:                 |       |                            |       |                           |       |   |   |   |   |
| Water infrastructure       |       | $                               | 172.4      |                           | $          | 172.8 |   | $ | 432.7 |   | $ | 434.7 |   |
| Piping systems             |       | 116.3                           |       | 116.3                          |       | 310.9 |   | 310.9 |   |
| Consolidated               |       | 288.7                           |       | 289.1                          |       | 743.6 |   | 745.6 |   |
| Segment EBITDA:            |       |                            |       |                           |       |   |   |   |   |
| Water infrastructure       |       | 45.2                            |       | 46.0                           |       | 111.4 |   | 113.0 |   |
| Piping systems             |       | 10.8                            |       | 12.4                           |       | 28.8 |   | 28.4 |   |
| Total segment EBITDA       |       | 56.0                            |       | 58.4                           |       | 140.2 |   | 141.4 |   |
| Operating Income:          |       |                            |       |                           |       |   |   |   |   |
| Water infrastructure       |       | 39.5                            |       | 40.3                           |       | 93.5 |   | 95.1 |   |
| Piping systems             |       | 6.5                             |       | 8.1                            |       | 16.1 |   | 15.7 |   |
| Corporate                  |       | (26.1                           | )          | (31.5                          | )          | (43.0 | ) | (48.4 | ) |
| Consolidated               |       | 19.9                            |       | 16.9                           |       | 66.6 |   | 62.4 |   |
|                            |            |                                 |            |                                |            |  |  |  |  |  |  |  |  |

 

**3.****             SegmentInformation**

 

Our operations consist of two operating segments: water infrastructureand piping systems. Water infrastructure products consist primarily ofhydrants, water and gas valves and related products used in water, power andgas distribution. Piping systems products consist primarily of pipe fittingsand couplings, pipe nipples and hangers and purchased products related topiping systems used in a variety of applications.

 

Intersegment sales and transfers are made at established intersegmentselling prices generally intended to cover costs. Our determination of segmentearnings does not reflect allocations of certain corporate expenses notattributable to segment operations and intersegment eliminations, which wedesignate as Corporate in the segment presentation, and is before interestexpense and early debt repayment costs, interest income and income taxes.Corporate expenses include costs related to financial and administrativematters, treasury, risk management, human resources, legal counsel, and taxfunctions. Corporate assets include items booked at the date of the Company’sinception in 1999 related to purchase accounting valuation adjustmentsassociated with property, plant and equipment and non-compete agreements withthe predecessor parent company, as well as intangibles associated withintellectual property. These assets and any related depreciation oramortization expense were not pushed down to our water infrastructure productsand piping systems products segments and are maintained as Corporate items.Therefore, segment earnings are not reflective of results on a stand-alonebasis.

 

The Company evaluates segment performance based on segment EBITDA.Segment EBITDA is defined as net income plus income tax expense, interestexpense (not net of interest income), depreciation and amortization expense.Segment assets

 

8

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consist primarily of accountsreceivable, inventories, property, plant and equipment—net, goodwill, andidentifiable intangibles. Summarized financial information for our segmentsfollows:

 
| ** **                         | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June 26, 2004** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **(restated)**                              | ** ** | ** **                                 | ** ** | **(restated)**                             | ** ** | ** **                                | ** ** |
| **Net Sales:**                     |       |                                        |       |                                       |       |                                       |       |                                      |       |
| Water infrastructure               |       | $                                           | 172.8      |                                       | $          | 172.1                                      |       | $                                         | 434.7      |   | $ | 480.8 |   |
| Piping systems                     |       | 116.3                                       |       | 124.8                                      |       | 310.9                                      |       | 357.4                                     |       |
| Consolidated                       |       | 289.1                                       |       | 296.9                                      |       | 745.6                                      |       | 838.2                                     |       |
|                               |       |                                        |       |                                       |       |                                       |       |                                      |       |
| **Intersegment sales:**            |       |                                        |       |                                       |       |                                       |       |                                      |       |
| Water infrastructure               |       | 4.1                                         |       | 3.8                                        |       | 10.1                                       |       | 10.6                                      |       |
| Piping systems                     |       | 0.2                                         |       | 0.3                                        |       | 0.5                                        |       | 0.6                                       |       |
| Consolidated                       |       | 4.3                                         |       | 4.1                                        |       | 10.6                                       |       | 11.2                                      |       |
|                               |       |                                        |       |                                       |       |                                       |       |                                      |       |
| **Segment EBITDA:**                |       |                                        |       |                                       |       |                                       |       |                                      |       |
| Water infrastructure               |       | 46.0                                        |       | 52.7                                       |       | 113.0                                      |       | 131.9                                     |       |
| Piping systems                     |       | 12.4                                        |       | 17.2                                       |       | 28.4                                       |       | 47.5                                      |       |
| Total segment EBITDA               |       | 58.4                                        |       | 69.9                                       |       | 141.4                                      |       | 179.4                                     |       |
|                               |       |                                        |       |                                       |       |                                       |       |                                      |       |
| **Depreciation and amortization:** |       |                                        |       |                                       |       |                                       |       |                                      |       |
| Water infrastructure               |       | 5.7                                         |       | 4.9                                        |       | 17.9                                       |       | 16.9                                      |       |
| Piping systems                     |       | 4.3                                         |       | 4.3                                        |       | 12.7                                       |       | 12.9                                      |       |
| Corporate                          |       | 6.3                                         |       | 2.2                                        |       | 18.9                                       |       | 7.0                                       |       |
| Consolidated                       |       | 16.3                                        |       | 11.4                                       |       | 49.5                                       |       | 36.8                                      |       |
|                               |       |                                        |       |                                       |       |                                       |       |                                      |       |
| **Impairment charges:**            |       |                                        |       |                                       |       |                                       |       |                                      |       |
| Water infrastructure               |       | —                                      |       | —                                     |       | —                                     |       | —                                    |       |
| Piping systems                     |       | —                                      |       | —                                     |       | 0.1                                        |       | —                                    |       |
| Corporate                          |       | —                                      |       | —                                     |       | —                                     |       | —                                    |       |
| Consolidated                       |       | —                                      |       | —                                     |       | 0.1                                        |       | —                                    |       |
|                               |       |                                        |       |                                       |       |                                       |       |                                      |       |
| **Capital expenditures:**          |       |                                        |       |                                       |       |                                       |       |                                      |       |
| Water infrastructure               |       | 3.1                                         |       | 4.0                                        |       | 9.3                                        |       | 13.0                                      |       |
| Piping systems                     |       | 3.3                                         |       | 2.9                                        |       | 8.1                                        |       | 6.8                                       |       |
| Corporate                          |       | —                                      |       | 0.3                                        |       | —                                     |       | 1.0                                       |       |
| Consolidated                       |       | 6.4                                         |       | 7.2                                        |       | 17.4                                       |       | 20.8                                      |       |
|                                    |            |                                             |            |                                            |            |                                            |            |                                           |            |  |  |  |  |

 
| ** **                    | ** ** | **At September 30, 2004** | ** ** | **At July 2, 2005** | ** ** |
|-------------------------------|------------|--------------------------------|------------|--------------------------|------------|
| **Total assets:**             |       |                           |       |                     |       |
| Water infrastructure          |       | $                              | 500.0      |                     | $          | 507.4 |   |
| Piping systems                |       | 307.9                          |       | 336.2                    |       |
| Corporate                     |       | 176.4                          |       | 182.6                    |       |
| Consolidated                  |       | 984.3                          |       | 1,026.2                  |       |
|                          |       |                           |       |                     |       |
| **Goodwill:**                 |       |                           |       |                     |       |
| Water infrastructure          |       | 149.1                          |       | 149.1                    |       |
| Piping systems                |       | 14.1                           |       | 14.1                     |       |
| Consolidated                  |       | 163.2                          |       | 163.2                    |       |
|                          |       |                           |       |                     |       |
| **Identifiable intangibles:** |       |                           |       |                     |       |
| Water infrastructure          |       | 5.3                            |       | 4.7                      |       |
| Piping systems                |       | 7.2                            |       | 5.7                      |       |
| Corporate                     |       | 42.7                           |       | 42.7                     |       |
| Consolidated                  |       | 55.2                           |       | 53.1                     |       |
|                               |            |                                |            |                          |            |  |  |

 

9

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The Company evaluates segment performance based on segment EBITDA. A reconciliationof segment EBITDA to consolidated income before income taxes follows:

 
| ** **                                 | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June  26, 2004** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **(restated)**                              | ** ** | ** **                                 | ** ** | **(restated)**                                   | ** ** | ** **                                | ** ** |
| Total segment EBITDA                       |       | $                                           | 58.4       |                                       | $          | 69.9                                             |       | $                                         | 141.4      |   | $ | 179.4 |   |
| Unallocated corporate costs                |       | (25.1                                       | )          | (9.2                                       | )          | (29.0                                            | )          | (21.8                                     | )          |
| Interest expense and early repayment costs |       | (21.7                                       | )          | (23.4                                      | )          | (42.1                                            | )          | (68.0                                     | )          |
| Depreciation and amortization              |       | (16.3                                       | )          | (11.4                                      | )          | (49.5                                            | )          | (36.8                                     | )          |
| Income before income taxes                 |       | $                                           | (4.7       | )                                          | $          | 25.9                                             |       | $                                         | 20.8       |   | $ | 52.8 |   |

 

Geographical area information with respect to net sales, as determinedby the location of the customer invoiced, and property, plant andequipment—net, as determined by the physical location of the assets, were asfollows for the three and nine months ended June 26, 2004 and July 2,2005:

 
| ** **      | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June 26, 2004** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|-----------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **      | ** ** | **(restated)**                              | ** ** | ** **                                 | ** ** | **(restated)**                             | ** ** | ** **                                | ** ** |
| Net sales:      |       |                                        |       |                                       |       |                                       |       |                                      |       |
| United States   |       | $                                           | 238.6      |                                       | $          | 238.2                                      |       | $                                         | 620.6      |   | $ | 686.3 |   |
| Canada          |       | 46.5                                        |       | 55.2                                       |       | 116.7                                      |       | 144.5                                     |       |
| Other Countries |       | 4.0                                         |       | 3.5                                        |       | 8.3                                        |       | 7.4                                       |       |
|            |       | $                                           | 289.1      |                                       | $          | 296.9                                      |       | $                                         | 745.6      |   | $ | 838.2 |   |

 
| ** **                          | ** ** | **At September 30, 2004** | ** ** | **At July 2, 2005** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|--------------------------|------------|
| Property, plant and equipment, net: |       |                           |       |                     |       |
| United States                       |       | $                              | 173.7      |                     | $          | 160.3 |   |
| Canada                              |       | 11.7                           |       | 11.7                     |       |
| Other Countries                     |       | 1.4                            |       | 1.5                      |       |
|                                |       | $                              | 186.8      |                     | $          | 173.5 |   |

 

**4.****             Summaryof Significant Accounting Policies**

 

Fiscal Year—The Company’s fiscal year ends on September 30. TheCompany’s third quarter ends on the Saturday closest to June 30.

 

Inventory—Inventories are recorded at the lower of cost (first-in,first-out) or market value. Additionally, the Company evaluates its inventoryreserves in terms of excess and obsolete exposures. This evaluation includessuch factors as anticipated usage, inventory turnover, inventory levels andultimate product sales value. These factors may change over time causing thereserve level to adjust accordingly.

