**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM10-Q**

 

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF  THE SECURITIES  EXCHANGE ACT OF 1934****For the quarterly period ended June 26, 2004.** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                      |

 

**Commission File Number 333-117473**

 

**MUELLER GROUP, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                   | ** ** | **37-1387813**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (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, including area code)      |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes o   No. ý.

 

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

 

| **Common Stock** | ** ** | **Shares Outstanding As of September 10, 2004** |
|------------------|------------|------------------------------------------------------|
|             |       |                                                 |
| $0.01 Par Value  |       | 100                                                  |

 

 

----

 

MUELLER GROUP, INC.

REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 26, 2004

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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**PARTI.  FINANCIAL INFORMATION**

**ITEM1.  FINANCIAL STATEMENTS**

 

**MUELLER GROUP, INC.**

**UNAUDITED CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                   | ** ** | **September 30,  2003**           | ** ** | **June 26,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                   | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
|                                                                                                         |       |                                   |       |                    |       |
| **Assets**                                                                                                   |       |                                   |       |                    |       |
| Cash and cash equivalents                                                                                    |       | $                                      | 71.4       |                    | $          | 23.3 |   |
| Receivables, less allowance for doubtful  accounts of $4.9 in September 2003 and $4.4 in June 2004 |       | 137.3                                  |       | 155.5                   |       |
| Inventories                                                                                                  |       | 240.5                                  |       | 260.6                   |       |
| Deferred income taxes                                                                                        |       | 5.6                                    |       | 7.3                     |       |
| Prepaid expenses and other current assets                                                                    |       | 29.8                                   |       | 25.9                    |       |
| Total current assets                                                                                         |       | 484.6                                  |       | 472.6                   |       |
| Property, plant and equipment, net                                                                           |       | 208.4                                  |       | 192.8                   |       |
| Goodwill, net                                                                                                |       | 163.2                                  |       | 163.2                   |       |
| Identifiable intangibles, net                                                                                |       | 63.0                                   |       | 57.7                    |       |
| Pension intangible                                                                                           |       | 0.9                                    |       | 0.9                     |       |
| Deferred financing fees, net                                                                                 |       | 12.0                                   |       | 33.6                    |       |
| Deferred income taxes                                                                                        |       | 18.8                                   |       | 26.7                    |       |
| Other noncurrent assets                                                                                      |       | 0.2                                    |       | 0.3                     |       |
| Total assets                                                                                                 |       | $                                      | 951.1      |                    | $          | 947.8 |   |
|                                                                                                         |       |                                   |       |                    |       |
| **Liabilities**                                                                                              |       |                                   |       |                    |       |
| Accounts payable                                                                                             |       | $                                      | 46.7       |                    | $          | 55.6 |   |
| Current portion of long-term debt                                                                            |       | 6.2                                    |       | 2.4                     |       |
| Accrued expenses and other current  liabilities                                                              |       | 69.2                                   |       | 69.8                    |       |
| Total current liabilities                                                                                    |       | 122.1                                  |       | 127.8                   |       |
| Long-term debt, net of current portion                                                                       |       | 569.5                                  |       | 930.1                   |       |
| Accrued pension liability                                                                                    |       | 32.2                                   |       | 36.6                    |       |
| Other long-term liabilities                                                                                  |       | 17.2                                   |       | 6.8                     |       |
| Total liabilities                                                                                            |       | 741.0                                  |       | 1,101.3                 |       |
| Commitments and contingencies (Note 10)                                                                      |       | —                                 |       | —                  |       |
| Redeemable preferred stock                                                                                   |       | 96.6                                   |       | —                  |       |
| **Shareholders’  equity**                                                                               |       |                                   |       |                    |       |
| Common stock - $0.01 par value (100 shares authorized  and issued)                                           |       | —                                 |       | —                  |       |
| Additional paid-in capital                                                                                   |       | 145.3                                  |       | —                  |       |
| Retained deficit                                                                                             |       | (11.3                                  | )          | (132.8                  | )          |
| Accumulated other comprehensive loss                                                                         |       | (20.5                                  | )          | (20.7                   | )          |
| Total shareholders’ equity                                                                              |       | 113.5                                  |       | (153.5                  | )          |
| Total liabilities and shareholders’ equity                                                              |       | $                                      | 951.1      |                    | $          | 947.8 |   |

 

The accompanying notes are an integral partof the financial statements.

 

3

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**MUELLER GROUP, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
| ** **                                  | ** ** | **Three months ended**                 | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **June 28,  2003**                | ** ** | **June 26,  2004** | ** ** |
| ** **                                  | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
|                                        |       |                                   |       |   |   |
| Net sales                                   |       | $                                      | 232.4      |   | $ | 288.7 |   |
| Cost of sales                               |       | 170.5                                  |       | 205.7 |   |
| Gross profit                                |       | 61.9                                   |       | 83.0 |   |
| Selling, general and administrative expense |       | 39.2                                   |       | 47.5 |   |
| Stock compensation expense                  |       | 0.2                                    |       | 15.5 |   |
| Facility rationalization and related costs  |       | 0.2                                    |       | — |   |
| Operating income                            |       | 22.3                                   |       | 20.0 |   |
| Interest expense and early repayment costs  |       | (9.1                                   | )          | (18.1 | ) |
| Interest income                             |       | 0.1                                    |       | 0.1 |   |
| Income before income taxes                  |       | 13.3                                   |       | 2.0 |   |
| Income tax expense (benefit)                |       | 5.5                                    |       | (3.2 | ) |
| Net income                                  |       | $                                      | 7.8        |   | $ | 5.2 |   |

 
| ** **                                  | ** ** | **Nine months ended**                  | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **June 28,  2003**                | ** ** | **June 26,  2004** | ** ** |
| ** **                                  | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
|                                        |       |                                   |       |   |   |
| Net sales                                   |       | $                                      | 671.4      |   | $ | 743.6 |   |
| Cost of sales                               |       | 495.4                                  |       | 533.7 |   |
| Gross profit                                |       | 176.0                                  |       | 209.9 |   |
| Selling, general and administrative expense |       | 113.9                                  |       | 126.5 |   |
| Stock compensation expense                  |       | 0.5                                    |       | 15.8 |   |
| Facility rationalization and related costs  |       | 1.7                                    |       | 0.9 |   |
| Operating income                            |       | 59.9                                   |       | 66.7 |   |
| Interest expense and early repayment costs  |       | (28.3                                  | )          | (39.3 | ) |
| Interest income                             |       | 0.4                                    |       | 0.3 |   |
| Income before income taxes                  |       | 32.0                                   |       | 27.7 |   |
| Income tax expense                          |       | 13.0                                   |       | 7.1 |   |
| Net income                                  |       | $                                      | 19.0       |   | $ | 20.6 |   |

 

The accompanying notes are an integral partof the financial statements.

 

4

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**MUELLER GROUP, INC.**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                   | ** ** | **Nine months ended**                  | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                   | ** ** | **June 28,  2003**                | ** ** | **June 26,  2004** | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| **Cash flows from  operating activities**                                                    |       |                                   |       |   |   |
| Net income                                                                                   |       | $                                      | 19.0       |   | $ | 20.6 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                                   |       |   |   |
| Depreciation                                                                                 |       | 35.5                                   |       | 34.3 |   |
| Amortization of intangibles                                                                  |       | 12.5                                   |       | 13.5 |   |
| Amortization of deferred financing fees                                                      |       | 2.1                                    |       | 2.1 |   |
| Amortization of tooling                                                                      |       | 1.7                                    |       | 1.7 |   |
| Write off of deferred financing fees                                                         |       | —                                 |       | 7.0 |   |
| Deferred income taxes                                                                        |       | 3.9                                    |       | (9.6 | ) |
| Stock compensation (non-cash amounts)                                                        |       | 0.5                                    |       | 3.2 |   |
| Asset impairment                                                                             |       | 1.4                                    |       | 0.1 |   |
| Unrealized gain on interest rate swaps                                                       |       | (9.8                                   | )          | (10.4 | ) |
| Changes in assets and liabilities, net of  the effects of acquisitions:                      |       |                                   |       |   |   |
| Receivables                                                                                  |       | 3.7                                    |       | (14.7 | ) |
| Inventories                                                                                  |       | (21.2                                  | )          | (9.9 | ) |
| Prepaid expenses and other current assets                                                    |       | (1.0                                   | )          | 2.2 |   |
| Pension, net                                                                                 |       | 4.4                                    |       | 4.0 |   |
| Accounts payable, accrued expenses and  other current liabilities                            |       | (5.2                                   | )          | 6.1 |   |
| Accrued royalty expense                                                                      |       | (13.5                                  | )          | — |   |
| Other, net                                                                                   |       | (0.9                                   | )          | 0.5 |   |
| Net cash provided by operating activities                                                    |       | 33.1                                   |       | 50.7 |   |
| **Cash flows from  investing activities**                                                    |       |                                   |       |   |   |
| Purchase of property, plant and equipment                                                    |       | (12.6                                  | )          | (17.4 | ) |
| Loss on disposal of property, plant and  equipment                                           |       | 0.5                                    |       | 0.6 |   |
| Acquisition of businesses, net of cash  acquired                                             |       | (11.2                                  | )          | (19.8 | ) |
| Decrease in restricted cash                                                                  |       | 11.6                                   |       | — |   |
| Net cash provided by (used in) investing  activities                                         |       | (11.7                                  | )          | (36.6 | ) |
| **Cash flows from  financing activities**                                                    |       |                                   |       |   |   |
| Proceeds from short-term borrowings                                                          |       | —                                 |       | 9.2 |   |
| Payment of short-term debt                                                                   |       | —                                 |       | (9.2 | ) |
| Proceeds from long-term debt                                                                 |       | —                                 |       | 960.0 |   |
| Payment of long-term debt                                                                    |       | (2.6                                   | )          | (603.4 | ) |
| Financing of assets through capital leases                                                   |       | (0.8                                   | )          | (1.0 | ) |
| Payment of deferred financing fees                                                           |       | —                                 |       | (30.7 | ) |
| Dividends paid (excluding amounts paid to  optionholders)                                    |       | —                                 |       | (387.3 | ) |
| Contributed capital                                                                          |       | 0.7                                    |       | — |   |
| Net cash used in financing activities                                                        |       | (2.7                                   | )          | (62.4 | ) |
| Effect of exchange rate changes on cash                                                      |       | 10.7                                   |       | 0.2 |   |
| Increase (decrease) in cash and cash  equivalents                                            |       | 29.4                                   |       | (48.1 | ) |
| **Cash and cash  equivalents**                                                               |       |                                   |       |   |   |
| Beginning of period                                                                          |       | 20.9                                   |       | 71.4 |   |
| End of period                                                                                |       | $                                      | 50.3       |   | $ | 23.3 |   |

 

The accompanying notes are an integral partof the financial statements.