 

Warranty Costs—The Company accrues for the estimated cost of productwarranties at the time of product sale based on historical experience.Adjustments to obligations for warranties are made as changes in theobligations become reasonably estimable. The following table summarizesinformation concerning the Company’s product warranty obligations:

 

| ** **                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **June 26, 2004** | ** ** | **July 2, 2005** | ** ** | **June 26, 2004** | ** ** | **July 2, 2005** | ** ** |
| Balance at beginning of period |       | $                      | 0.9        |                  | $          | 1.4 |   | $ | 0.9 |   | $ | 1.6 |   |
| Accruals for warranties        |       | 2.0                    |       | 0.5                   |       | 4.5 |   | 1.6 |   |
| Settlement of warranty claims  |       | (0.9                   | )          | (0.2                  | )          | (3.4 | ) | (1.5 | ) |
| Balance at end of period       |       | $                      | 2.0        |                  | $          | 1.7 |   | $ | 2.0 |   | $ | 1.7 |   |

 

Comprehensive Income—The Company’s comprehensive income for the threemonths ended June 26, 2004, and July 2, 2005 includes foreigncurrency translation losses of $(1.1) million and $(1.2) million,respectively and minimum pension liability

 

10

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adjustment of $(0.4) millionfor the three months ended June 26, 2004. The Company’s comprehensiveincome for the nine months ended June 26, 2004 and July 2, 2005includes foreign currency translation gains of $0.2 million and $2.2 million,respectively, and minimum pension liability adjustment of $(0.4) million forthe nine months ended June 26, 2004.

 

Related Party Transactions— Substantially all of the outstanding sharesof our common stock are held by DLJ Merchant Banking Partners II, L.P. and itsaffiliates (the “DLJ Funds”). On July 23, 1999, the Company and itssubsidiary, Mueller Group, Inc., entered into a financial advisoryagreement with Donaldson, Lufkin & Jenrette (“DLJ”) whereby theCompany committed to pay DLJ for financial advisory services provided byDLJ.  On April 27, 2004, CreditSuisse, as successor to DLJ, assigned its rights under the financial advisoryagreement to DLJ Merchant Banking II, Inc. (“DLJ Merchant Banking”), otherthan the right to provide services to the Company and receive customarycompensation for such services in connection with a “Transaction”, generallydefined in the financial advisory agreement to be a sale or disposition of theCompany, a significant acquisition by the Company or a refinancing orrestructuring of the Company’s debt or equity. Credit Suisse and DLJ Merchant Banking are affiliates of the DLJ Funds.

 

The aggregate amount of all fees incurred by the Company with DLJMerchant Banking and Credit Suisse under the financial advisory agreement wasapproximately $24.6 million and $0.2 million, respectively, for each ofthe three-month periods ended June 26, 2004 and July 2, 2005 and$25.1 million and $0.4 million for the nine-month periods ended June 26,2004 and July 2, 2005, respectively. Included in fees paid during the three- and nine-month periods ended June 26,2004 was $24.4 million related to the Company’s April 2004recapitalization.  Under the financialadvisory agreement, Credit Suisse will be entitled to receive fees inconnection with the closing of the pending merger of the Company and WalterIndustries.  See Note 5 – MergerAnnouncement and Acquisitions.

 

**5.****             MergerAnnouncement and Acquisitions**

 

*Merger Announcement*

 

As previously announced, on June 17, 2005, the Company enteredinto a definitive merger agreement with Walter Industries, Inc. (“WalterIndustries”) whereby Walter Industries will acquire the Company for anaggregate purchase price of approximately $1.91 billion, consisting ofapproximately $860 million in cash and the assumption of approximately $1.05 billionin Company debt, based on the Company’s balance sheet as of April 2, 2005,subject to the post-closing adjustments specified in the merger agreement basedon the Company’s working capital upon the closing of the transaction.  As a result of the merger, the Company’sshares of common stock will be converted into the right to receive theapplicable merger consideration in cash at the closing, subject to thepost-closing adjustments.  Upon closingof the transaction, the outstanding warrants of the Company will become rightsto receive cash upon exercise of the warrants based on the number of sharesunderlying the warrants.

 

Also, as previously disclosed, the Company will cause its subsidiary,Mueller Group, Inc. (“Group”), to commence a tender offer and consentsolicitation for Group’s second priority senior secured floating rate notes due2011, and the closing of the tender offer and consent solicitation would besimultaneous with the merger closing but is not a condition to the mergerclosing.  Group’s senior credit facilitywill be refinanced at merger closing.  Inaddition, the holders of the Company’s 14 3⁄4% senior discount notes due 2014 andGroup’s 10% senior subordinated notes due 2012 will have the right to put thesenotes to their respective issuers following the change of control resultingfrom the consummation of the merger transaction in accordance with therespective indentures.  See Note 7 – LongTerm Debt.

 

The merger is subject to customary conditions to closing, including theexpiration or termination of the waiting period under the Hart-Scott-RodinoAntitrust Improvements Act and the funding of Walter Industries’ committedfinancing, and there can be no assurance that the transaction will beconsummated.

 

*Acquisitions*

 

Effective January 15, 2004, the Company acquired certain assets ofStar Pipe, Inc. (“Star”). The acquisition was accounted for in accordancewith SFAS No. 141 and the operating results were included in theconsolidated results since the date of acquisition. Star is a leadingdistributor of cast and grooved fittings and couplings sourced outside of theUnited States. The Star acquisition provided an entry into the marketplace forthese foreign-sourced products. The acquisition’s purchase price was$17 million, paid in cash at closing, plus possible deferred purchaseprice payments, as discussed below.

 

11

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The following summary presents the estimated fair values of the assetsand liabilities assumed as of January 15, 2004:

 

| **(dollars  in millions)**           | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Current assets                       |       | $          | 13.1       |   |
| Property, plant & equipment |       | 0.4        |       |
| Intangible assets                    |       | 6.7        |       |
| Total assets                         |       | $          | 20.2       |   |
| Current liabilities                  |       | 3.2        |       |
| Net assets acquired                  |       | $          | 17.0       |   |

 

As part of the acquisition, the Company agreed to a future payment tobe made to the seller to the extent that the gross profit of the acquiredbusiness exceeds a targeted gross profit. The maximum potential deferredpayment amount is $23 million. Management currently estimates the deferredpayment could total approximately $3 to $6 million for the three-yeardeferred payment period which began February 1, 2004 and ends January 31,2007. This estimated deferred payment amount is based on management’s bestestimate, but the actual deferred payment could be materially different. Theliability for such deferred payment will be recorded at the end of eachtwelve-month period ending January 31, 2005, 2006 or 2007, in accordancewith the purchase agreement. No deferred payment was earned for the twelvemonths ended January 31, 2005.

 

The intangible assets acquired include trademarks, customerrelationships and a non-compete agreement with the former owners. Theseintangibles are being amortized over their estimated useful lives of ten years,three years and five years, respectively.

 

Also effective January 15, 2004, the Company acquired certainassets of Modern Molded Products (“Modern Molded”). The acquisition wasaccounted for in accordance with SFAS No. 141 and the operating resultswere included in the consolidated results since the date of acquisition. Thepurchase of the assets and technology of Modern Molded has enabled the Companyto internally produce parts that were previously purchased, thereby reducingspending and increasing product supply line predictability. The acquisition’spurchase price was $2.8 million, and was paid in cash.

 

The following summary presents the estimated fair values of the assetsand liabilities assumed as of January 15, 2004:

 

| **(dollars  in millions)**           | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Current assets                       |       | $          | 0.2        |   |
| Property, plant & equipment |       | 0.7        |       |
| Intangible assets                    |       | 1.9        |       |
| Net assets acquired                  |       | $          | 2.8        |   |

 

The intangible assets acquired include a non-compete agreement with theformer owners and purchased technology. These intangibles are being amortizedover their estimated useful lives of five years.

 

The following unaudited pro forma summary presents the consolidatedresults of operations for the three and nine months ended June 26, 2004 asif the acquisitions of Star and Modern Molded had occurred as of October 1,2003:

 
| ** ** | ** ** | **Three months  ended**   | ** ** | **Nine months  ended** | ** ** |
|------------|------------|---------------------------|------------|------------------------|------------|
| ** ** | ** ** | **June 26, 2004**    | ** ** | **June 26, 2004** | ** ** |
| ** ** | ** ** | **(dollars in millions)** | ** ** |
| Net Sales  |       | $                         | 289.1      |                   | $          | 753.0 |   |
| Net income |       | 0.6                       |       | 16.1                   |       |
|            |            |                           |            |                        |            |  |  |

 

The unaudited consolidated pro forma information is not necessarilyindicative of the combined results that would have occurred had the acquisitionsoccurred on that date, nor is it indicative of the results that may occur inthe future.

 

**6.****             NewAccounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Board issuedSFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFASNo. 123, “Accounting for Stock-Based Compensation,” and supersedes APBOpinion No. 25,

 

12

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“Accounting for Stock Issued toEmployees.” SFAS No. 123(R) requires compensation costs related to share-basedpayment transactions to be recognized in the financial statements over theperiod that an employee provides service in exchange for the award. Publiccompanies are required to adopt the new standard using a modified prospectivemethod and may elect to restate prior periods using the modified retrospectivemethod. Under the modified prospective method, companies are required to recordcompensation cost for new and modified awards over the related vesting periodof such awards prospectively and record compensation cost prospectively for theunvested portion, at the date of adoption, of previously issued and outstandingawards over the remaining vesting period of such awards. No change to priorperiods presented is permitted under the modified prospective method. Under themodified retrospective method, companies record compensation costs for priorperiods retroactively through restatement of such periods using the exact proforma amounts disclosed in the companies’ footnotes. Also, in the period ofadoption and after, companies record compensation based on the modifiedprospective method. SFAS No. 123(R), as amended in April 2005 forcompliance dates, allows companies to implement the standard at the beginningof their next fiscal year. The Company plans to adopt SFAS No. 123(R) asof October 1, 2005, the beginning of its next fiscal year and to use themodified prospective method. The adoption of SFAS 123(R) is not expectedto have a material impact on the Company’s financial statements, as all optionspreviously outstanding have been cancelled as part of the April 2004recapitalization.

 

In November 2004, the Financial Accounting Standards Board issuedSFAS No. 151, “Inventory Costs.” SFAS No. 151 amends the guidance inARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial. This Statement requires that those items be recognized as current-periodcharges regardless of whether they meet the criterion of “so abnormal.” Inaddition, this Statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities. SFAS No. 151 is effective for fiscal years beginning after June 15,2005. The Company intends to adopt SFAS No. 151 on October 1, 2005,the beginning of its 2006 fiscal year. The Company is currently evaluating theimpact of this standard on its financial statements.

 

FASB Staff Position (FSP) No. FAS 109-1 and 109-2 were issuedin December 2004, providing guidance on foreign earnings repatriation andqualified production activities of the American Jobs Creation Act (AJCA) thatwas enacted on October 22, 2004. The AJCA created a temporary incentivefor United States multinationals to repatriate accumulated earnings outside theUnited States by providing an 85 percent dividends received deduction forcertain qualifying earnings repatriations in either fiscal 2005 or in fiscal2006. As of July 2, 2005, the Company has not provided deferred taxes onforeign earnings because any taxes on dividends would be substantially offsetby foreign tax credits or because the Company intends to reinvest thoseearnings indefinitely. Due to the complexity of the repatriation provision, theCompany is still evaluating the effects of this provision on its plan forrepatriation of foreign earnings and does not expect to be able to completethis evaluation until after the Treasury Department has issued all of itsguidance, including the expected passage of a Technical Corrections Bill byCongress.