 

5

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**MUELLER GROUP, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**THREE MONTHS ENDED JUNE 28, 2003 ANDJUNE 26, 2004**

**(UNAUDITED)**

 

**1.  Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementsof Mueller Group, Inc. (the “Company”) have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information. Accordingly, the unaudited condensedconsolidated financial statements and notes do not contain certain informationincluded in the Company’s annual financial statements. In the opinion ofmanagement, all normal and recurring adjustments that are considered necessaryfor a fair presentation have been made. Operating results for the three monthsended June 26, 2004 and the nine months ended June 26, 2004 are notnecessarily indicative of the results that may be expected for the fiscal yearended September 30, 2004. The consolidated financial statements should beread in conjunction with the audited consolidated financial statements for theyear ended September 30, 2003 as seen in our registration statement filedon form S-4.

 

**2. Segment Information**

 

Our operations consist of two operating segments under SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information”:  Mueller Co. and Anvil.  The operating segments are organized arounddifferences in products and are consistent with how the operating entities arebeing managed, how resources are being allocated, and information used by thechief operating decision maker.  MuellerCo. products consist primarily of hydrants, water and gas valves and relatedproducts used in water, power and gas distribution.  Anvil products consist primarily of pipefittings and couplings, pipe nipples and hangers and purchased products relatedto piping systems used in a variety of applications.

 

The accounting policies of both of the segments are the same as thosedescribed in Note 3.  Intersegment salesand transfers are made at established intersegment selling prices generallyintended to cover costs.  Ourdetermination of segment earnings does not reflect allocations of certaincorporate expenses not attributable to segment operations and intersegmenteliminations, which we designate as Corporate in the segment presentation, andis before interest expense, interest income and income taxes.  Corporate expenses include costs related tofinancial and administrative matters, treasury, risk management, human resources,legal counsel, and tax functions. Corporate assets include items booked at the date of the Company’sinception such as step-up on fixed assets and non-compete agreements with thepredecessor parent company, as well as intellectual property.  These assets and any related depreciation oramortization expense have not been pushed down to Mueller Co. and Anvil.  Therefore, segment earnings are notreflective of results on a stand-alone basis.

 

The Company evaluates segment performance based on EBITDA.  EBITDA is defined as income (loss) beforecumulative effect of accounting change plus income tax expense, interestexpense (not net of interest income), depreciation and amortization expense.

 

Segment assets consist primarily of accounts receivable, inventories,property, plant and equipment - net, goodwill, and identifiableintangibles.  Summarized financialinformation for our segments follows:

 

6

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| ** **                          | ** ** | **Three  months  ended  June  26, 2004** | ** ** | **Three  months  ended  June  28, 2003** | ** ** | **Nine  months  ended  June  26, 2004** | ** ** | **Nine  months  ended  June  28, 2003** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **(dollars in millions)**                | ** ** |
| **Net Sales:**                      |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Mueller Co.                         |       | $                                        | 172.4      |                                     | $          | 136.0                                   |       | $                                       | 432.7      |   | $ | 384.2 |   |
| Anvil                               |       | 116.3                                    |       | 96.4                                     |       | 310.9                                   |       | 287.2                                   |       |
| Consolidated                        |       | 288.7                                    |       | 232.4                                    |       | 743.6                                   |       | 671.4                                   |       |
| **Intersegment sales:**             |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Mueller Co.                         |       | 4.1                                      |       | 3.2                                      |       | 10.1                                    |       | 9.6                                     |       |
| Anvil                               |       | 0.2                                      |       | 0.1                                      |       | 0.5                                     |       | 0.4                                     |       |
| Consolidated                        |       | 4.3                                      |       | 3.3                                      |       | 10.6                                    |       | 10.0                                    |       |
| **EBITDA:**                         |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Mueller Co.                         |       | 45.2                                     |       | 32.9                                     |       | 111.4                                   |       | 94.0                                    |       |
| Anvil                               |       | 10.8                                     |       | 9.0                                      |       | 28.8                                    |       | 23.5                                    |       |
| Corporate                           |       | (19.6                                    | )          | (2.7                                     | )          | (23.7                                   | )          | (7.5                                    | )          |
| Consolidated                        |       | 36.4                                     |       | 39.2                                     |       | 116.5                                   |       | 110.0                                   |       |
| **Depreciation and  amortization:** |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Mueller Co.                         |       | 5.7                                      |       | 6.3                                      |       | 17.9                                    |       | 18.2                                    |       |
| Anvil                               |       | 4.3                                      |       | 4.2                                      |       | 12.7                                    |       | 12.5                                    |       |
| Corporate                           |       | 6.3                                      |       | 6.3                                      |       | 18.9                                    |       | 19.0                                    |       |
| Consolidated                        |       | 16.3                                     |       | 16.8                                     |       | 49.5                                    |       | 49.7                                    |       |
| **Impairment charges:**             |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Mueller Co.                         |       | —                                   |       | 0.1                                      |       | —                                  |       | 1.0                                     |       |
| Anvil                               |       | —                                   |       | 0.1                                      |       | 0.1                                     |       | 0.4                                     |       |
| Corporate                           |       | —                                   |       | —                                   |       | —                                  |       | —                                  |       |
| Consolidated                        |       | —                                   |       | 0.2                                      |       | 0.1                                     |       | 1.4                                     |       |
| **Capital  expenditures:**          |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Mueller Co.                         |       | 3.1                                      |       | 2.9                                      |       | 9.3                                     |       | 7.8                                     |       |
| Anvil                               |       | 3.3                                      |       | 1.5                                      |       | 8.1                                     |       | 4.8                                     |       |
| Corporate                           |       | —                                   |       | —                                   |       | —                                  |       | —                                  |       |
| Consolidated                        |       | 6.4                                      |       | 4.4                                      |       | 17.4                                    |       | 12.6                                    |       |
|                                     |            |                                          |            |                                          |            |                                         |            |                                         |            |  |  |  |  |

 

7

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| ** **                     | ** ** | **At June 26, 2004** | ** ** | **At September 30, 2003** | ** ** |
|--------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| **Total assets:**              |       |                      |       |                           |       |
| Mueller Co.                    |       | $                         | 505.7      |                           | $          | 498.9 |   |
| Anvil                          |       | 301.7                     |       | 273.2                          |       |
| Corporate                      |       | 140.4                     |       | 179.0                          |       |
| Consolidated                   |       | 947.8                     |       | 951.1                          |       |
| **Goodwill:**                  |       |                      |       |                           |       |
| Mueller Co.                    |       | 149.1                     |       | 149.2                          |       |
| Anvil                          |       | 14.1                      |       | 14.0                           |       |
| Consolidated                   |       | 163.2                     |       | 163.2                          |       |
| **Identifiable  intangibles:** |       |                      |       |                           |       |
| Mueller Co.                    |       | 6.6                       |       | 5.7                            |       |
| Anvil                          |       | 7.5                       |       | 1.6                            |       |
| Corporate                      |       | 43.6                      |       | 55.7                           |       |
| Consolidated                   |       | 57.7                      |       | 63.0                           |       |
|                                |            |                           |            |                                |            |  |  |

 

We present EBITDA because we consider it an important supplementalmeasure of our performance.  Areconciliation of consolidated EBITDA to consolidated income before incometaxes follows:

 
| ** **                                 | ** ** | **Three months  ended June  26, 2004** | ** ** | **Three months  ended June  28, 2003** | ** ** | **Nine months  ended June  26, 2004** | ** ** | **Nine months  ended June  28, 2003** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **(dollars in millions)**              | ** ** |
| Total consolidated EBITDA                  |       | $                                      | 36.4       |                                   | $          | 39.2                                  |       | $                                     | 116.5      |   | $ | 110.0 |   |
| Interest expense and early repayment costs |       | (18.1                                  | )          | (9.1                                   | )          | (39.3                                 | )          | (28.3                                 | )          |
| Depreciation and amortization              |       | (16.3                                  | )          | (16.8                                  | )          | (49.5                                 | )          | (49.7                                 | )          |
| Income before income taxes                 |       | $                                      | 2.0        |                                   | $          | 13.3                                  |       | $                                     | 27.7       |   | $ | 32.0 |   |

 

Geographical area information with respect to net sales, as determinedby the location of the customer invoiced, and property, plant and equipment –net, as determined by the physical location of the assets, were as follows forthe nine months ended June 26, 2004 and June 28, 2003:

 
| ** **      | ** ** | **Nine months  ended June  26, 2004** | ** ** | **Nine months  ended June  28, 2003** | ** ** |
|-----------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **      | ** ** | **(dollars in millions)**             | ** ** |
| Net sales:      |       |                                  |       |                                  |       |
| United States   |       | $                                     | 618.6      |                                  | $          | 562.7 |   |
| Canada          |       | 116.7                                 |       | 98.7                                  |       |
| Other Countries |       | 8.3                                   |       | 10.0                                  |       |
|            |       | $                                     | 743.6      |                                  | $          | 671.4 |   |

 

8

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| ** **                          | ** ** | **At June 26, 2004** | ** ** | **At September 30, 2003** | ** ** |
|-------------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| Property, plant and equipment, net: |       |                      |       |                           |       |
| United States                       |       | $                         | 180.1      |                           | $          | 195.1 |   |
| Canada                              |       | 11.4                      |       | 12.4                           |       |
| Other Countries                     |       | 1.3                       |       | 0.9                            |       |
|                                |       | $                         | 192.8      |                           | $          | 208.4 |   |

 

**3.  Summary of SignificantAccounting Policies**

 

Fiscal Year -The Company’s fiscal year ends onSeptember 30. The Company’s third quarter ends on the Saturday precedingJune 30.