 

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN47”), “Accounting for Conditional Asset Retirement Obligations.” FIN 47provides clarification of certain sections of FASB Statement No. 143, “Accountingfor Asset Retirement Obligations.” Specifically, FIN 47 clarifies the meaningof the term “conditional asset retirement obligation” as used in SFAS 143and also clarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation. FIN 47 iseffective no later than the end of fiscal years ending after December 15,2005. The Company is currently evaluating the impact of this standard on itsfinancial statements.

 

**7.****             Long-TermDebt**

 
| ** **                             | ** ** | **September 30, 2004** | ** ** | **July 2, 2005** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **(dollars in millions)**   | ** ** |
| Senior credit facility term loans      |       | $                           | 515.0      |                  | $          | 513.5 |   |
| Second Priority Senior Secured Notes   |       | 100.0                       |       | 100.0                 |       |
| 10% Senior Subordinated Notes          |       | 315.0                       |       | 315.0                 |       |
| 14 3¤4%  Senior discount notes(1) |       | 106.8                       |       | 120.9                 |       |
| Capital lease obligations              |       | 2.6                         |       | 2.3                   |       |
|                                   |       | 1,039.4                     |       | 1,051.7               |       |
| Less current portion                   |       | (3.2                        | )          | (3.9                  | )          |
|                                   |       | $                           | 1,036.2    |                  | $          | 1,047.8 |   |

 

----

(1)                                  At September 30,2004 and July 2, 2005, the accreted value of the 14 3¤4%senior discount notes is reduced by $10.1 million (net of $0.4 million ofamortization) and $9.3 million (net of $1.2 million of amortization),respectively,  to

 

13

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reflect the fair market value assigned to the warrants sold as unitswith these notes. The fair market value assigned to the warrants is reflectedin stockholders’ equity.  Accretion onthe 14 3¤4%senior discount notes for the nine months ended July 2, 2005 was $13.3million.  Amortization of the bonddiscount for the nine months ended July 2, 2005 was $0.8 million.

 

Treatment of Long-Term Debt in Connection with Walter Industries Merger- Under the Walter Industries merger agreement and prior to merger closing, theCompany will cause its subsidiary, Mueller Group, Inc. (“Group”), tocommence a tender offer and consent solicitation for Group’s second prioritysenior secured floating rate notes due 2011. The consummation of the tender offer and consent solicitation isexpected to occur simultaneously with the consummation of the merger, but it isnot a condition to merger closing.  Group’ssenior credit facility will be refinanced at merger closing.  The Company’s 14 3/4% senior discount notesdue 2014 and Group’s 10% senior subordinated notes due 2012 will remainoutstanding after the merger is completed. However, holders of these notes will have the right to put them to theirrespective issuers following the change of control resulting from theconsummation of the merger transaction in accordance with the respectiveindentures.  The Company anticipatesthat, in connection with the merger, the Company will incur additionaldebt.  As a result, the Company’sleverage will increase, thereby increasing its debt service obligations.  The increased leverage could adversely affectthe outstanding notes of the Company and Group going forward.

 

Asa result of the pending acquisition by Walter Industries, it is expectedthat Walter Industries’ US Pipe subsidiary will be contributed to theCompany, which will have an impact on the Company’s financial statements by,for example, lowering the margins of the consolidated company.  In addition, we expect that our reportingsegments may be changed after the merger.  We also expect that purchaseaccounting adjustments could increase non-cash deprecation andamortization expense.

 

Interest Rate Swaps—Group has entered into interest rate swapagreements in order to reduce interest rate risks and manage interest expense.As of July 2, 2005, a notional principal amount of $100.0 million inswap agreements was outstanding and scheduled to mature in July 2005 and May 2007.The swap agreements effectively convert floating-rate debt into fixed-rate debtand carried an average fixed interest rate of 5.77% at July 2, 2005.Interest differentials to be paid or received because of swap agreements arereflected as an adjustment to interest expense over the related debt period. AtJuly 2, 2005 and September 30, 2004, the fair value of interest rateswaps was a liability of $0.5 million and $4.7 million, respectively,and has been recorded in Other Long-Term Liabilities on the ConsolidatedBalance Sheets.

 

On July 27, 2005, Group executed a new interest rate swapagreement – notional principal amount of $50.0 million, maturing in April 2007– to replace the swap agreement which expired in July 2005.  Interest differentials to be paid or receivedbecause of swap agreements will be reflected as an adjustment to interestexpense over the related debt period.

 

**8.****             RedeemableCommon Stock**

 

Group has entered into an employment agreement with Dale B. Smith,the Company’s and Group’s President and Chief Executive Officer. Thisagreement, in certain circumstances, gives Mr. Smith the right to sell tothe Company, at a price equal to the fair market value of his equity interestsas of the date of such sale or purchase, his shares of the Company’s commonstock. The Company has classified an amount representing the initial fair valueof the redeemable shares of its common stock owned by Mr. Smith outside ofpermanent equity. At September 30, 2004 and July 2, 2005, Mr. Smithbeneficially owned approximately 9.2 million Class A common shares.These shares of common stock have not been marked-to-market as thecircumstances that would give rise to Mr. Smith’s right to sell, and theCompany’s obligation to purchase Mr. Smith’s shares of common stock, are currentlyconsidered remote.

 

**9.****             Commitmentsand Contingencies**

 

The Company is subject to retention on certain contracts, with theretention portion of the amount receivable paid upon project completion.

 

In the normal course of business, the Company incurs claims withrespect to product liability. Such claims are insured up to certain limits,with such policies containing certain self-insured retention limits. Productliability claims for product manufactured or sold prior to August 1999,and environmental claims relating to property owned at or before August 1999or arising out of events occurring prior to that date, are subject toindemnification by Tyco International, based on the provisions of the August 1999acquisition agreement whereby the Company was acquired from Tyco International.

 

Certain of our products contain lead. Environmental advocacy groups,relying on standards established by California’s Proposition 65, are seeking toeliminate or reduce the content of lead in some of our products offered forsale in California. In certain cases, we have entered into settlementagreements with these environmental advocacy groups to modify our products oroffer substitutes. Further, similar issues may be raised by other advocacygroups in other jurisdictions.

 

Over the next two to three years, the Company expects to incur between$2.0 million and $6.0 million of capital costs at its U.S. iron foundries tocomply with the United States Environmental Protection Agency’s NationalEmissions Standards for

 

14

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Hazardous Air Pollutants (“NESHAP”)for Iron and Steel Foundries and the NESHAP for Miscellaneous Metal PartsCoating Operations.

 

The Company’s subsidiary, James Jones Company, and its former parentcompany are defendants in a false claims lawsuit in which a former James JonesCompany employee is suing on behalf of cities, water districts andmunicipalities. The employee alleges that the defendants sold allegedlynon-conforming public water system parts to various government entities. Thelawsuit seeks consequential damages, penalties and punitive damages. TheCompany’s subsidiary, Mueller Co., which had also been named as a defendant,brought a summary judgment motion and was dismissed from this litigation in January 2004.Any liability associated with the lawsuit is covered by an indemnification fromTyco International, our previous owner.

 

On March 31, 2004, the Company’s subsidiary, Anvil International,entered into a consent order with the Georgia Department of Natural Resourcesregarding various alleged hazardous waste violations at the Statesboro, Georgiasite owned by Anvil. Pursuant to the consent order, Anvil paid a settlementamount of $100,000, comprised of a $50,000 monetary fine and $50,000 towards asupplemental environmental project. Anvil has also agreed to perform variousinvestigatory and remedial actions at the site and its landfill. During thesecond quarter of 2005, investigatory procedures were performed that resultedin management’s decision to perform additional remediation and book anadditional $0.4 million to the reserve relating to this remediation. Whilethe ultimate investigatory and remedial costs are currently unknown, the totalcosts are estimated to be between $1.2 million and $1.4 million. TheCompany believes that it maintains an adequate reserve to cover these estimatedcosts.

 

In November 2003, Beck Manufacturing, a division of AnvilInternational, closed its manufacturing facility in Kearny, NJ, and withdrewfrom the Teamsters Local 11 Pension Fund (“Teamsters” or “Fund”). Anvilhas established an accrual of $0.2 million for any withdrawal liability.On July 19, 2004, the Fund Trustees issued notice to Anvil that, pursuantto ERISA Sections 4202 and 4219(b)(1), Anvil owed approximately$1.2 million in withdrawal liability to the Fund. On October 5, 2004,Anvil sent notice to the Teamsters appealing the amount of the withdrawalliability. The Teamsters denied Anvil’s appeal, and Anvil has filed anarbitration demand.  However, prior tothe arbitration proceeding, the parties have agreed to mediate the dispute sometime in the fall of 2005.

 

As part of the Star acquisition, the Company agreed to a future paymentto be made to the seller to the extent that the gross profit of the acquiredbusiness exceeds a targeted gross profit. The maximum potential deferredpayment amount is $23 million. Management currently estimates the deferredpayment could total approximately $3 to $6 million for the three-yeardeferred payment period which began February 1, 2004 and ends January 31,2007. This estimated deferred payment amount is based on management’s bestestimate, but the actual deferred payment could be materially different. Theliability for such deferred payment will be recorded at the end of eachtwelve-month period ending January 31, 2005, 2006 or 2007, in accordancewith the purchase agreement. No deferred payment was earned for the twelvemonths ended January 31, 2005.

 

In the opinion of management, accruals associated with contingenciesincurred in the normal course of business are sufficient. Resolution ofexisting known contingencies is not expected to significantly affect theCompany’s financial position and result of operations.

 

**10.****          NetPeriodic Benefit Cost—Defined Benefit Plans**

 

For a detailed disclosure on the Company’s pension and employeebenefits plans, please refer to Note 13 of the Company’s AuditedConsolidated Financial Statements for the year ended September 30, 2004,as found on Form 10-K (File No. 333-116590).

 

The following sets forth the components of net periodic benefit cost ofthe domestic non-contributory defined benefit plans for the three months andthe nine months ended June 26, 2004 and July 2, 2005:

 

15

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| ** **                         | ** ** | **Three months ended**     | ** ** | **Nine months ended**  | ** ** |
|------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **June 26,  2004**    | ** ** | **July 2,  2005** | ** ** | **June 26,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                         | ** ** | **(dollars  in millions)** |
| Service cost                       |       | $                          | 0.5        |                   | $          | 0.8 |   | $ | 1.5 |   | $ | 2.3 |   |
| Interest cost                      |       | 1.4                        |       | 1.4                    |       | 4.2 |   | 4.1 |   |
| Expected return on plan assets     |       | (1.1                       | )          | (1.3                   | )          | (3.4 | ) | (3.8 | ) |
| Amortization of prior service cost |       | —                     |       | —                 |       | — |   | 0.1 |   |
| Amortization of net actuarial loss |       | 0.6                        |       | 0.7                    |       | 2.0 |   | 2.0 |   |
| Net periodic benefit cost          |       | $                          | 1.4        |                   | $          | 1.6 |   | $ | 4.3 |   | $ | 4.7 |   |

 

The Companypreviously disclosed in its financial statements for the year endedSeptember 30, 2004, that it was required to contribute $0.1 millionto its pension plans in 2005. As of July 2, 2005, no contributions havebeen made. The Company presently anticipates contributing $0.1 million tofund its pension plans in 2005 and may make further discretionary payments.

 

**11.****          Supplementary Balance Sheet Information**

 

Selectedsupplementary balance sheet information is presented below:

 
| ** **                                 | ** ** | **September 30,  2004** | ** ** | **July 2,  2005** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **(dollars in millions)**    | ** ** |
| **Inventories**                            | ** ** | ** **                   | ** ** | ** **             | ** ** |
| Purchased materials and manufactured parts |       | $                            | 41.1       |                   | $          | 37.0 |   |
| Work in process                            |       | 67.3                         |       | 90.3                   |       |
| Finished goods                             |       | 151.8                        |       | 182.4                  |       |
|                                       |       | $                            | 260.2      |                   | $          | 309.7 |   |

 

**12.****          Supplementary Income Statement Information**

 

The componentsof interest expense are presented below:

 
| ** **                                         | ** ** | **Three months ended**     | ** ** | **Nine months ended**  | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **June 26,  2004**    | ** ** | **July 2,  2005** | ** ** | **June 26,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                                         | ** ** | **(dollars  in millions)** | ** ** |
| **Interest expense and early repayment costs:**    | ** ** | ** **                 | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contractual interest expense                       |       | $                          | 18.4       |                   | $          | 23.4 |   | $ | 36.4 |   | $ | 68.3 |   |
| Deferred financing fee amortization                |       | 0.8                        |       | 1.3                    |       | 2.1 |   | 3.9 |   |
| Senior subordinated debt early redemption  penalty |       | —                     |       | —                 |       | 7.0 |   | — |   |
| Write off of deferred financing fees               |       | 6.6                        |       | —                 |       | 7.0 |   | — |   |
| Interest rate swap gains                           |       | (4.1                       | )          | (1.3                   | )          | (10.4 | ) | (4.2 | ) |
| Total interest expense and early repayment  costs  |       | $                          | 21.7       |                   | $          | 23.4 |   | $ | 42.1 |   | $ | 68.0 |   |

 

Areconciliation of net income available to common shareholders is as follows:

 
| ** **                                                                                       | ** ** | **Three months ended**    | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **June 26, 2004**    | ** ** | **July 2, 2005** | ** ** | **June 26, 2004** | ** ** | **July 2, 2005** | ** ** |
| ** **                                                                                       | ** ** | **(restated)**            | ** ** | ** **            | ** ** | **(restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **(dollars in millions)** | ** ** |
| Net income                                                                                       |       | $                         | 0.6        |                  | $          | 16.0 |   | $ | 15.9 |   | $ | 31.9 |   |
| Less preferred share accretion related to  redeemable preferred stock retired in April 2004 |       | (1.3                      | )          | —                |       | (9.3 | ) | — |   |
| Net income available to common shareholders                                                      |       | $                         | (0.7       | )                     | $          | 16.0 |   | $ | 6.6 |   | $ | 31.9 |   |

 

16

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**13.****          Facility Rationalization, Restructuring and RelatedCosts**

 

In the firstquarter of fiscal 2005, the Company announced that it would cease manufacturingand begin outsourcing a product line it produced at its water infrastructureplant in Colorado. A restructuring charge of $0.1 million in the firstquarter of fiscal 2005 related to severance payments. An additional charge of$1.5 million, related primarily to the termination of operating leases forthe plant building and machinery, was reflected in the second quarter of fiscal2005.

 

For the threemonths ended June 26, 2004, the Company recorded no charges.  For the nine months ended June 26, 2004,the Company recorded a charge of $0.1 million related to asset impairmentfor write-offs at piping systems facilities that were closed in Norcross,Georgia and Kearny, New Jersey, $0.3 million related to environmentalissues at the piping systems closed facility in Statesboro, Georgia (seeNote 9), and $0.5 million related to future lease obligations at theclosed and vacated Kearny, New Jersey facility.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

In this report,each of the terms “Mueller Water,” the “Company,” “we,” “us” or “our” refers toMueller Water Products, Inc. and its subsidiaries, except where thecontext makes clear that the reference is only to Mueller WaterProducts, Inc. itself, and is not inclusive of its subsidiaries.

 

Except asotherwise noted, we present all financial and operating data on a fiscalquarter basis. Our fiscal year ends on September 30, and our third fiscalquarter ends on the Saturday closest to June 30.

 

Certaininformation included or incorporated by reference in this document may bedeemed to be “forward looking statements” within the meaning of the federalsecurities laws. All statements other than statements of historical fact arestatements that could be deemed forward looking statements. In this context,forward looking statements often address our future business and financialperformance, and may be characterized by terminology such as “believe”,“anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”,“projects”, “positioned”, “strategy”, and similar expressions. These statementsare based on assumptions and assessments made by the Company’s management inlight of its experience and its perception of historical trends, currentconditions, expected future developments and other factors it believes to beappropriate.

 

These forwardlooking statements are subject to a number of risks and uncertainties,including but not limited to: the possibility that the Company and WalterIndustries may not be able to obtain regulatory approvals required for theproposed acquisition of the Company by Walter Industries; the Company’sbusinesses may suffer as a result of the uncertainty surrounding the WalterIndustries acquisition; upon consummation of the acquisition, the combinedcompany will have significant debt; integrating the businesses after theacquisition may not be successfully accomplished as anticipated; theacquisition may involve unexpected costs; the Company’s ability to continuelong-standing relationships with major customers; increased competition; demandfor and market acceptance of new and existing products in the markets we serve;adverse changes in currency exchange rates or raw material prices, specificallysteel scrap, steel pipe and brass ingot; unanticipated developments that couldoccur with respect to contingencies such as litigation, product liabilityexposures and environmental matters; the Company’s ability to integrateacquired businesses into its operations; and other risks and uncertainties thataffect the manufacturing sector generally including, but not limited to,economic, political, governmental and technological factors affecting theCompany’s operations, markets, products, services and prices.

 

Any suchforward looking statements are not guarantees of future performances and actualresults, developments and business decisions may differ from those contemplatedby such forward looking statements. These forward looking statements speak onlyas of the date of this Quarterly Report. The Company disclaims any duty toupdate any forward looking statement, all of which are expressly qualified bythe foregoing.

 

**Overview**

 

We are aleading North American manufacturer of a broad range of flow control productsfor use in water distribution, water and wastewater treatment facilities, gasdistribution systems and piping systems and maintain a large installed base ofproducts. We are comprised of two segments: water infrastructure, a leadingmanufacturer of hydrants, valves and other products for use in water and gasdistribution systems; and piping systems, a leading manufacturer of fittings,pipe hangers and other products for use in piping system applications.  Our business strategy continues to be focusedon sustaining our market leadership and competitive differentiation, whilegrowing revenues and enhancing profitability.

 

Results forthe third quarter and first nine months of 2005 reflected continued strongperformance in the residential construction market, as well as the full effectof the pricing increases implemented in the second half of 2004 and early 2005.

 

17

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Both our water infrastructureand piping systems segments reported improvements in gross profit and operatingincome in the three months and the nine months ended July 2, 2005 ascompared to the three months and nine months ended June 26, 2004.

 

The Companyincurred a significant amount of additional indebtedness in connection with itsrecapitalization in April 2004. New debt associated with therecapitalization added $5.5 million and $33.7 million of interestexpense in the three and nine month periods ended July 2, 2005 as comparedto the similar fiscal periods in 2004.

 

As previouslyannounced, on June 17, 2005, the Company entered into a definitive mergeragreement with Walter Industries, Inc. (“Walter Industries”) wherebyWalter Industries will acquire the Company for an aggregate purchase price ofapproximately $1.91 billion, consisting of approximately $860 million in cash andthe assumption of approximately $1.05 billion in Company debt, based on theCompany’s balance sheet as of April 2, 2005, subject to the post-closingadjustments specified in the merger agreement based on the Company’s workingcapital upon the closing of the transaction. As a result of the merger, the Company’s shares of common stock will beconverted into the right to receive the applicable merger consideration in cashat the closing, subject to the post-closing adjustments.  Upon closing of the transaction, theoutstanding warrants of the Company will become rights to receive cash uponexercise of the warrants based on the number of shares underlying the warrants.

 

Under themerger agreement and prior to merger closing the Company will cause itssubsidiary, Mueller Group, Inc. (“Group”), to commence a tender offer andconsent solicitation for Group’s second priority senior secured floating ratenotes due 2011.  The consummation of thetender offer and consent solicitation is expected to occur simultaneously withthe consummation of the merger, but is not a condition to the mergerclosing.  Group’s senior credit facilitywill be refinanced at merger closing. The Company’s 14 3⁄4% senior discount notes due 2014 and Group’s 10%senior subordinated notes due 2012 will remain outstanding after the merger iscompleted.  However, holders of thesenotes will have the right to put them to their respective issuers following thechange of control resulting from the consummation of the merger transaction inaccordance with the respective indentures. The Company anticipates that, in connection with the merger, the Companywill incur additional debt.  As a result,the Company’s leverage will increase, thereby increasing its debt serviceobligations.  The increased leverage couldadversely affect the outstanding notes of the Company and Group going forward.

 

The merger issubject to customary conditions to closing, including the expiration ortermination of the waiting period under the Hart-Scott-Rodino AntitrustImprovements Act and the funding of Walter Industries’ committed financing, andthere can be no assurance that the transaction will be consummated.

 

**Restatements**

 

InNovember 2004, our Audit Committee was notified of alleged potentialaccounting improprieties concerning our accounting for inventory reserves andcertain questions concerning revenue recognition. The Audit Committee appointedan independent law firm to investigate the allegations. In January 2005,the independent law firm issued an investigative report that identified severalareas requiring financial review by the Company. These areas principallyconcerned accounting for excess and obsolete (E&O) inventory, thecapitalization of costs relating to a project that should have been expensed inprior periods, the accrual of reserves for this project without identifyingsupport for such accruals and the timing of recognition of revenue with regardto full truckload shipments that were not immediately dispatched to customersby certain freight carriers used by the Company. The Company also identifiedsome additional annual and interim items recorded in incorrect periods in thecourse of finalizing the 2004 financial statements. In addition, the Companydetermined that the value it assigned to stock compensation in connection withits April 2004 recapitalization should be revised. As a result of thesefindings, the Company restated its annual financial statements for its 2002 and2003 fiscal years and its interim financial statements for its 2004 fiscalyear. For more specific information about prior period restatements, seeNotes 2 and 21 of the Company’s Audited Consolidated Financial Statementsfor the year ended September 30, 2004 as found in Form 10-K for suchfiscal year (File No. 333-116590).