 

Inventory -Inventories are recorded at the lower of cost(first-in, first-out) or market value. Additionally, the Company evaluates itsinventory reserves in terms of excess and obsolete exposures. This evaluationincludes such factors as anticipated usage, inventory turnover, inventorylevels and ultimate product sales value. As such, these factors may change overtime causing the reserve level to adjust accordingly.

 

Goodwill, Intangible Assets and Other Assets -In accordancewith SFAS No. 142, “Goodwill and Other Intangible Assets” the Company nolonger amortizes goodwill, but instead tests it for impairment at leastannually. In addition, the Company no longer amortizes indefinite livedintangibles, such as tradenames, but instead tests these assets for impairmentin accordance with the standard until their lives are determined to no longerbe indefinite. Recognized intangible assets that have definite lives are amortizedover their respective estimated useful lives.

 

Identifiable intangible assets consist of the following:

 
| ** **                              | ** ** | **September 30, 2003** | ** ** | **June 26, 2004**        | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                              | ** ** | **(dollars in millions)**   | ** ** |
|                                    |       |                        |       |                          |       |   |   |   |   |
| **Amortized  intangible assets**        |       |                        |       |                          |       |   |   |   |   |
| Non-compete agreements                  |       | $                           | 82.9       |                          | $          | 67.2 |   | $ | 84.7 |   | $ | 80.0 |   |
| Patents                                 |       | 0.5                         |       | 0.1                           |       | 0.5 |   | 0.1 |   |
| Design and engineering drawing rights   |       | 2.9                         |       | 0.6                           |       | 7.3 |   | 0.9 |   |
| Customer relationships                  |       | 2.0                         |       | 0.1                           |       | 4.0 |   | 0.5 |   |
|                                    |       | 88.3                        |       | 68.0                          |       | 96.5 |   | 81.5 |   |
| **Indefinite-lived  intangible assets** |       |                        |       |                          |       |   |   |   |   |
| Tradenames                              |       | 42.7                        |       | —                        |       | 42.7 |   | — |   |
|                                    |       | $                           | 131.0      |                          | $          | 68.0 |   | $ | 139.2 |   | $ | 81.5 |   |

 

Aggregated amortization expense for the nine months ended June 28,2003 and June 26, 2004 was $12.5 million and $13.5 million,respectively. Estimated amortization for the years ending September 30,2004, 2005, 2006, 2007 and 2008 is $15.0 million, $1.2 million,$1.0 million, $0.4 million and $0.4 million, respectively. The$13.8 million decrease from 2004 to 2005 is due to a non-compete agreementbecoming fully amortized in August 2004.

 

9

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The changes in various amortizable intangible assets’ gross carryingamount for the nine months ended June 26, 2004 relate primarily toacquisitions (see Note 4).

 

Deferred Financing Fees – Deferred costs of debt financing included inother non-current assets are amortized over the life of the related debtagreements, which range from one to eight years.  Such costs are reassessed when amendmentsoccur, in accordance with Emerging Issues Task Force (EITF) 96-19, “DebtorsAccounting for a Modification or Exchange of Debt Instruments”.  During the quarter ended June 26, 2004,the Company entered into a new senior credit facility and issued new notes, asdescribed in Note 6.  These transactionsresulted in recording $30.7 million of new deferred financing fees, and becausethe new credit facility represented a partial extinguishment of the former creditfacility, a write-off of $6.6 million of existing deferred financing fees.

 

Warranty Costs -The Company accrues for the estimated cost ofproduct warranties at the time of 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:

 
| ** **                    | ** ** | **Three  months  ended  June 26,  2004** | ** ** | **Nine  months  ended  June 26,  2004** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **(dollars in millions)**                     | ** ** |
|                          |       |                                          |       |                                         |       |
| Beginning balance             |       | $                                             | 0.9        |                                         | $          | 0.9 |   |
| Accruals for warranties       |       | 2.0                                           |       | 4.5                                          |       |
| Settlement of warranty claims |       | (0.9                                          | )          | (3.4                                         | )          |
|                          |       |                                          |       |                                         |       |
| Accrual at June 26, 2004 |       | $                                             | 2.0        |                                         | $          | 2.0 |   |

 

Income Taxes -The Company’s current estimated effective taxrate for fiscal 2004 is 40 percent, excluding discrete items. Discretethird quarter events which include the conclusion of the federal taxexamination, the conclusion of certain state tax examinations and expiration ofcertain state statutes of limitation allowed the Company to adjust tax accrualsby approximately $6.4 million. Additional third quarter financing is expected to inhibit the Company’sability to realize deferred tax assets related to Foreign Tax Credits.Therefore, the Company has recorded a full valuation allowance against suchassets equal to $0.5 million. Additionally, a deduction of Foreign Tax Credits of approximately $2.3million was claimed in the third quarter, reducing the previously expectedbenefit by $1.4 million.

 

A reconciliation of tax expense at the current estimated effective taxrate of 40% to the total recorded income tax expense for the quarter and ninemonths ended June 26, 2004 is as follows:

 

10

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| ** **                                                                                          | ** ** | **Three  months  ended  June 26,  2004** | ** ** | **Nine  months  ended  June 26,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **(dollars in millions)**                     | ** ** |
|                                                                                                |       |                                          |       |                                         |       |
| Tax expense at current estimated effective  rate                                                    |       | $                                             | 0.9        |                                         | $          | 11.2 |   |
| Adjustment of tax accruals for conclusion  of examinations and expiration of certain state statutes |       | (6.4                                          | )          | (6.4                                         | )          |
| Deduction of Foreign Tax Credits                                                                    |       | 1.4                                           |       | 1.4                                          |       |
| Creation of valuation allowance related to  Foreign Tax Credits                                     |       | 0.5                                           |       | 0.5                                          |       |
| Other, including the effect on prior period  deferred tax balances of change in effective rate      |       | 0.4                                           |       | 0.4                                          |       |
|                                                                                                |       |                                          |       |                                         |       |
| Tax expense (benefit) for period ended  June 26, 2004                                          |       | $                                             | (3.2       | )                                            | $          | 7.1 |   |

 

Comprehensive Income -The Company’s comprehensive income forthe three and the nine months ended June 26, 2004 consisted of foreigncurrency adjustments of $(1.1) million and $0.2 million, respectively, andminimum pension liability adjustments of $(0.4) million for both periods.

 

Related Party Transactions -In April 2004, the Companypaid Credit Suisse First Boston, LLC (“CSFB”), an affiliate of the DLJ MerchantBanking funds (a principal stockholder of Mueller Holdings (N.A.), Inc.), feesand expenses of $21.3 million in connection with the arrangement andsyndication of our senior credit facility, the arrangement as sole leadbookrunning manager for our Second Priority Senior Secured Floating Rate notesdue 2011 and our 10% Senior Subordinated Notes due 2012.  The Company also paid CSFB a management feeof $0.1 million for each of the three month periods ended June 28, 2003and June 26, 2004.

 

Stock-Based Compensation -The Company accounts for itsstock-based compensation plan under Accounting Principles Board OpinionNo. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,”which requires recognizing compensation costs based upon the intrinsic value ofthe equity instrument at the grant date. The FASB issued SFAS No. 123,“Accounting for Stock-Based Compensation,” which encourages companies torecognize compensation costs based upon the fair value of the equity instrumentat the grant date. However, SFAS No. 123 allows companies to continue toapply the provisions of APB No. 25 and make pro forma disclosures assuminga hypothetical fair value application. The Company has adopted the pro formadisclosure provisions of SFAS No. 123.

 

The Company recognizes compensation cost for stock-based compensationarrangements equal to the difference, if any, between the quoted market priceof the stock option and the exercise price at the date of the grant inaccordance with the provisions of APB No. 25. All options granted underthe Management Incentive Plan were issued at quoted market prices at the dateof grant.

 

The following table illustrates the effect on net income if the Companyhad applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148“Accounting for Stock-Based Compensation -Transition and Disclosure,”to stock-based employee compensation.

 

11

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| ** **                                                                                                                                    | ** ** | **Three  months  ended  June  28, 2003** | ** ** | **Three  months  ended  June  26, 2004** | ** ** | **Nine  months  ended  June  28, 2003** | ** ** | **Nine  months  ended  June  26, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(dollars in millions)**                | ** ** |
|                                                                                                                                          |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Net income, as reported                                                                                                                       |       | $                                        | 7.8        |                                     | $          | 5.2                                     |       | $                                       | 19.0       |   | $ | 20.6 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (0.1                                     | )          | —                                   |       | (0.3                                    | )          | (0.2                                    | )          |
|                                                                                                                                          |       |                                     |       |                                     |       |                                    |       |                                    |       |
| Pro forma net income                                                                                                                          |       | $                                        | 7.7        |                                     | $          | 5.2                                     |       | $                                       | 18.7       |   | $ | 20.4 |   |

 

Use of Estimates - The preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesof America requires management to make extensive use of certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported periods. Significant estimates in these financial statements includeallowances for doubtful accounts receivable, estimates of future cash flowsassociated with assets, asset impairments, useful lives for depreciation andamortization, loss contingencies, net realizable value of inventories, incometaxes and tax valuation reserves and the determination of discount and otherrate assumptions for pension and post-retirement employee benefit expenses.Actual results could differ from those estimates.

 

**4. Acquisitions**

 

Effective January 15, 2004, the Company acquired certain assets ofSTAR Pipe, Inc. (“STAR”).  Theacquisition is being accounted for in accordance with SFAS No. 141 and theoperating results have been included in the consolidated results since the dateof acquisition.  STAR is a leadingdistributor of foreign-sourced cast and grooved fittings and couplings.  The STAR acquisition provides an entry intothe foreign-sourced product marketplace. The acquisition’s purchase price is $17 million, and was paid in cash.