 

18

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**Resultsof Operations**

 

***Three Months EndedJuly 2, 2005 As Compared to the Three Months Ended June 26, 2004***

 
| ** **                                                     | ** ** | **Three months ended**    | ** ** | ** **                        | ** ** | **FY05 Q3 vs. FY04 Q3** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **July 2,  2005**    | ** ** | **Percentage  of net sales  (2)** | ** ** | **June 26,  2004** | ** ** | **Percentage  of net sales  (2)** | ** ** | **Increase/  (decrease)** | ** ** | **Change in  percentage  of  net sales** | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | ** **                        | ** ** | **(restated)**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **(dollars in millions)** | ** ** |
| **Net sales**                                                  | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | $                         | 172.1      |                              | 58.0       | %                       | $          | 172.8 |   | 59.8 | % | $ | (0.7 | ) | (1.8% | ) |
| Piping systems                                                 |       | 124.8                     |       | 42.0                              |       | 116.3                   |       | 40.2 |   | 8.5 |   | 1.8 |   |
| Consolidated                                                   |       | 296.9                     |       | 100.0                             |       | 289.1                   |       | 100.0 |   | 7.8 |   | — |   |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Gross profit**                                               | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 64.5                      |       | 37.5                              |       | 56.6                    |       | 32.8 |   | 7.9 |   | 4.7 |   |
| Piping systems                                                 |       | 32.2                      |       | 25.8                              |       | 28.0                    |       | 24.1 |   | 4.2 |   | 1.7 |   |
| Consolidated                                                   |       | 96.7                      |       | 32.6                              |       | 84.6                    |       | 29.3 |   | 12.1 |   | 3.3 |   |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Selling, general and administrative  expenses**              | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 16.7                      |       | 9.7                               |       | 16.3                    |       | 9.4 |   | 0.4 |   | 0.3 |   |
| Piping systems                                                 |       | 19.3                      |       | 15.5                              |       | 19.9                    |       | 17.1 |   | (0.6 | ) | (1.6 | ) |
| Corporate                                                      |       | 11.8                      |       | 4.0                               |       | 10.6                    |       | 3.7 |   | 1.2 |   | 0.3 |   |
| Consolidated                                                   |       | 47.8                      |       | 16.1                              |       | 46.8                    |       | 16.2 |   | 1.0 |   | (0.1 | ) |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Stock compensation expense**                                 | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate                                                      |       | —                    |       | —                            |       | 20.9                    |       | 7.2 |   | (20.9 | ) | (7.2 | ) |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Facility rationalization, restructuring and  related costs** | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | —                    |       | —                            |       | —                  |       | — |   | — |   | — |   |
| Piping systems                                                 |       | —                    |       | —                            |       | —                  |       | — |   | — |   | — |   |
| Consolidated                                                   |       | —                    |       | —                            |       | —                  |       | — |   | — |   | — |   |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Operating income**                                           | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 47.8                      |       | 27.8                              |       | 40.3                    |       | 23.3 |   | 7.5 |   | 4.5 |   |
| Piping systems                                                 |       | 12.9                      |       | 10.3                              |       | 8.1                     |       | 7.0 |   | 4.8 |   | 3.3 |   |
| Corporate                                                      |       | (11.8                     | )          | (4.0                              | )          | (31.5                   | )          | (10.9 | ) | 19.7 |   | 6.9 |   |
| Consolidated                                                   |       | 48.9                      |       | 16.5                              |       | 16.9                    |       | 5.8 |   | 32.0 |   | 10.7 |   |
| Interest expense                                               |       | (23.4                     | )          | (7.9                              | )          | (21.7                   | )          | (7.5 | ) | (1.7 | ) | (0.4 | ) |
| Interest income                                                |       | 0.4                       |       | 0.1                               |       | 0.1                     |       | — |   | 0.3 |   | 0.1 |   |
| Income before income taxes                                     |       | 25.9                      |       | 8.7                               |       | (4.7                    | )          | (1.6 | ) | 30.6 |   | 10.3 |   |
| Income tax expense                                             |       | 9.9                       |       | 3.3                               |       | (5.3                    | )          | (1.8 | ) | 15.2 |   | 5.1 |   |
| Net income                                                     |       | $                         | 16.0       |                              | 5.4        | %                       | $          | 0.6 |   | 0.2 | % | $ | 15.4 |   | 5.2 | % |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |   |   |   |
| **Segment EBITDA(1)**                                          | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 52.7                      |       | 30.6                              |       | 46.0                    |       | 26.6 |   | 6.7 |   | 4.0 |   |
| Piping systems                                                 |       | 17.2                      |       | 13.8                              |       | 12.4                    |       | 10.7 |   | 4.8 |   | 3.1 |   |
| Total segment EBITDA                                           |       | $                         | 69.9       |                              | 23.5       |                    | $          | 58.4 |   | 20.2 |   | $ | 11.5 |   | 3.3 |   |

 

----

(1)           Segment EBITDA isdefined as segment operating income plus depreciation and amortization expenseand excludes unallocated corporate expenses. This performance measure may notbe comparable to EBITDA as reported by other companies.

 

The Companyevaluates segment performance based on segment EBITDA. A reconciliation ofsegment EBITDA to consolidated income before income taxes follows:

 

19

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| ** **                                 | ** ** | **Three months ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **July 2, 2005**  | ** ** | **June 26, 2004** | ** ** |
| ** **                                 | ** ** | ** **             | ** ** | **(as restated)(3)** | ** ** |
| Total segment EBITDA                       |       | $                      | 69.9       |   | $ | 58.4 |   |
| Unallocated corporate costs                |       | (9.2                   | )          | (25.1 | ) |
| Interest expense and early repayment costs |       | (23.4                  | )          | (21.7 | ) |
| Depreciation and amortization              |       | (11.4                  | )          | (16.3 | ) |
| Income before income taxes                 |       | $                      | 25.9       |   | $ | (4.7 | ) |

 

----

(2)           Percentagesare by segment, if applicable.

 

(3)           SeeNote 2 for a discussion of the restatement.

 

*Net Sales.* Net sales for the three months ended July 2, 2005 were $296.9million, or a 2.7% increase as compared to $289.1 million for the threemonths ended June 26, 2004.

 

Waterinfrastructure net sales for the three months ended July 2, 2005 were$172.1 million, or a 0.4% decrease as compared to $172.8 million for thethree months ended June 26, 2004. The sales volume for hydrants and valvesdecreased for our third quarter of 2005 as compared to our third quarter of2004.  There was a price increase inMay 2004 that we believe resulted in customers placing a larger-than-usualamount of orders ahead of that date in order to get the benefit of lowerpricing, which subsequently resulted in higher shipments during the thirdquarter of 2004. There was no similar price increase announced during the thirdquarter of 2005.  The impact of thedecrease in hydrant and valve volumes was offset by the effects of priceincreases on those same products.

 

Piping systemsnet sales for the three months ended July 2, 2005 were$124.8 million, or a 7.3% increase as compared to $116.3 million forthe three months ended June 26, 2004. This increase was driven primarilyby price increases which were implemented in the second half of 2004 and in thefirst half of 2005, and also by an additional $2.1 million of Star productsales.

 

*Gross Profit.* Gross profit for the three months ended July 2, 2005 was$96.7 million, or a 14.3% increase as compared to $84.6 million forthe three months ended June 26, 2004. Gross profit, as a percentage of netsales, or gross margin, increased from 29.3% for our third quarter of 2004 to32.6% for our third quarter of 2005.

 

Waterinfrastructure gross profit for the three months ended July 2, 2005 was$64.5 million, or a 14.0% increase as compared to $56.6 million forthe three months ended June 26, 2004. Gross profit, as a percentage of netsales, increased from 32.8% for our third quarter of 2004 to 37.5% for ourthird quarter of 2005. The increase in gross profit was primarily driven byprice increases and the continued strong performance of the residentialconstruction market. Partially offsetting the effects of higher prices werehigher raw material costs (most notably brass ingot and scrap steel) due toworldwide supply and demand issues. We cannot provide assurances that anyfuture increases in raw material costs can be passed on to our customers.

 

Piping systemsgross profit for the three months ended July 2, 2005 was $32.2 million, ora 15.0% increase as compared to $28.0 million for the three months endedJune 26, 2004. Gross profit, as a percentage of net sales, increased from24.1% to 25.8%. The increase in gross profit was primarily driven by price increases.Increased raw material costs partially offset the effects of the higher prices.We cannot provide assurances that we can continue to pass on cost increases toour customers.

 

*Selling, General & Administrative Expense.*  Selling, General and Administrative expenses(“SG&A”) for the three months ended July 2, 2005 were$47.8 million, or a 2.1% increase as compared to $46.8 million forthe three months ended June 26, 2004. As a percentage of net sales,SG&A decreased from 16.2% for our third quarter of 2004 to 16.1% for ourthird quarter of 2005.

 

Waterinfrastructure SG&A for the three months ended July 2, 2005 was $16.7million, or a 2.5% increase as compared to $16.3 million for the threemonths ended June 26, 2004. As a percentage of net sales, SG&A increasedslightly from 9.4% for our third quarter of 2004 to 9.7% for our third quarterof 2005. The increase was primarily due to compensation and benefit costs foradditional personnel.

 

Piping systemsSG&A for the three months ended July 2, 2005 was $19.3 million, or a3.0% decrease as compared to $19.9 million for the three months endedJune 26, 2004. As a percentage of net sales, SG&A decreased from 17.1%for our third quarter of 2004 to 15.5% for our third quarter of 2005.  The decrease was primarily due to a reductionin legal expenses and

 

20

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foreign currency losses forCanadian transactions recognized in the third quarter of 2004.  There were no similar foreign currency lossesin the third quarter of 2005.  Thesedecreases were partially offset by a moderate increase in selling costs of$0.6 million, primarily due to higher sales commissions.

 

Corporateexpenses for the three months ended July 2, 2005 were $11.8 million ascompared to $10.6 million for the three months ended June 26, 2004.Significant factors contributing to costs in the third quarter of 2005 includeconsulting fees of $1.1 million related to efforts to become compliantwith public company reporting and Sarbanes-Oxley internal control requirements,$1.4 million related to compensation payments to current employees anddirectors to offset additional taxes owed by them as a result of the Company’srevaluation of stock compensation paid to them in 2004, $1.6 million ofprofessional fees related to efforts to sell the Company (see Note 5),increased board of director fees of $0.2 million, increased legal, audit andother consulting fees of $0.7 million, and increased salary and benefitcosts of $0.4 million associated with additional accounting and legalstaffing. These items are offset by a $4.0 million reduction inamortization expense for the third quarter of 2005 as compared to the thirdquarter of 2004 due to an intangible asset becoming fully amortized during thefourth quarter of 2004. Corporate expenses consist primarily of corporatestaff, benefits, legal and facility costs.

 

*Stock Compensation Expense. *Corporate stock compensation expense for thethree months ended June 26, 2004 was $20.9 million, primarily related tocharges for employee optionholders made in connection with the recapitalizationof the Company during the third quarter of 2004.  All options were cancelled at that time.

 

There was no stock compensation expense for the three months endedJuly 2, 2005.

 

*Interest Expense.*  Interest expense for the three months endedJuly 2, 2005 was $23.4 million, or a $1.7 million increase from$21.7 million for the three months ended June 26, 2004. Interestexpense for the three months ended July 2, 2005, included$5.5 million of additional interest expense and amortization of deferredfinancing fees on $518.0 million of net additional debt resulting from theCompany’s recapitalization in April 2004. This increase was offset by a $6.6 million write-off of term debtdeferred financing fees during the three months ended June 26, 2004 inconnection with the April 2004 recapitalization.  Also, gains recorded on interest rate swapswere $2.8 million lower in 2005 than in 2004 as more swap agreementsexpired and were not renewed.

 

*Income Tax Expense.*  The effective tax rates (excluding discretethird quarter items) for three months ended July 2, 2005 and June 26,2004 were 41% and 26%, respectively. For the third quarter of 2005, the Companyadjusted its tax accruals downward by approximately $0.7 million due to theexpiration of statutes of limitation. Discrete third quarter events in 2004 included the conclusion of thefederal and certain state tax examinations and the expiration of certain statestatutes of limitation which allowed the Company to adjust tax accrualsdownward by approximately $6.4 million. Partially offsetting these items in thethird quarter of 2004 were $2.3 million of charges related to Foreign TaxCredits and the effects of other items, including changes in the effective rateon prior period deferred tax balances.

 

*Segment EBITDA.*  Segment EBITDA for the three months endedJuly 2, 2005 was $69.9 million, or a 19.7% increase as compared to$58.4 million for the three months ended June 26, 2004.

 

Waterinfrastructure EBITDA for the three months ended July 2, 2005 was$52.7 million, which was $6.7 million or 14.6% higher than the$46.0 million for the three months ended June 26, 2004. The increasedEBITDA resulted primarily from increased prices, partially offset by additionalSG&A spending as discussed above.

 

Piping systemsEBITDA was $17.2 million for the three months ended July 2, 2005, whichwas $4.8 million or 38.7% higher than the $12.4 million reported forthe three months ended June 26, 2004. The increased EBITDA resultedprimarily from increased prices.

 

21

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**Resultsof Operations**

 

***Nine Months EndedJuly 2, 2005 As Compared to the Nine Months Ended June 26, 2004***

 
| ** **                                                     | ** ** | **Nine months ended**     | ** ** | ** **                        | ** ** | **2005 vs. 2004**       | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **July 2,  2005**    | ** ** | **Percentage  of net sales  (2)** | ** ** | **June 26,  2004** | ** ** | **Percentage  of net sales  (2)** | ** ** | **Increase/  (decrease)** | ** ** | **Change in  percentage  of  net sales** | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | ** **                        | ** ** | **(restated)**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **(dollars in millions)** | ** ** |
| **Net sales**                                                  | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | $                         | 480.8      |                              | 57.4       | %                       | $          | 434.7 |   | 58.3 | % | $ | 46.1 |   | (0.9% | ) |
| Piping systems                                                 |       | 357.4                     |       | 42.6                              |       | 310.9                   |       | 41.7 |   | 46.5 |   | 0.9 |   |
| Consolidated                                                   |       | 838.2                     |       | 100.0                             |       | 745.6                   |       | 100.0 |   | 92.6 |   | — |   |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Gross profit**                                               | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 166.1                     |       | 34.5                              |       | 139.9                   |       | 32.2 |   | 26.2 |   | 2.3 |   |
| Piping systems                                                 |       | 94.4                      |       | 26.4                              |       | 70.0                    |       | 22.5 |   | 24.4 |   | 3.9 |   |
| Consolidated                                                   |       | 260.5                     |       | 31.1                              |       | 209.9                   |       | 28.2 |   | 50.6 |   | 2.9 |   |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Selling, general and administrative  expenses**              | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 49.5                      |       | 10.3                              |       | 44.8                    |       | 10.3 |   | 4.7 |   | — |   |
| Piping systems                                                 |       | 59.8                      |       | 16.7                              |       | 53.4                    |       | 17.2 |   | 6.4 |   | (0.5 | ) |
| Corporate                                                      |       | 29.8                      |       | 3.6                               |       | 27.2                    |       | 3.6 |   | 2.6 |   | — |   |
| Consolidated                                                   |       | 139.1                     |       | 16.6                              |       | 125.4                   |       | 16.8 |   | 13.7 |   | (0.2 | ) |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Stock compensation expense**                                 | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate                                                      |       | —                    |       | —                            |       | 21.2                    |       | 2.8 |   | (21.2 | ) | (2.8 | ) |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Facility rationalization, restructuring and  related costs** | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 1.6                       |       | 0.3                               |       | —                  |       | — |   | 1.6 |   | 0.3 |   |
| Piping systems                                                 |       | —                    |       | —                            |       | 0.9                     |       | 0.3 |   | (0.9 | ) | (0.3 | ) |
| Consolidated                                                   |       | 1.6                       |       | 0.2                               |       | 0.9                     |       | 0.1 |   | 0.7 |   | 0.1 |   |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Operating income**                                           | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 115.0                     |       | 23.9                              |       | 95.1                    |       | 21.9 |   | 19.9 |   | 2.0 |   |
| Piping systems                                                 |       | 34.6                      |       | 9.7                               |       | 15.7                    |       | 5.0 |   | 18.9 |   | 4.7 |   |
| Corporate                                                      |       | (29.8                     | )          | (3.6                              | )          | (48.4                   | )          | (6.5 | ) | 18.6 |   | 2.9 |   |
| Consolidated                                                   |       | 119.8                     |       | 14.3                              |       | 62.4                    |       | 8.4 |   | 57.4 |   | 5.9 |   |
| Interest expense                                               |       | (68.0                     | )          | (8.1                              | )          | (42.1                   | )          | (5.6 | ) | (25.9 | ) | (2.5 | ) |
| Interest income                                                |       | 1.0                       |       | 0.1                               |       | 0.5                     |       | 0.1 |   | 0.5 |   | — |   |
| Income before income taxes                                     |       | 52.8                      |       | 6.3                               |       | 20.8                    |       | 2.8 |   | 32.0 |   | 3.5 |   |
| Income tax expense                                             |       | 20.9                      |       | 2.5                               |       | 4.9                     |       | 0.7 |   | 16.0 |   | 1.8 |   |
| Net income                                                     |       | $                         | 31.9       |                              | 3.8        | %                       | $          | 15.9 |   | 2.1 | % | $ | 16.0 |   | 1.7 | % |
|                                                           |       |                      |       |                              |       |                    |       |   |   |   |   |   |   |
| **Segment EBITDA(1)**                                          | ** ** | ** **                | ** ** | ** **                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 131.9                     |       | 27.4                              |       | 113.0                   |       | 26.0 |   | 18.9 |   | 1.4 |   |
| Piping systems                                                 |       | 47.5                      |       | 13.3                              |       | 28.4                    |       | 9.1 |   | 19.1 |   | 4.2 |   |
| Total segment EBITDA                                           |       | $                         | 179.4      |                              | 21.4       |                    | $          | 141.4 |   | 19.0 |   | $ | 38.0 |   | 2.4 |   |

 

22

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(1)           Segment EBITDA is defined assegment operating income plus depreciation and amortization expense andexcludes unallocated corporate expenses. This performance measure may not becomparable to EBITDA as reported by other companies.

 

The Companyevaluates segment performance based on segment EBITDA. A reconciliation ofsegment EBITDA to consolidated income before income taxes follows:

 
| ** **                                 | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **July 2, 2005** | ** ** | **June 26, 2004** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | **(as restated)(3)** | ** ** |
| Total segment EBITDA                       |       | $                     | 179.4      |   | $ | 141.4 |   |
| Unallocated corporate costs                |       | (21.8                 | )          | (29.0 | ) |
| Interest expense and early repayment costs |       | (68.0                 | )          | (42.1 | ) |
| Depreciation and amortization              |       | (36.8                 | )          | (49.5 | ) |
| Income before income taxes                 |       | $                     | 52.8       |   | $ | 20.8 |   |

 

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(2)           Percentagesare by segment, if applicable.

 

(3)           SeeNote 2 for a discussion of the restatement.

 

*Net Sales.* Net sales for the nine months ended July 2, 2005 were $838.2million, or a 12.4% increase as compared to $745.6 million for the ninemonths ended June 26, 2004.

 

Waterinfrastructure net sales for the nine months ended July 2, 2005 were$480.8 million, or a 10.6% increase as compared to $434.7 million for thenine months ended June 26, 2004. This increase was driven primarily byprice increases implemented in the second half of 2004 and during the secondquarter of 2005, as well as increased volumes due to the continued strong performanceof the residential construction market.

 

Piping systemsnet sales for the nine months ended July 2, 2005 were $357.4 million, or a15.0% increase as compared to $310.9 million for the nine months endedJune 26, 2004. This increase was driven primarily by price increasesimplemented in the second half of 2004 and the first half of 2005, as well as$9.5 million of additional Star product sales. We acquired the Starbusiness in January 2004 (see Note 5).

 

*Gross Profit.* Gross profit for the nine months ended July 2, 2005 was$260.5 million, or a 24.1% increase as compared to $209.9 million forthe nine months ended June 26, 2004. Gross profit, as a percentage of netsales, or gross margin, increased from 28.2% for our first nine months of 2004to 31.1% for our first nine months of 2005.

 

Waterinfrastructure gross profit for the nine months ended July 2, 2005 was$166.1 million, or an 18.7% increase as compared to $139.9 millionfor the nine months ended June 26, 2004. Gross profit, as a percentage ofnet sales, increased from 32.2% for our first nine months of 2004 to 34.5% forour first nine months of 2005. The increase in gross profit was primarilydriven by price increases and the continued strong performance of theresidential construction market. Partially offsetting the effects of higherprices were higher raw material costs (most notably brass ingot and scrapsteel) due to worldwide supply and demand issues. We cannot provide assurancesthat any future increases in raw material costs can be passed on to ourcustomers.

 

Piping systemsgross profit for the nine months ended July 2, 2005 was $94.4 million, ora 34.9% increase as compared to $70.0 million for the nine months endedJune 26, 2004. Gross profit, as a percentage of net sales, increased from22.5% to 26.4%. The increase in gross profit was primarily driven by priceincreases. Increased raw material costs partially offset the effects of thehigher prices. We cannot provide assurances that we can continue to pass oncost increases to our customers.

 

*Selling, General & Administrative Expense.*  Selling, General and Administrative expenses(“SG&A”) for the nine months ended July 2, 2005 were$139.1 million, or a 10.9% increase as compared to $125.4 million forthe six months ended June 26, 2004. As a percentage of net sales, SG&Adecreased from 16.8% for our first nine months of 2004 to 16.6% for our firstnine months of 2005.

 

Waterinfrastructure SG&A for the nine months ended July 2, 2005 was $49.5million, or a 10.5% increase as compared to $44.8 million for the ninemonths ended June 26, 2004. As a percentage of net sales, SG&Aremained steady at 10.3% for both

 

23

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our first nine months of 2004and 2005. Significant factors contributing to the higher costs includeincreased management incentive compensation costs of $1.3 million relatedto higher earnings, increased sales commissions of $0.3 million related tohigher sales, and increased wages and benefit costs of $1.2 million.

 

Piping systemsSG&A for the nine months ended July 2, 2005 was $59.8 million, or a12.0% increase as compared to $53.4 million for the nine months endedJune 26, 2004. As a percentage of net sales, SG&A decreased from 17.2%for our first nine months of 2004 to 16.7% for our first nine months of 2005.Significant factors contributing to the higher costs include increased sellingcosts of $3.7 million primarily due to higher sales commissions, increasedwarehousing costs of $1.1 million primarily related to the Star productline and increased management incentive compensation cost of $1.1 milliondue to higher earnings.

 

Corporateexpenses for the nine months ended July 2, 2005 were $29.8 million ascompared to $27.2 million for the nine months ended June 26, 2004.Significant factors contributing to higher costs for the first nine months of2005 were: legal and audit fees of $3.0 million related to an internalinvestigation (see Note 2), accounting and legal fees of $1.1 millionrelated to SEC filing matters, consulting fees of $2.6 million related toefforts to become compliant with public company reporting and Sarbanes-Oxleyinternal control requirements, $1.4 million related to compensation payments tocurrent employees and directors to offset additional taxes owed by them as aresult of the Company’s revaluation of stock compensation paid to them in 2004,$1.6 million of professional fees related to efforts to sell the Company (seeNote 5), increased board of director fees of $0.2 million, increased incentivecompensation costs of $1.6 million, increased legal, audit and otherconsulting fees of $1.4 million, and increased salary, benefit, recruitingand relocation costs of $1.2 million associated with additional accountingand legal staffing. These items are offset by a $12.0 million reduction inamortization expense for the first nine months of 2005 as compared to the firsthalf of 2004 due to an intangible asset becoming fully amortized during thefourth quarter of 2004. Corporate expenses consist primarily of corporate staff,benefits, legal and facility costs.

 

*Stock Compensation Expense. *Corporate stock compensation expense for thenine months ended June 26, 2004 was $21.2 million, primarily related tocharges for employee optionholders made in connection with the recapitalizationof the Company during the third quarter of 2004.  All options were cancelled at that time.

 

There was no stock compensation expense for the nine months endedJuly 2, 2005.

 

*Facility Rationalization, Restructuring and Related Costs.*  There was $1.6 million of restructuringcosts for the nine months ended July 2, 2005, related primarily toseverance payments and to the termination of operating leases for the buildingand machinery at a water infrastructure plant in Colorado that ceased manufacturingand began outsourcing a product line in February 2005.