 

The following summary presents the preliminary estimated fair values ofthe assets and liabilities assumed as of January 15, 2004:

 

(dollars in millions)

 
| Current assets                  |   | $   | 13.5   |   |
|---------------------------------|--------|-----|--------|--------|
| Property, plant & equipment |   | 0.4 |   |
| Intangible assets               |   | 6.7 |   |
| Total assets                    |   | $   | 20.6   |   |
| Current liabilities             |   | 3.6 |   |
| Net assets acquired             |   | $   | 17.0   |   |

 

As part of the acquisition, the Company has 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 deferred payment amount is $23 million.  Management currently estimates the deferredpayment could total approximately $11 to $13 million for the deferred paymentperiod which begins February 1, 2004 and ends January 31, 2007.  The deferred payment amount indicated aboveis based on management’s best estimate, but the actual adjustment could bematerially

 

12

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different.  The liability forsuch deferred payment will be recorded at the end of each deferred paymentperiod, in accordance with the purchase agreement.

 

The final purchase price allocation is subject to completion of certainasset valuations, which the Company is in the process of finalizing.  The preliminary allocation of purchase pricecould change based upon completion of these valuations.  Additionally, to the extent the fair value ofassets acquired exceeds purchase price, a deferred credit will be recorded asthe purchase agreement contains a provision for future contingent consideration(deferred payment).

 

The preliminary intangible assets acquired include trademarks, customerrelationships and a non-compete agreement with the former owners.  These intangibles are being amortized overtheir 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 is being accounted for inaccordance with SFAS No. 141 and the operating results have been included inthe consolidated results since the date of acquisition.  The purchase of the assets and technology ofModern Molded will allow the company to internally produce parts that wepreviously purchased.  The acquisitionwill allow the Company to reduce spending as well as to increase product supplyline predictability. The acquisition’s purchase price is $2.8 million and waspaid in cash.

 

The following summary presents the preliminary estimated fair values ofthe assets and 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 amortized over their estimated useful livesof five years.

 

The following unaudited pro forma summary presents the consolidatedresults of operations for the quarter and nine months ended June 28, 2003and June 26, 2004 as if the acquisitions of STAR and Modern Molded hadoccurred as of October 1, 2002:

 
| ** ** | ** ** | **Three months ended**    | ** ** | **Nine months ended**  | ** ** |
|------------|------------|---------------------------|------------|------------------------|------------|
| ** ** | ** ** | **June 28, 2003**    | ** ** | **June 26, 2004** | ** ** | **June 28, 2003** | ** ** | **June 26, 2004** | ** ** |
| ** ** | ** ** | **(dollars in millions)** | ** ** |
| Net Sales  |       | $                         | 238.5      |                   | $          | 288.7 |   | $ | 688.4 |   | $ | 751.2 |   |
| Net income |       | 8.2                       |       | 5.2                    |       | 19.9 |   | 20.9 |   |
|            |            |                           |            |                        |            |  |  |  |  |  |  |  |  |

 

13

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

 

**5.  New Accounting Pronouncements**

 

In April 2003, the Financial Accounting Standards Board (FASB)issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.” SFAS No. 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.” SFAS No. 149 iseffective for contracts entered into or modified after June 30, 2003,except for certain hedging relationships designated after June 30, 2003.The adoption of this statement did not have any impact on the Company’sfinancial condition or results of operations.

 

On December 24, 2003, the FASB issued a revision to StaffInterpretation (FIN) No. 46 (revised 2003), which clarified some of theprovisions of the original Interpretation No. 46 “Consolidation ofVariable Interest Entities,” and exempted certain entities from itsrequirements. The application of revised FIN 46 is required in financialstatements of public entities that have interests in variable interest entitiescommonly referred to as special-purpose entities for periods ending afterDecember 15, 2003. Application by public entities, other than smallbusiness entities, for all other types of entities is required in financialstatements for periods ending March 15, 2004. The Company does not believethe revised FIN No. 46 will have a material effect on its financialcondition or results of operations and the Company will provide thedisclosures, where appropriate, as provided for in revised FIN No. 46.  At June 26, 2004 the Company did nothave any entities that would be considered variable interest entities.

 

On December 23, 2003, the FASB issued SFAS No. 132 (revised2003), “Employers’ Disclosures about Pensions and Other PostretirementBenefits.” SFAS No. 132 retains the disclosures required by the originalStatement No. 132, which standardized the disclosure requirements forpensions and other postretirement benefits to the extent practicable andrequired additional information on changes in the benefit obligations and fairvalues of plan assets. Additional disclosures have been added in response toconcerns expressed by users of financial statements. Those disclosures includeinformation describing the types of plan assets, investment strategy,measurement date(s), plan obligations, cash flows, and components of netperiodic benefit cost recognized during interim periods. The provisions ofStatement 132 remain in effect until the provisions of the revised Statement132 are adopted. This revised Statement is effective for financial statementswith fiscal years ending after December 15, 2003. The interim-perioddisclosures required by this revised Statement are effective for interimperiods beginning after December 15, 2003. The Company has provided theadditional required disclosure information.

 

On December 17, 2003, the Securities and Exchange Commission (SEC)issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition,which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB104’s primary purpose is to rescind accounting guidance contained in SAB 101related to multiple element revenue arrangements, superceded as a result of theissuance of Emerging Issues Task Force (EITF) 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds theSEC’s Revenue Recognition in Financial Statements Frequently Asked Questionsand Answers issued with SAB 101 that had been codified in SEC Topic 13, RevenueRecognition. The adoption of this bulletin did not have an impact on theCompany’s financial condition or results of operations.

 

14

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In May 2003, the FASB issued SFAS No. 150, “Accounting forCertain Financial Instruments With Characteristics of Both Liabilities andEquity.” SFAS 150 establishes standards for how a company classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity. It requires that a company classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). Asdiscussed in Note 7, Holdings issued 16% Senior Exchangeable PreferredStock in connection with the formation of the Company which would be subject toSFAS 150 for the fiscal year beginning October 1, 2004.  The preferred stock was redeemed by Holdingson April 23, 2004 (see Note 6). Therefore, the adoption of this statement will not have any impact onthe Company’s financial condition or result of operations.

 

**6.  Borrowing Arrangements andRecapitalization**

 

Long-Term Debt: 

 
| ** **                           | ** ** | **September 30,  2003** | ** ** | **June 26  2004** | ** ** |
|--------------------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **(dollars in millions)**    | ** ** |
|                                 |       |                         |       |                   |       |
| Credit facility                      |       |                         |       |                   |       |
| Term loans                           |       | $                            | 523.4      |                   | $          | 515.0 |   |
| Senior subordinated notes            |       | 50.0                         |       | —                 |       |
| Second Priority Senior Secured Notes |       | —                       |       | 100.0                  |       |
| 10% Senior Subordinated Notes        |       | —                       |       | 315.0                  |       |
| Capital lease obligations            |       | 2.3                          |       | 2.5                    |       |
|                                 |       |                         |       |                   |       |
|                                 |       | 575.7                        |       | 932.5                  |       |
| Less current portion                 |       | (6.2                         | )          | (2.4                   | )          |
|                                 |       | $                            | 569.5      |                   | $          | 930.1 |   |

 

A schedule of debt maturities as of June 26, 2004 is asfollows:

 
| ** **                           | ** ** | **Less  than 1  year**    | ** ** | **1 -3  years** | ** ** | **4 - 5  years** | ** ** | **After 5  years** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|---------------------------|------------|-----------------|------------|------------------|------------|--------------------|------------|-----------|------------|
| ** **                           | ** ** | **(dollars in millions)** | ** ** |
|                                 |       |                      |       |            |       |             |       |               |       |      |       |
| Term loans                           |       | $                         | 1.4        |            | $          | 10.9             |       | $                  | 10.9       |      | $          | 491.8 |   | $ | 515.0 |   |
| Second Priority Senior Secured Notes |       | —                    |       | —          |       | —           |       | 100.0              |       | 100.0     |       |
| 10% Senior Subordinated Notes        |       | —                    |       | —          |       | —           |       | 315.0              |       | 315.0     |       |
| Capital lease obligations            |       | 1.0                       |       | 1.5             |       | —           |       | —             |       | 2.5       |       |
| Total debt maturities                |       | $                         | 2.4        |            | $          | 12.4             |       | $                  | 10.9       |      | $          | 906.8 |   | $ | 932.5 |   |

 

**Recapitalization and refinancing**

 

At April 23, 2004 the Company completed a refinancing of existingterm loans, issuance of $415 million of new notes and payment of a dividend toour parent company.  Existing ownership

 

15

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of the Company was unchanged as a result of these transactions.  The transactions are described further asfollows:

 

*Second Priority Senior Secured Floating Rate Notes:*  The Company issued $100 million of suchnotes.  Interest on the secured notes ispayable at a rate equal to the three-month reserve-adjusted London-interbankoffered rate, or LIBOR, which is reset quarterly, plus 4.75% onFebruary 1, May 1, August 1 and November 1 of each year,beginning on August 1, 2004.  Theinterest rate for the first interest period ending August 1, 2004 was5.89% per annum.  The secured notesmature in 2011 and are guaranteed by each of the existing domestic restrictedsubsidiaries and secured by second-priority liens on the assets securing thesenior credit facility (other than certain subsidiary stock and assets of ourparent company). The secured notes contain customary covenants and events ofdefault, including covenants that limit the Company’s ability to incur debt,pay dividends and make investments and also include a maintenance covenantlimiting the Company’s senior total leverage as a multiple of EBITDA, asdefined in the indenture.

 

*10% Senior**Subordinated Notes: *The Company issued $315 million ofsuch notes.  Interest on the subordinatednotes is payable at an annual rate of 10% on May 1 and November 1 of eachyear, beginning on November 1, 2004. The subordinated notes mature in 2012 and are guaranteed by each of theCompany’s existing domestic restricted subsidiaries. The subordinated notescontain customary covenants and events of default, including covenants thatlimit our ability to incur debt, pay dividends and make investments.