 

There was$0.9 million of facility rationalization costs for the nine months endedJune 26, 2004, related primarily to future lease obligations at a closedpiping systems facility in New Jersey and environmental issues at a closedpiping systems plant in Georgia.

 

*Interest Expense.*  Interest expense for the nine months endedJuly 2, 2005 was $68.0 million, or a $25.9 million increase from$42.1 million for the nine months ended June 26, 2004. Interest expensefor the nine months ended July 2, 2005, includes $33.7 million ofadditional interest expense and amortization of deferred financing fees on$518.0 million of net additional debt resulting from the Company’srecapitalization in April 2004.  Inthe nine months ended June 26, 2004, interest expense included a $6.6million write-off of term debt deferred financing fees related to theApril 2004 recapitalization, and a $7.0 million early redemptionpenalty and a write-off of $0.4 million in deferred financing fees relatedto the early redemption of $50.0 million of senior subordinated debt inNovember 2003. Also, gains recorded on interest rate swaps were$6.2 million lower in 2005 than in 2004 as more swap agreements expiredand were not renewed.

 

*Income Tax Expense.*  The effective tax rates (excluding discretethird quarter items) for the nine months ended July 2, 2005 andJune 26, 2004 were 41% and 43%, respectively. Discrete third quarterevents in 2005 and 2004 allowed the Company to adjust tax accruals, asdescribed in the quarterly comparison section.

 

*Segment EBITDA.*  Segment EBITDA for the nine months endedJuly 2, 2005 was $179.4 million, or a 26.9% increase as compared to$141.4 million for the nine months ended June 26, 2004.

 

24

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Waterinfrastructure EBITDA for the nine months ended July 2, 2005 was$131.9 million, which was $18.9 million or 16.7% higher than the$113.0 million for the nine months ended June 26, 2004. The increasedEBITDA resulted primarily from increased prices and volumes, partially offsetby additional SG&A spending as discussed above.

 

Piping systemsEBITDA was $47.5 million for the nine months ended July 2, 2005, which was$19.1 million or 67.3% higher than the $28.4 million reported for thenine months ended June 26, 2004. The increased EBITDA resulted primarilyfrom increased prices and additional Star gross profit, partially offset byadditional SG&A spending as discussed above.

 

**Liquidityand Capital Resources**

 

We are a holdingcompany and have no direct material operations. Our only material asset is ourownership of Group, and our only material liabilities are the senior discountnotes, our guarantee of Group’s senior credit facility and our potentialobligation to repurchase Dale B. Smith’s equity interest (seeNote 8). Our principal source of liquidity has been and is expected to bedividends from Group and our principal use of cash will be for debt servicebeginning in 2009.

 

Group is theborrower under the senior credit facility and the issuer of $100 millionprincipal amount of senior secured notes due 2011 and $315 million seniorsubordinated notes due 2012.  The seniorcredit facility, secured notes and subordinated notes impose limitations onGroup’s ability to pay dividends to us. Group’s ability to generate net incomewill depend upon various factors that may be beyond our control. Accordingly,Group may not generate sufficient cash flow or be permitted by the terms of itsdebt instruments to pay dividends or distributions to us in amounts sufficientto allow us to pay cash interest on the senior discount notes. We would then berequired to secure alternate financing, which may not be available onacceptable terms, or at all.

 

Group’sprincipal sources of liquidity have been and are expected to be cash flow fromoperations and borrowings under the senior credit facility. Its principal usesof cash will be debt service requirements as described below, capitalexpenditures, working capital requirements, dividends to us to finance our cashneeds and possible acquisitions.

 

*Debt Service*

 

As ofJuly 2, 2005 we had: (a) total consolidated indebtedness ofapproximately $1,051.7 million; and (b) approximately $58.5 millionof borrowings available under Group’s senior revolving credit facility, subjectto customary conditions. As of July 2, 2005, Group had obtained$21.5 million in letters of credit under the senior revolving creditfacility, which reduced availability for borrowings thereunder. Our significantdebt service obligations could have material consequences to our securityholders. Our key financial covenants are dependent on attaining certain levelsof EBITDA, as defined in the respective debt arrangements. The most restrictivecovenant in effect at July 2, 2005 related to Group’s leverage ratio, asdefined in the debt arrangements, which required approximately$162 million of EBITDA over the trailing twelve months, based on Group’snet debt outstanding. Group’s EBITDA, as defined in the debt agreement,exceeded $230 million over the trailing twelve months ended July 2,2005.

 

*Capital Expenditures*

 

The seniorcredit facility contains restrictions on our and Group’s ability to makecapital expenditures. Based on current estimates, management believes that theamount of capital expenditures permitted to be made under the senior creditfacility will be adequate to maintain the properties and business of ourcontinuing operations.

 

*Sources of Funds*

 

We anticipatethat our operating cash flow, together with permitted borrowings under thesenior credit facility, will be sufficient to meet our anticipated futureoperating expenses, capital expenditures and debt service obligations as theybecome due for at least the next twelve months. However, the ability to makescheduled payments of principal of, to pay interest on or to refinanceindebtedness and to satisfy other debt obligations will depend upon futureoperating performance, which will be affected by general economic, financial,competitive, legislative, regulatory, business, environmental and other factorsbeyond our control.

 

From time totime we may explore additional financing methods and other means to lower ourcost of capital, which could include stock issuance or debt financing and theapplication of the proceeds therefrom to the repayment of bank debt or otherindebtedness. In addition, in connection with any future acquisitions, we mayrequire additional funding which may be

 

25

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provided in the form ofadditional debt or equity financing or a combination thereof. There can be noassurance that any additional financing will be available to us on acceptableterms.

 

*Walter Industries Merger*

 

Under themerger agreement between Walter Industries and the Company and prior to mergerclosing, the Company will cause its subsidiary, Mueller Group, Inc. (“Group”),to commence a tender offer and consent solicitation for Group’s second prioritysenior secured floating rate notes due 2011.  The consummation of thetender offer and consent solicitation is expected to occur simultaneously withthe consummation of the merger, but it is not a condition to the mergerclosing.  Group’s senior credit facility will be refinanced at mergerclosing.  The Company’s 14 3⁄4% senior discount notes due 2014 and Group’s10% senior subordinated notes due 2012 will remain outstanding after the mergeris completed.   However, holders ofthese notes will have the right to put them to their respective issuersfollowing the change of control resulting from the consummation of the mergertransaction in accordance with the respective indentures.  The Companyanticipates that, in connection with the merger, the Company will incur additional debt.  As a result, the Company’sleverage will increase, increasing its debt service obligations.  Theincreased leverage could adversely affect the outstanding notes of the Companyand Group going forward.

 

As a result ofthe pending acquisition by Walter Industries, it is expected that WalterIndustries’ US Pipe subsidiary will be contributed to the Company, whichwill have an impact on the Company’s financial statements by, for example,lowering the margins of the consolidated company.  In addition, we expect that our reportingsegments may be changed after the merger.  We also expect that purchaseaccounting adjustments could increase non-cash deprecation andamortization expense.

 

The mergertransaction is subject to customary conditions to closing, and there can be noassurance that the transaction will be consummated.

 

***Historical***

 

Historically,our financing requirements have been funded primarily through cash generated byoperating activities and borrowings under the revolving credit facility. Fromtime to time, we have also raised additional funds through term debt offerings.

 

*Cash flows from operating activities.*  Net cash provided by operations was$31.2 million for the first nine months of 2005, compared to net cashprovided of $50.8 million for the first nine months of 2004. Significantchanges in working capital balances in the first nine months of 2005 included a$49.5 million increase in inventories. Water infrastructure inventoriesincreased $25.9 million during the nine months ended July 2, 2005.Significant contributing factors to the increase include higher raw materialcosts of approximately $7 million, as well as a seasonal build ofapproximately $10 million to meet anticipated fourth quarter demand.  Other contributing factors include $1.8million of increased on-hand quantities of raw material due to larger purchasesto achieve lower prices, $1.8 million of inventory costs associated with alarge, highly-engineered project scheduled to ship late in the fourth quarterof 2005, and $1.2 million in Canadian product inventories (purchased from otherwater infrastructure locations) required to service Canadian customerrequirements.  Piping systems inventoriesincreased $23.6 million during the nine months ended July 2, 2005.Increased material and labor costs accounted for approximately $7 million ofthe increase. Approximately $14 million was due to increased foreign productinventories required to service North American and European customerrequirements.  Of this $14 million,approximately $2 million is related to the start-up of European export efforts,while the remaining $12 million is related to ongoing efforts to make availablea full line of foreign-sourced products to our North American customers.

 

*Cash flows used in investing activities.*  In the first nine months of 2005 we had netcash used in investing activities of $20.8 million compared to net cashused in the first nine months of 2004 of $37.2 million. This decrease wasprimarily due to $19.8 million spent during the second quarter of 2004 forthe acquisitions of Star and Modern Molded (see Note 5).

 

*Cash flows from financing activities.*  Cash flows used in financing activitiesdecreased from $61.9 million in the first nine months of 2004 to$2.4 million in the first nine months of 2005. This was primarily due toearly payment of $50 million of subordinated notes due 2009 in the firstquarter of 2004.

 

**Off-BalanceSheet Arrangements**

 

We do not haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. In addition, we do not have any undisclosed borrowings or debt, andwe have not entered into any derivative contracts (other than those describedin “—Qualitative and Quantitative Disclosure About Market Risk”) or syntheticleases. We are, therefore, not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

 

Group utilizesletters of credit and surety bonds in the ordinary course of business to ensureperformance of contractual obligations. As of July 2, 2005, Group had$21.5 million of letters of credit and $16.3 million of surety bondsoutstanding.

 

**ContractualObligations**

 

Ourcontractual obligations as of July 2, 2005:

 

**Payments Due by Period**

 
| **Contractual Obligations**           | ** ** | **Less than  1 Year**     | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|-------------------|------------|-----------|------------|
| ** **                            | ** ** | **(dollars in millions)** | ** ** |
| Long-term debt                        |       |                      |       |          |       |          |       |              |       |      |       |
| Principal on long-term debt           |       | $                         | 2.9        |          | 5.8        |          | 5.8        |              | 1,024.1    |      | 1,038.6    |   |
| Interest on long-term debt(1)         |       | 72.4                      |       | 143.9         |       | 182.9         |       | 354.9             |       | 754.1     |       |
| Capital lease obligations             |       | 1.0                       |       | 1.2           |       | 0.1           |       | —            |       | 2.3       |       |
| Operating leases                      |       | 8.8                       |       | 11.3          |       | 3.0           |       | 2.9               |       | 26.0      |       |
| Unconditional purchase obligations(2) |       | 6.5                       |       | —        |       | —        |       | —            |       | 6.5       |       |
| Other long-term obligations(3)        |       | —                    |       | —        |       | —        |       | —            |       | —    |       |
| Total contractual cash obligations    |       | $                         | 91.6       |          | 162.2      |          | 191.8      |              | 1,381.9    |      | 1,827.5    |   |

 

26

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(1)           Interest on the seniorcredit facility and secured notes is calculated using LIBOR of 3.54% and 3.21%respectively, the rates applicable under these debt instruments and in effecton July 2, 2005. Each increase or decrease in LIBOR of 0.125% would resultin an increase or decrease in annual interest on the senior credit facility andsecured notes of $0.8 million. Because the interest rates under the seniorcredit facility and secured notes will be variable, actual payments may differ.Interest does not include payments that could be required under ourinterest-rate swap agreements, which payments will depend upon movements ininterest rates and could vary significantly. The payments due on the existinginterest rate swaps expiring in July 2005 and May 2007 are estimatedto be approximately $0.5 million, net of LIBOR interest of 3.54% receivedfrom counterparties.

 

(2)           Includescontractual obligations for purchases of raw materials and capitalexpenditures.

 

(3)           Excludes the deferredpayment portion of the purchase price for Star. The Star purchase price issubject to adjustment to reflect, among other things, a deferred payment to bemade by us to the extent that the gross profit of the business exceeds thetarget gross profit from February 1, 2004 to January 31, 2007.Although the maximum amount payable is $23 million, we estimate that thetotal deferred payment will be approximately $3.0 to $6.0 million. Thiscalculation of the potential Star purchase price adjustment is based onmanagement’s best estimate; however, the actual adjustment may be materiallydifferent.

 

**Effectof Inflation; Seasonality**

 

We do notbelieve that general inflation has had a material impact on our financialposition or results of operations, with the exception of recent increases inthe cost of our raw materials.

 

Our businessis largely dependent upon the North American construction industry, which isvery seasonal due to the impact of winter or wet weather conditions. Our netsales and operating income have historically been lowest, and our workingcapital needs have been highest, in the three month periods ending aroundDecember 31 and March 31, when the northern United States and all ofCanada generally face weather that restricts significant construction activityand we build working capital in anticipation of the peak construction season,during which time our working capital tends to be reduced.

 

**CriticalAccounting Policies**

 

Oursignificant accounting policies are described in our audited consolidatedfinancial statements for the year ended September 30, 2004 as found onForm 10-K (File No. 333-116590). While all significant accountingpolicies are important to our consolidated financial statements, some of thesepolicies may be viewed as being critical. Such policies are those that are bothmost important to the portrayal of our financial condition and require our mostdifficult, subjective and complex estimates and assumptions that affect thereported amounts of assets, liabilities, revenues, expenses and relateddisclosure of contingent assets and liabilities. These estimates are based uponour historical experience and on various other assumptions that we believe tobe reasonable under the circumstances. Our actual results may differ from theseestimates under different assumptions or conditions.

 

**RecentlyIssued Accounting Standards**

 

InDecember 2004, the Financial Accounting Standards Board issued SFASNo. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFASNo. 123, “Accounting for Stock-Based Compensation,” and supersedes APBOpinion No. 25, “Accounting for Stock Issued to Employees.” SFASNo. 123(R) requires compensation costs related to share-based paymenttransactions to be recognized in the financial statements over the period thatan employee provides service in exchange for the award. Public companies arerequired to adopt the new standard using a modified prospective method and mayelect to restate prior periods using the modified retrospective method. Underthe modified prospective method, companies are required to record compensationcost for new and modified awards over the related vesting period of such awardsprospectively and record compensation cost prospectively for the unvestedportion, at the date of adoption, of previously issued and outstanding awardsover the remaining vesting period of such awards. No change to prior periodspresented is permitted under the modified prospective method. Under themodified retrospective method, companies record compensation costs for priorperiods retroactively through restatement of such periods using the exact proforma amounts disclosed in the companies’ footnotes. Also, in the period ofadoption and after, companies record compensation based on the modifiedprospective method. SFAS

 

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No. 123(R), as amended inApril 2005 for compliance dates, allows companies to implement thestandard at the beginning of their next fiscal year. The Company plans to adoptSFAS No. 123(R) as of October 1, 2005, the beginning of its nextfiscal year and to use the modified prospective method. The adoption ofSFAS 123(R) is not expected to have a material impact on the Company’sfinancial statements for the year ended September 30, 2005.

 

InNovember 2004, the Financial Accounting Standards Board issued SFASNo. 151, “Inventory Costs.” SFAS No. 151 amends the guidance in ARBNo. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial. This Statement requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal.” In addition, this Statement requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS No. 151 is effective for fiscal yearsbeginning after June 15, 2005. The Company intends to adopt SFASNo. 151 on October 1, 2005, the beginning of its 2006 fiscal year.The adoption of SFAS No. 151 is not expected to have a material impact onthe Company’s financial statements.

 

FASB StaffPosition (FSP) No. FAS 109-1 and 109-2 were issued inDecember 2004, providing guidance on foreign earnings repatriation andqualified production activities of the American Jobs Creation Act (AJCA) thatwas enacted on October 22, 2004. The AJCA created a temporary incentivefor United States multinationals to repatriate accumulated earnings outside theUnited States by providing an 85 percent dividends received deduction forcertain qualifying earnings repatriations in either fiscal 2005 or in fiscal2006. As of July 2, 2005, the Company has not provided deferred taxes onforeign earnings because any taxes on dividends would be substantially offsetby foreign tax credits or because the Company intends to reinvest thoseearnings indefinitely. Due to the complexity of the repatriation provision, theCompany is still evaluating the effects of this provision on its plan forrepatriation of foreign earnings and does not expect to be able to completethis evaluation until after the Treasury Department has issued all of itsguidance, including the expected passage of a Technical Corrections Bill byCongress.

 

InMarch 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”),“Accounting for Conditional Asset Retirement Obligations.” FIN 47 providesclarification of certain sections of FASB Statement No. 143, “Accountingfor Asset Retirement Obligations.” Specifically, FIN 47 clarifies the meaningof the term “conditional asset retirement obligation” as used in SFAS 143and also clarifies when an entity would have sufficient information toreasonably estimate the fair value of an asset retirement obligation. FIN 47 iseffective no later than the end of fiscal years ending after December 15,2005. The Company is currently evaluating the impact of this standard on itsfinancial statements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The nature ofmarket risks faced by the Company at July 2, 2005 were the same asdisclosed in the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2004. We are exposed to various market risks, which arepotential losses arising from adverse changes in market rates and prices, suchas interest rates, foreign exchange fluctuations and raw materials. We do notenter into derivatives or other financial instruments for trading orspeculative purposes.

 

AtJuly 2, 2005 we had fixed rate debt of $438.2 million and variablerate debt of $613.5 million. The pre-tax earnings and cash flows impactresulting from a 100 basis point increase in interest rates on variable ratedebt, holding other variables constant and excluding the impact of the hedgingagreements described below, would be approximately $6.1 million per year.

 

Group hasentered into interest rate swap agreements with a notional principal amount of$100.0 million in order to reduce interest rate risks and manage interestexpense. The swap agreements, which mature in July 2005 and May 2007,effectively convert floating rate debt under Group’s credit facility intofixed-rate debt and carried an average fixed interest rate of 5.77% atJuly 2, 2005.

 

OnJuly 27, 2005, Group executed a new interest rate swap agreement –notional principal amount of $50.0 million, maturing in April 2007 – toreplace the swap agreement which expired in July 2005.  With this new swap agreement, floating ratedebt under Group’s credit facility is effectively converted into fixed-ratedebt at an average fixed interest rate of 4.09% at July 27, 2005.

 

Our strategyfor management of currency risk relies primarily on conducting our operationsin a country’s respective currency and may, from time to time, involve currencyderivatives, primarily forward foreign exchange contracts, to reduce our exposureto currency fluctuations. As of July 2, 2005, we had foreign exchangecontracts outstanding with a notional principal amount of $3.2 million tohedge our Canadian operations’ exposure to currency fluctuations on productspurchased from United States suppliers and purchases of equipment from Europeansuppliers.

 

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**ITEM 4. CONTROLS AND PROCEDURES.**

 

As previouslyreported, in January 2005, the Company received a written investigativereport from the independent law firm retained by us to conduct an internalinvestigation of a whistle-blower complaint that alleged accountingimproprieties. The investigative report did not identify any fraud orintentional misconduct by the Company or any of its employees. However, thereport identified deficiencies in the Company’s accounting policies, internalcontrols and related matters. In connection with the audit of our fiscal 2004results and as a result of the investigation, we have concluded that theconditions that currently exist at the Company represent reportable conditions(as defined in AU 325, “Communication of Internal Control Related Matters NotedIn An Audit”, of the AICPA professional standards) that collectively constitutea material weakness in our internal control over financial reporting.

 

As previouslyreported, our Board has adopted the recommendations of the investigative reportand, at this time, we are continuing to take steps to improve our disclosurecontrols and procedures, including our internal control structure andprocedures for financial reporting to enhance our ability to produce SECreports within the time periods and in the form required under the ExchangeAct. In order to comply with these requirements, we:

 

•      reassigned our ChiefFinancial Officer, appointed an Interim Chief Financial Officer and are in theprocess of hiring additional accounting and finance staff;

 

•      have introducedincreased training for our existing financial and accounting and other staff;

 

•      have retained thirdparty consultants with significant SEC financial reporting experience toprovide assistance in complying with SEC reporting requirements;

 

•      have formed adisclosure committee to supervise the preparation of our Exchange Act Reportsand other public communications;

 

•      are in the process ofimproving our controls over, and developing written policies and proceduresthat will cover, all of our significant accounting processes, including themaking of journal entries, the development and communication of income taxprovisions, information data conversion issues and program changes, revenuerecognition and assessing financial exposures;

 

•      have retained athird-party consultant to assist us in improving and centralizing our controlover our information technology; and

 

•      continue to implementglobal compliance initiatives under the direction of our Chief ComplianceOfficer.

 

The Company’sChief Executive Officer and Interim Chief Financial Officer, with theparticipation of senior management, evaluated the effectiveness of theCompany’s disclosure controls and procedures as of July 2, 2005, the lastday of the period covered by this report. Based on deficiencies previouslyreported, our chief executive officer and interim chief financial officer officerhave concluded that our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities and Exchange Actof 1934, as amended) at July 2, 2005 were not effective. Nonetheless, ourchief executive officer and interim chief financial officer believe that theprocedures we performed in connection with our preparation of this quarterlyreport, including, in particular, increased review and analysis oftransactions, account balances and journal entries in the areas whereweaknesses were identified, provide reasonable assurance that the identifieddeficiencies did not lead to material misstatements in our consolidatedfinancial statements presented in this quarterly report.

 

There were nosignificant changes in our internal controls over financial reporting or otherfactors that have materially affected or are reasonably likely to materiallyaffect these internal controls over financial reporting as of the end of theperiod covered by this report.

 

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**PART II OTHER INFORMATION**

 

**Item 6. Exhibits.**

 
| 3.1   |   | Certificate  of Incorporation of Mueller Water Products, Inc. (formerly known as  Mueller Holdings (N.A.), Inc., formerly known as Hydrant Acquisition  Corp.)(1) |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1.1 |   | Amendment to  Certificate of Incorporation(2)                                                                                                                               |
| 3.2   |   | By-Laws of  Mueller Water Products, Inc.(1)                                                                                                                            |
| 31.1  |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002*                                                                  |
| 31.2  |   | Certification  of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002*                                                          |
| 32.1  |   | Certification  of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002*                                                              |
| 32.2  |   | Certification  of the Interim Chief Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002*                                                      |

 

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(1)           Previouslyfiled as an Exhibit to our Registration Statement on Form S-1 asfiled with the SEC on June 17, 2004.

 

(2)           Previouslyfiled as Exhibit 3.1.1 to our Annual Report on Form 10-K as filedwith the SEC on March 31, 2005.

 

*              Filedherewith.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                        | MUELLER  WATER PRODUCTS, INC. |
|-----------------------------|-------------------------------|
|                        |                          |   |
|                        |                          |   |
| Date:  August 12, 2005 | By:                           | /s/ DALE B.  SMITH |   |
|                        |                          | Dale B.  Smith |
|                        |                          | President  and Chief Executive Officer |
|                        |                          |   |
| Date:  August 12, 2005 | By:                           | /s/ THOMAS  E. FISH |   |
|                        |                          | Thomas E.  Fish |
|                        |                          | Interim  Chief Financial Officer |
|                             |                               |  |  |  |

 

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