 

*Senior Credit Facility:*  The Company entered into a new senior creditfacility, which includes a $545 million amortizing term loan maturingseven years after closing and an $80.0 million revolving credit facilitythat will terminate five years after closing. The revolving credit facilityand/or the term loan facility is expected to be subject to a potential,although uncommitted, increase of up to an aggregate of $50.0 million atour request at any time prior to maturity. In addition, although uncommitted, aforeign currency sub-facility may be made available to one or more of theCompany’s restricted foreign subsidiaries in an aggregate principal amount ofup to the U.S. dollar equivalent of $30.0 million. This increase and theadditional foreign currency sub-facility will only be available if one or morefinancial institutions agree to provide them.

 

Borrowings under the senior credit facility are generally expected tobear interest based on a margin over, at the Company’s option, the base rate orLIBOR. The applicable margin is 3.25% over LIBOR and 2.00% over the base ratefor borrowings under the revolving senior credit facility and 3.25% over LIBORand 2.00% over the base rate for term loans. Beginning at a time set forth inthe senior credit facility, the applicable margin for revolving credit loansvaries based upon the ratio of consolidated debt to EBITDA, as defined in thesenior credit facility. The Company’s obligations under the senior creditfacility are guaranteed by our parent company and all of the existing or futuredomestic restricted subsidiaries and is secured by substantially all of theassets of the Company and the subsidiary guarantors, including a pledge of thecapital stock of all the existing and future domestic subsidiaries, a pledge ofno more than 65.0% of the voting stock of any foreign subsidiary, a pledge ofall intercompany indebtedness in favor of the Company and its domesticrestricted subsidiaries, and a pledge of the Company’s capital stock by itsparent company. The senior credit facility contains customary covenants,including covenants that limit the ability to incur debt and liens, paydividends and make investments and capital expenditures, and events of default.

 

The net proceeds of these financings have been used to refinance theCompany’s existing credit facility borrowings, pay a dividend to the Company’sparent company and pay related fees and expenses. The Company’s parent companyhas used the proceeds of the offering to redeem its outstanding preferred stockand to pay a dividend to its equityholders.

 

16

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At April 29, 2004, Mueller Holdings (N.A.), Inc., the parentcompany of Mueller Group, Inc. issued 223,000 units, each consisting of $1,000principal amount at maturity of 143/4% Senior DiscountNotes due 2014 and one warrant to purchase 109.80889 shares of Class A commonstock, par value $0.01 per share, of Mueller Holdings (N.A.), Inc. After theseparation date, the notes and the warrants are separately transferable.  The notes are Holdings’ senior unsecuredobligations and rank equally with all of its existing and future seniorindebtedness. The notes are effectively subordinated to all of its existing andfuture secured debt and to all indebtedness and other liabilities of itssubsidiaries, including the Company. Holdings used the proceeds to pay an additional dividend to itsequityholders.

 

At June 26, 2004, the Company was in compliance with allrestrictive covenants.

 

**Use of proceeds from recapitalization and refinancing**

 

The Company used the net proceeds from these offerings and the creditfacility borrowings to repay all existing loans under its existing creditfacility together with accrued interest and a 1.0% prepayment premium thereonand to pay a dividend to our parent company, which was used to (i) redeem thepreferred stock at a price equal to liquidation preference ($105.5 million atApril 23, 2004) plus a 1.0% premium thereon, (ii) pay a dividend to itscommon stockholders of $1.91 per share, or approximately $386.6 million in theaggregate and (iii) make a payment to its employee optionholders of the excessof the per share dividend to our common stockholders over the exercise price oftheir options, or $12.6 million in the aggregate. Mueller Group retainedapproximately $10.0 million of proceeds from its offerings to be used forgeneral corporate purposes.

 

**Senior Subordinated Debt** -The seniorsubordinated debt at September 30, 2003 consisted of promissory notes witha principal amount of $50.0 million. A majority of these notes were ownedor held by an owner of Holdings. These notes accrued interest at a rate of14.0% per annum, payable semi-annually.

 

On November 14, 2003, the Company redeemed the notes in full,along with accrued and unpaid interest of $0.3 million and earlyredemption penalty of $7.0 million. Additionally, $0.4 million ofdeferred financing fees were written off.

 

**Interest Rate Swap** - The Company has enteredinto interest rate swap agreements in order to reduce interest rate risks andmanage interest expense. As of June 26, 2004, a notional principal amountof $150 million in swap agreements is still outstanding and scheduled tomature between July 2004 and July 2005. The swap agreements effectivelyconvert floating-rate debt into fixed-rate debt and carry an average fixedinterest rate of 7.55% at June 26, 2004. Interest differentials to be paidor received because of swap agreements are reflected as an adjustment tointerest expense over the related debt period. While the Company is exposed tocredit loss on its interest rate swaps in the event of non-performance by thecounterparties to such swaps, management believes such nonperformance isunlikely to occur given the financial resources of the counterparties.

 

**Distributions to our Parent Company –** Ourparent company has no material assets other than its ownership of our capitalstock and accordingly depends upon distributions from us to satisfy its cashneeds.  Our parent company’s principalcash needs will be debt service on its Senior Discount Notes due 2014.  The parent company notes do not require cashinterest payments until 2009 and contain restrictive covenants that will, amongother things, limit the ability of Mueller Holdings and its subsidiaries(including us) to incur debt, pay dividends and make investments.  Neither we nor any of our subsidiariesguarantee the parent company notes. Mueller Holdings, however, is a

 

17

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holding company and its ability to pay interest on the parent companynotes will be dependent upon the receipt of dividends from its subsidiaries. Weare currently Mueller Holdings’ only direct subsidiary.  However, the terms of our borrowingarrangements significantly restrict our ability to pay dividends to MuellerHoldings.

 

**7. Shareholders’ Equity**

 

A summary of the changes in the components of Shareholders’ Equitysince September 30, 2003 is as follows:

 
| ** **                                         | ** ** | **Add’l  Paid-In  Capital** | ** ** | **Retained  Deficit** | ** ** | **Accum.  Other  Compre-  hensive.  Loss** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|-----------|------------|
| ** **                                         | ** ** | **(dollars in millions)**        | ** ** |
| Balance at September 30, 2003                 |       | $                                | 145.3      |                  | $          | (11.3                                      | )          | $         | (20.5      | ) | $ | 113.5 |   |
| Employee stock compensation                        |       | 15.8                             |       | —                |       | —                                     |       | 15.8      |       |
| Accretion of redeemable preferred stock            |       | (9.9                             | )          | —                |       | —                                     |       | (9.9      | )          |
| Retirement of preferred stock by Holdings (1)      |       | 106.5                            |       | —                |       | —                                     |       | 106.5     |       |
| Dividends paid to parent company                   |       | (257.7                           | )          | (142.1                | )          | —                                     |       | (399.8    | )          |
| Net income                                         |       | —                           |       | 20.6                  |       | —                                     |       | 20.6      |       |
| Change in foreign currency translation  adjustment |       | —                           |       | —                |       | 0.2                                        |       | 0.2       |       |
| Additional minimum pension liability, net  of tax  |       | —                           |       | —                |       | (0.4                                       | )          | (0.4      | )          |
| Balance at June 26, 2004                      |       | $                                | —     |                  | $          | (132.8                                     | )          | $         | (20.7      | ) | $ | (153.5 | ) |

 

----

(1) Upon retirement of the mandatorily redeemable preferred stock withproceeds of the notes by Holdings, the redemption was accounted for as acontribution to Additional Paid-In Capital.

 

**8. Redeemable Preferred Stock**

 

*Push Down Accounting of Redeemable PreferredStock* -Holdings used a portion of the dividendpaid by the Company from the proceeds of the Company’s offering of SecondPriority Senior Secured Floating Rate Notes due 2011 and Senior SubordinatedNotes due 2012 in April 2004 to redeem Holdings’ preferred stock describedbelow in full. As a result, the Company has determined that the effect of usingthe proceeds of its current debt offering to retire Mueller Holdings’mandatorily redeemable preferred stock required the Company to retroactively“push down” the redeemable preferred stock and reflect it as an obligation inthe Company’s September 30, 2003 balance sheet in compliance with theprovisions of Staff Accounting Bulletin 54 (Topic 5-J).

 

*Redeemable Preferred Stock*-In connection with the Company’s formation in 1999, Holdings issuedtwo million shares of 16% Senior Exchangeable Preferred Stock, dueAugust 15, 2010, par value $0.01 per share (“preferred stock”). Thepreferred stock bears dividends at a rate of 16% per annum, which dividendswill accrue or be payable in cash, at Holdings’ option until August 2006and must be paid in cash thereafter when and if declared by Holdings’ board outof funds legally available therefor. The liquidation value on any future dateis the sum of $25 per share plus the dividend accretion since issuance.

 

Upon a change of control or upon the payment by the Holdings of certaintypes of restricted

 

18

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payments, including payment of dividends on the common stock ofHoldings, the preferred stock is subject to redemption at the holder’s optionat 101% of its liquidation preference. Additionally, the stock is subject tomandatory redemption for cash in August 2010 out of funds legally availabletherefor. The Company’s credit facility imposes restrictions upon the Company’sability to make distributions to Holdings. A failure by Holdings to paydividends or redeem such stock when required or a breach of certain covenantswould entitle the holders to two directors on Holdings’ board.

 

Prior to August 15, 2004, Holdings may redeem the preferred stockat 114% of liquidation value. On or after August 15, 2004, Holdings may atits option redeem the preferred stock at the following liquidation values:

 
| **Year  beginning August 15,** | ** ** | **Percentage  liquidation value** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
|                                |       |                              |       |
| 2004                                |       | 108.000                           | %          |
| 2005                                |       | 105.333                           | %          |
| 2006                                |       | 102.667                           | %          |
| 2007 and thereafter                 |       | 100.000                           | %          |

 

The preferred stock, in certain circumstances, is exchangeable at theoption of Holdings for 16% Senior Subordinated Exchange Debentures due 2010.

 

The accretion of dividends of $1.9 million and $9.9 millionfor the three months and the nine months ended June 26, 2004,respectively, was accounted for as a non-cash transaction.  The accretion reduces the net incomeavailable to common shareholders.  Asdescribed in Note 6, the preferred stock was redeemed by Holdings onApril 23, 2004.

 

**9.  Derivative Instruments**

 

Changes in the fair value of derivatives are recorded each period inearnings or Accumulated Other Comprehensive Income (Loss), depending on whethera derivative is designated and effective as part of a hedge transaction and, ifit is, the type of hedge transaction. Any gains and losses on derivativeinstruments that are reported in Accumulated Other Comprehensive Income (Loss)are included in earnings in the periods in which earnings are affected by thehedged item. All gains or losses on interest rate swaps since the adoption ofSFAS No. 133 have been included in earnings and have not been included in AccumulatedOther Comprehensive Income (Loss) as the Company has not treated theseinstruments as hedges under SFAS 133.

 

For a derivative to qualify as a hedge at inception and throughout thehedge period, the Company must formally document the nature and relationshipsbetween the hedging instruments and hedged items, as well as itsrisk-management objectives, strategies for undertaking the various hedgetransactions and method of assessing hedge effectiveness. Any financialinstruments qualifying for hedge accounting must maintain a specified level ofeffectiveness between the hedging instrument and the item being hedged, both atinception and throughout the hedged period.

 

Interest Rate Swaps -At June 26, 2004 andSeptember 30, 2003 the fair value of interest rate swaps was a liabilityof $6.8 million and $17.2 million, respectively, and has beenrecorded in Other Long-Term Liabilities on the Consolidated Balance Sheets.

 

19

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**10.  Commitments and 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. Prior toAugust 1999, product liability and environmental claims that occurred aresubject to indemnification by Tyco, based on the provisions of the acquisitionagreement.

 

Workers compensation claims are self-insured by the Company to theextent of stop loss coverage per claim. The claim liability is recorded basedon an actuarially determined estimate of the present value of the obligationoutstanding at year-end. The recorded reserve at September 30, 2003 andJune 26, 2004 was approximately $7.2 million and $8.0 million,respectively.

 

The Company is subject to warranty claims related to sales of watermeters that can be read remotely by hand-held or drive-by electronic readers.Radio transmitters purchased from one of its third party vendors havedemonstrated a high failure rate and actions to correct the issue have beenonly partially effective. To date, the third party vendor has taken financialresponsibility with respect to this matter and the Company has incurredinsignificant costs. However, should the third party vendor be unable tocorrect the issue or be unable to meet its warranty obligations with respect tothis matter, the Company may find it necessary to replace the third partyvendors’ radio transmitters, which is not expected to exceed $3 million.The Company has estimated that it will incur costs of approximately $1 millionrelated to the warranty claims.  TheCompany has accrued $1 million as of June 26, 2004.

 

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. The Company may incur additional costs to implement theprovisions under these settlement agreements. Further, similar issues may beraised by other advocacy groups in other jurisdictions under Proposition 65.

 

The Company expects to incur costs at its steel and iron foundries tocomply with the United States Environmental Protection Agency’s National EmissionsStandards for Hazardous Air Pollutants which were issued April 22,2004.  The Company is in the process ofperforming an analysis to assess the impact of these standards on the financialresults of the Company.

 

James Jones Company and its former parent company are defendants in afalse claims lawsuit in which a former James Jones Company employee is suing onbehalf of cities, water districts and municipalities. The employee alleges thatthe defendants sold allegedly non-conforming public water system parts tovarious government entities. The lawsuit seeks consequential damages, penaltiesand punitive damages. Mueller Co., which had also been named as a defendant,brought a summary judgment motion and was dismissed from this litigation inJanuary 2004. Any liability associated with the lawsuit is covered by anindemnification from our previous owner.

 

On March 31, 2004, Anvil International entered into a consentorder with the Georgia Department of Natural Resources regarding variousalleged hazardous waste violations at Anvil’s

 

20

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formerly operated Statesboro, Georgia site. Pursuant to the consentorder, Anvil has agreed to pay a settlement amount of $100,000, comprised of a$50,000 monetary fine and $50,000 towards a supplemental environmental project.Anvil has also agreed to perform various investigatory and remedial actions atthe site and its landfill. While the ultimate investigatory and remedial costsare currently unknown, the total costs are estimated to be between $0.3 millionand $0.5 million.  The Company hasaccrued $0.3 million as of June 26, 2004.

 

In the opinion of management, accruals associated with contingenciesincurred in the normal course of business are sufficient. Resolution of existingcontingencies is not expected to significantly affect the Company’s financialposition and result of operations.

 

**11. Net Periodic Benefit Cost – Defined Benefit Plans**

 

For a detailed disclosure on the Company’s pension and employeebenefits plans, please refer to Note 11 of the Company’s Audited ConsolidatedFinancial Statements for the year ended September 30, 2003 as found in ourregistration statement filed on form S-4 (File No. 333-117473).

 

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:

 
| ** **                            | ** ** | **Three months ended  June 26, 2004** | ** ** | **Nine months ended  June 26, 2004** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **(dollars in millions)**                  | ** ** |
| Service cost                          |       | $                                          | 0.5        |                                      | $          | 1.5 |   |
| Interest cost                         |       | 1.4                                        |       | 4.2                                       |       |
| Expected return (loss) on plan assets |       | (1.1                                       | )          | (3.4                                      | )          |
| Amortization of loss                  |       | 0.6                                        |       | 2.0                                       |       |
| Net periodic cost                     |       | $                                          | 1.4        |                                      | $          | 4.3 |   |

 

**Employer Contributions**

 

As of June 26, 2004, no contributions have been made and there areno anticipated statutory funding requirements for the remainder of 2004.

 

**12.  Supplementary Balance SheetInformation**

 

Selected supplementary balance sheet information is presented below:

 
| ** **                                 | ** ** | **September 30,  2003** | ** ** | **June 26,  2004** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **(dollars in millions)**    | ** ** |
|                                       |       |                         |       |                    |       |
| **Inventories**                            |       |                         |       |                    |       |
| Purchased materials and manufactured parts |       | $                            | 46.3       |                    | $          | 43.7 |   |
| Work in process                            |       | 65.6                         |       | 71.9                    |       |
| Finished goods                             |       | 128.6                        |       | 145.0                   |       |
|                                       |       | $                            | 240.5      |                    | $          | 260.6 |   |

 

21

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**13.  Supplementary Income StatementInformation**

 

The components of interest expense are presented below:

 
| ** **                                         | ** ** | **Three months ended**    | ** ** | **Nine months ended**   | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **June 28,  2003**   | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** |
| ** **                                         | ** ** | **(dollars in millions)** | ** ** |
|                                               |       |                      |       |                    |       |   |   |   |   |
| **Interest expense  and early repayment costs:**   |       |                      |       |                    |       |   |   |   |   |
| Contractual interest expense                       |       | $                         | 11.4       |                    | $          | 14.7 |   | $ | 36.0 |   | $ | 33.6 |   |
| Deferred financing fee amortization                |       | 0.7                       |       | 0.9                     |       | 2.1 |   | 2.1 |   |
| Senior subordinated debt early redemption  penalty |       | —                    |       | —                  |       | — |   | 7.0 |   |
| Write off of deferred financing fees               |       | —                    |       | 6.6                     |       | — |   | 7.0 |   |
| Interest rate swap gains                           |       | (3.0                      | )          | (4.1                    | )          | (9.8 | ) | (10.4 | ) |
| Total interest expense and early repayment  costs  |       | $                         | 9.1        |                    | $          | 18.1 |   | $ | 28.3 |   | $ | 39.3 |   |

 

A reconciliation of net income to income available to commonshareholders is as follows:

 
| ** **                                  | ** ** | **Three months ended**    | ** ** | **Nine months ended**   | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **June 28,  2003**   | ** ** | **June 26,  2004** | ** ** | **June 28,  2003** | ** ** | **June 26,  2004** | ** ** |
| ** **                                  | ** ** | **(dollars in millions)** | ** ** |
|                                        |       |                      |       |                    |       |   |   |   |   |
| Net income                                  |       | $                         | 7.8        |                    | $          | 5.2 |   | $ | 19.0 |   | $ | 20.6 |   |
| Less preferred share accretion              |       | (3.6                      | )          | (1.3                    | )          | (10.4 | ) | (9.3 | ) |
| Net income available to common shareholders |       | $                         | 4.2        |                    | $          | 3.9 |   | $ | 8.6 |   | $ | 11.3 |   |

 

**14.  Stock Plans**

 

Effective August 31, 2000, Holdings implemented its ManagementIncentive Plan and its Direct Investment Program. These stock plans werecreated with the purpose of attracting, retaining and motivating key employeesof the Company. Prior to August 31, 2000, the Company did not have anemployee stock option plan or a stock purchase plan; however, certain employeesof the Company had been granted stock and stock options under Tyco’s stockaward plans.

 

*Direct Investment Program*-Under the Direct Investment Program, certain employees are allowed topurchase a specific number of shares of Holdings, at a price equal to fairvalue at the time of the purchase. Under the plan, Holdings will loan theemployee up to 50% of the total purchase price on a non-recourse basis.However, all shares of the plan are pledged as collateral. Holdings isauthorized to grant 10 million shares under the plan and issuedapproximately 9.5 million shares at a purchase price of $1.00 per shareand 0.5 million shares at a purchase price of $1.50 per share as ofSeptember 30, 2003. The Company recorded non-cash compensation expense of$1.0 million for the nine months ended June 26, 2004, related to the loanportion of the shares purchased pursuant to the Direct Investment Program.

 

22

----

 

During 2003, the Company’s chief executive officer purchased 476,244shares of Holdings stock at $1.50 per share under the Direct InvestmentProgram. As a result, the Company increased paid in capital by approximately$0.7 million in 2003.

 

In connection with the recapitalization completed in April 2004,all outstanding employee loans were repaid in full by the employees.  There are no remaining shares available forpurchase as of June 26, 2004.

 

*Management Incentive Plan*-Underthe Management Incentive Plan, Holdings is authorized to grant stock options tokey individuals of the Company. The options are granted to purchase commonshares of Holdings at prices equal to the fair value of the common shares onthe date the options are granted. The options become fully vested andexercisable on the eighth anniversary of the date of grant, provided that theindividual is in the employment of the Company at all times during the vestingperiod. The agreement provides for accelerated vesting if certain milestonesare achieved. The options expire on the tenth anniversary of the grant date.

 

Holdings is authorized to grant options for 15 million shares. Alloptions granted have an exercise price equal to the fair value at the date ofgrant. As of result, no compensation expense was required to be recognizedprior to the refinancing discussed in Note 6.

 

In connection with the refinancing, Holdings modified these stockoption awards to accelerate vesting upon completion of a refinancing.  A portion of the dividend distribution toHoldings was used to make a payment to its employee optionholders of the excessof the per share dividend to its common stockholders over the exercise price oftheir options, or approximately $12.6 million in the aggregate, and the optionswere cancelled.  The option buyoutresulted in a capital contribution from Holdings to the Company and anadditional charge of approximately $14.8 million ($12.6 million cash charge and$2.2 million non-cash charge) upon completion of the refinancing in the quarterending June 26, 2004.  Additionally,the Company has recorded a non-cash compensation charge of approximately $0.7million related to the loan portion of the shares purchased pursuant to theDirect Investment Program.

 

Information with respect to stock option activity under the Company’splan is as follows: 

 
| ** **              | ** ** | **Number of   Common  Shares** | ** ** | **Option Price  Per Share** | ** **    | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------|------------|--------------------------------|------------|-----------------------------|---------------|---------------------------------------|------------|
|                    |       |                           |       |                        |          |                                  |       |
| September 30, 2001 |       | 12,968,875                     |       | 1.00                        |          | 1.00                                  |       |
| Granted                 |       | 370,000                        |       | 1.19                        |          | 1.19                                  |       |
| Cancelled               |       | (106,900                       | )          | 1.00                        |          | 1.00                                  |       |
| September 30, 2002 |       | 13,231,975                     |       | $                           | 1.00 to $1.19 |                                  | $          | 1.01 |   |
| Granted                 |       | 1,700,000                      |       | 1.50                        |          | 1.50                                  |       |
| Cancelled               |       | (203,550                       | )          | 1.00                        |          | 1.00                                  |       |
| September 30, 2003 |       | 14,728,425                     |       | $                           | 1.00 to $1.50 |                                  | $          | 1.06 |   |
| Cancelled               |       | (120,656                       | )          | $                           | 1.00 to $1.50 |                                  | $          | 1.12 |   |
| March 27, 2004     |       | 14,607,769                     |       | $                           | 1.00 to $1.50 |                                  | $          | 1.06 |   |
| Exercised               |       | (14,607,769                    | )          | $                           | 1.00 to $1.50 |                                  | $          | 1.06 |   |
| June 26, 2004      |       | 0                              |       |                        |          |                                  |       |

 

23

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There were no options authorized, granted, or outstanding onJune 26, 2004.

 

**15.  Facility Rationalization andRelated Costs**

 

During the three months and nine months ended June 28, 2003, theCompany continued its efforts to reduce operating costs. After reviewing itsfacility utilization and associated assets, the Company recorded charges of$0.2 million and $1.7 million, respectively, related to asset impairment.

 

For the three months ended June 26, 2004, the Company recorded nocharge.  For the nine months endedJune 26, 2004, the Company recorded $0.9 million, related to assetimpairment, environmental issues at a closed facility in Statesboro, GA (seenote 10) and lease expense at a closed and vacated facility.

 

**16. Subsequent Event**

 

On August 26, 2004, the Company entered into a First Amendment to itsSecond Amended and Restated Credit Agreement, dated as of April 23, 2004 (the“Credit Agreement”).

 

The First amendment provides for, among otherthings, (1) the reduction of the term loan pricing for LIBOR-based loans toLIBOR plus 2.75% and for Base Rate Loans to the Base Rate plus 1.50%, and (2)the ability to use certain available cash to retire junior debt subject to a maximumLeverage Ratio and maximum annual basket amounts.

 

**17. Consolidating Guarantor and Non-Guarantor Financial Information**

 

The following tables set forth the consolidating statements ofoperations and cash flows for the periods ended June 26, 2004 and June 28,2003 and the consolidating balance sheets as of June 26, 2004 andSeptember 30, 2003.  The followinginformation is included as a result of the guarantee by certain of theCompany’s wholly-owned U.S. subsidiaries (“Guarantor Companies”) of the secondpriority senior secured notes and senior subordinated notes issued by theCompany.  None of the Company’s othersubsidiaries guarantee the debt.  Each ofthe guarantees is joint and several and full and unconditional.  “Mueller Group, Inc.” or “Issuer” includesthe consolidated financial results of Mueller Group, Inc. with all of itswholly-owned subsidiaries accounted for under the equity method.  Tax allocations between the Issuer andGuarantor Companies are based on a tax-sharing agreement between the parties.

 

24

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**Consolidating Statement of Operations**

**For the Three Months Ended June 28, 2003**

 
| ** **                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consol-  idating  Eliminations** | ** ** | **Consol-  idated** | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------|------------|------------------------------------|------------|---------------------|------------|
| Net Sales                                       |       | $          | —     |                     | $          | 192.7                          |       | $                                  | 39.7       |                | $          | — |   | $ | 232.4 |   |
| Cost of sales                                   |       | 0.0        |       | 139.3                    |       | 31.2                           |       | —                             |       | 170.5               |       |
| Royalty expense                                 |       | —     |       | (0.5                     | )          | 0.5                            |       | —                             |       | —              |       |
| Gross profit                                    |       | (0.0       | )          | 53.9                     |       | 8.0                            |       | —                             |       | 61.9                |       |
| Selling, general, & administrative  expense |       | 2.8        |       | 31.5                     |       | 5.1                            |       | —                             |       | 39.4                |       |
| Facility rationalization & related  costs   |       | —     |       | 0.2                      |       | —                         |       | —                             |       | 0.2                 |       |
| Operating income                                |       | (2.8       | )          | 22.2                     |       | 2.9                            |       | —                             |       | 22.3                |       |
| Interest expense and early repayment costs      |       | (9.0       | )          | 0.6                      |       | (0.7                           | )          | —                             |       | (9.1                | )          |
| Interest income                                 |       | 0.1        |       | —                   |       | —                         |       | —                             |       | 0.1                 |       |
| Income (loss) before income taxes               |       | (11.7      | )          | 22.8                     |       | 2.2                            |       | —                             |       | 13.3                |       |
| Income tax expense (benefit)                    |       | (4.8       | )          | 9.4                      |       | 0.9                            |       | —                             |       | 5.5                 |       |
| Equity income from subsidiaries                 |       | 14.7       |       | 1.3                      |       | —                         |       | (16.0                              | )          | —              |       |
| Net income                                      |       | $          | 7.8        |                     | $          | 14.7                           |       | $                                  | 1.3        |                | $          | (16.0 | ) | $ | 7.8 |   |

 

#### **Consolidating Statement of Operations**

**For the Three Months Ended June 26, 2004**

 
| ** **                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consol-  idating  Eliminations** | ** ** | **Consol-  idated** | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------|------------|------------------------------------|------------|---------------------|------------|
| Net Sales                                       |       | $          | —     |                     | $          | 246.5                          |       | $                                  | 42.2       |                | $          | — |   | $ | 288.7 |   |
| Cost of sales                                   |       | —     |       | 174.9                    |       | 30.8                           |       | —                             |       | 205.7               |       |
| Royalty expense                                 |       | —     |       | (0.6                     | )          | 0.6                            |       | —                             |       | 0.0                 |       |
| Gross profit                                    |       | —     |       | 72.2                     |       | 10.8                           |       | —                             |       | 83.0                |       |
| Selling, general, & administrative  expense |       | 19.5       |       | 38.2                     |       | 5.3                            |       | —                             |       | 63.0                |       |
| Facility rationalization & related  costs   |       | —     |       | —                   |       | —                         |       | —                             |       | —              |       |
| Operating income                                |       | (19.5      | )          | 34.0                     |       | 5.5                            |       | —                             |       | 20.0                |       |
| Interest expense and early repayment costs      |       | (18.0      | )          | 0.7                      |       | (0.8                           | )          | —                             |       | (18.1               | )          |
| Interest income                                 |       | —     |       | —                   |       | 0.1                            |       | —                             |       | 0.1                 |       |
| Income (loss) before income taxes               |       | (37.5      | )          | 34.7                     |       | 4.8                            |       | —                             |       | 2.0                 |       |
| Income tax expense (benefit)                    |       | (14.1      | )          | 9.0                      |       | 1.9                            |       | —                             |       | (3.2                | )          |
| Equity income from subsidiaries                 |       | 28.6       |       | 2.9                      |       | —                         |       | (31.5                              | )          | —              |       |
| Net income                                      |       | $          | 5.2        |                     | $          | 28.6                           |       | $                                  | 2.9        |                | $          | (31.5 | ) | $ | 5.2 |   |

 

25

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#### **Consolidating Statement of Operations**

**For the Nine Months Ended June 28, 2003**

 
| ** **                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consol-  idating  Eliminations** | ** ** | **Consol-  idated** | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------|------------|------------------------------------|------------|---------------------|------------|
| Net Sales                                       |       | $          | —     |                     | $          | 574.9                          |       | $                                  | 96.5       |                | $          | — |   | $ | 671.4 |   |
| Cost of sales                                   |       | —     |       | 417.9                    |       | 77.5                           |       | —                             |       | 495.4               |       |
| Royalty expense                                 |       | —     |       | (1.1                     | )          | 1.1                            |       | —                             |       | —              |       |
| Gross profit                                    |       | —     |       | 158.1                    |       | 17.9                           |       | —                             |       | 176.0               |       |
| Selling, general, & administrative  expense |       | 8.0        |       | 93.9                     |       | 12.5                           |       | —                             |       | 114.4               |       |
| Facility rationalization & related  costs   |       | —     |       | 1.7                      |       | —                         |       | —                             |       | 1.7                 |       |
| Operating income                                |       | (8.0       | )          | 62.5                     |       | 5.4                            |       | —                             |       | 59.9                |       |
| Interest expense and early repayment costs      |       | (28.1      | )          | 1.9                      |       | (2.1                           | )          | —                             |       | (28.3               | )          |
| Interest income                                 |       | 0.3        |       | —                   |       | 0.1                            |       | —                             |       | 0.4                 |       |
| Income (loss) before income taxes               |       | (35.8      | )          | 64.4                     |       | 3.4                            |       | —                             |       | 32.0                |       |
| Income tax expense (benefit)                    |       | (14.5      | )          | 26.1                     |       | 1.4                            |       | —                             |       | 13.0                |       |
| Equity income from subsidiaries                 |       | 40.3       |       | 2.0                      |       | —                         |       | (42.3                              | )          | —              |       |
| Net income                                      |       | $          | 19.0       |                     | $          | 40.3                           |       | $                                  | 2.0        |                | $          | (42.3 | ) | $ | 19.0 |   |

 

#### **Consolidating Statement of Operations**

**For the Nine Months Ended June 26, 2004**

 
| ** **                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consol-  idating  Eliminations** | ** ** | **Consol-  idated** | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------|------------|------------------------------------|------------|---------------------|------------|
| Net Sales                                       |       | $          | —     |                     | $          | 633.3                          |       | $                                  | 110.3      |                | $          | — |   | $ | 743.6 |   |
| Cost of sales                                   |       | —     |       | 451.0                    |       | 82.7                           |       | —                             |       | 533.7               |       |
| Gross profit                                    |       | —     |       | 182.3                    |       | 27.6                           |       | —                             |       | 209.9               |       |
| Selling, general, & administrative  expense |       | 23.7       |       | 104.1                    |       | 14.5                           |       | —                             |       | 142.3               |       |
| Facility rationalization & related  costs   |       | —     |       | 0.9                      |       | —                         |       | —                             |       | 0.9                 |       |
| Operating income                                |       | (23.7      | )          | 77.3                     |       | 13.1                           |       | —                             |       | 66.7                |       |
| Interest expense and early repayment costs      |       | (39.2      | )          | 2.4                      |       | (2.5                           | )          | —                             |       | (39.3               | )          |
| Interest income                                 |       | 0.1        |       | —                   |       | 0.2                            |       | —                             |       | 0.3                 |       |
| Income (loss) before income taxes               |       | (62.8      | )          | 79.7                     |       | 10.8                           |       | —                             |       | 27.7                |       |
| Income tax expense (benefit)                    |       | (24.2      | )          | 27.0                     |       | 4.3                            |       | —                             |       | 7.1                 |       |
| Equity income from subsidiaries                 |       | 59.2       |       | 6.5                      |       | —                         |       | (65.7                              | )          | —              |       |
| Net income                                      |       | $          | 20.6       |                     | $          | 59.2                           |       | $                                  | 6.5        |                | $          | (65.7 | ) | $ | 20.6 |   |

 

26

----

 

#### **Condensed Consolidating Balance Sheet**

**September 30, 2003**

 
| ** **                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies  (1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consol-  idating  Eliminations** | ** ** | **Consol-  idated** | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------------------------|------------|--------------------------------|------------|------------------------------------|------------|---------------------|------------|
| **Assets**                                      | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **                     | ** ** | ** **                         | ** ** | ** **          | ** ** |
| Cash and cash equivalents                       |       | $          | 53.3       |                          | $          | 1.6                            |       | $                                  | 16.5       |                | —     |   | $ | 71.4 |   |
| Receivables, net                                |       | 0.5        |       | 115.0                         |       | 21.8                           |       | —                             |       | 137.3               |       |
| Inventories                                     |       | —     |       | 200.6                         |       | 39.9                           |       | —                             |       | 240.5               |       |
| Deferred income taxes                           |       | (0.1       | )          | 5.7                           |       | —                         |       | —                             |       | 5.6                 |       |
| Prepaid exp and other cur assets                |       | 0.1        |       | 28.0                          |       | 1.7                            |       | —                             |       | 29.8                |       |
| Total current assets                            |       | 53.8       |       | 350.9                         |       | 79.9                           |       | —                             |       | 484.6               |       |
| Property, plant and equipment, net              |       | 0.9        |       | 194.4                         |       | 13.1                           |       | —                             |       | 208.4               |       |
| Goodwill, net                                   |       | —     |       | 163.1                         |       | 0.1                            |       | —                             |       | 163.2               |       |
| Identifiable intangibles, net                   |       | (0.0       | )          | 62.5                          |       | 0.5                            |       | —                             |       | 63.0                |       |
| Pension intangible                              |       | —     |       | 0.9                           |       | —                         |       | —                             |       | 0.9                 |       |
| Investment in subsidiaries                      |       | 835.7      |       | 16.8                          |       | —                         |       | (852.5                             | )          | —              |       |
| Deferred financing fees, net                    |       | 12.0       |       | —                        |       | —                         |       | —                             |       | 12.0                |       |
| Deferred income taxes                           |       | (6.0       | )          | 24.5                          |       | 0.3                            |       | —                             |       | 18.8                |       |
| Other noncurrent assets                         |       | —     |       | 0.2                           |       | —                         |       | —                             |       | 0.2                 |       |
| Total assets                                    |       | $          | 896.4      |                          | $          | 813.3                          |       | $                                  | 93.9       |                | $          | (852.5 | ) | $ | 951.1 |   |
|                                            |       |       |       |                          |       |                           |       |                               |       |                |       |
| **Liabilities**                                 |       |       |       |                          |       |                           |       |                               |       |                |       |
| Accounts payable                                |       | $          | 1.1        |                          | $          | 36.2                           |       | $                                  | 9.4        |                | —     |   | $ | 46.7 |   |
| Current portion of long-term debt               |       | 5.3        |       | 0.9                           |       | —                         |       | —                             |       | 6.2                 |       |
| Accrued exp and other cur liabilities           |       | 7.5        |       | 53.1                          |       | 8.6                            |       | —                             |       | 69.2                |       |
| Total current liabilities                       |       | 13.9       |       | 90.2                          |       | 18.0                           |       | —                             |       | 122.1               |       |
| Intercompany accounts                           |       | 87.1       |       | (145.7                        | )          | 58.6                           |       | —                             |       | —              |       |
| Long-term debt, net of cur portion              |       | 568.1      |       | 1.4                           |       | —                         |       | —                             |       | 569.5               |       |
| Accrued pension liability                       |       | (0.0       | )          | 31.7                          |       | 0.5                            |       | —                             |       | 32.2                |       |
| Other long-term liabilities                     |       | 17.2       |       | —                        |       | —                         |       | —                             |       | 17.2                |       |
| Total liabilities                               |       | 686.3      |       | (22.4                         | )          | 77.1                           |       | —                             |       | 741.0               |       |
| Redeemable preferred stock                      |       | 96.6       |       | —                        |       | —                         |       | —                             |       | 96.6                |       |
| **Shareholders’  equity**                  |       |       |       |                          |       |                           |       |                               |       |                |       |
| Total shareholders’ equity                 |       | 113.5      |       | 835.7                         |       | 16.8                           |       | (852.5                             | )          | 113.5               |       |
| Total liabilities and shareholders’ equity |       | $          | 896.4      |                          | $          | 813.3                          |       | $                                  | 93.9       |                | $          | (852.5 | ) | $ | 951.1 |   |

 

27

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#### **Condensed Consolidating Balance Sheet**

**June 26, 2004**

 
| ** **                                         | ** ** | **Issuer** | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consol-  idating  Eliminations** | ** ** | **Consol-  idated** | ** ** |
|----------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------|------------|------------------------------------|------------|---------------------|------------|
| **Assets**                                         | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                     | ** ** | ** **                         | ** ** | ** **          | ** ** |
| Cash and cash equivalents                          |       | $          | 13.2       |                     | $          | (4.5                           | )          | $                                  | 14.6       |                | —     |   | $ | 23.3 |   |
| Receivables, net                                   |       | —     |       | 129.5                    |       | 26.0                           |       | —                             |       | 155.5               |       |
| Inventories                                        |       | —     |       | 216.7                    |       | 43.9                           |       | —                             |       | 260.6               |       |
| Deferred income taxes                              |       | —     |       | 8.7                      |       | (1.4                           | )          | —                             |       | 7.3                 |       |
| Prepaid expenses & other current assets        |       | 0.2        |       | 23.9                     |       | 1.8                            |       | —                             |       | 25.9                |       |
| Total current assets                               |       | 13.4       |       | 374.3                    |       | 84.9                           |       | —                             |       | 472.6               |       |
| Property, plant and equipment, net                 |       | 0.7        |       | 179.9                    |       | 12.2                           |       | —                             |       | 192.8               |       |
| Goodwill, net                                      |       | —     |       | 163.1                    |       | 0.1                            |       | —                             |       | 163.2               |       |
| Identifiable intangibles, net                      |       | —     |       | 57.7                     |       | —                         |       | —                             |       | 57.7                |       |
| Pension intangible                                 |       | —     |       | 0.9                      |       | —                         |       | —                             |       | 0.9                 |       |
| Investment in subsidiaries                         |       | 914.5      |       | 20.5                     |       | —                         |       | (935.0                             | )          | —              |       |
| Deferred financing fees, net                       |       | 33.6       |       | —                   |       | —                         |       | —                             |       | 33.6                |       |
| Deferred income taxes                              |       | 17.0       |       | 9.4                      |       | 0.3                            |       | —                             |       | 26.7                |       |
| Other non current assets                           |       | —     |       | 0.3                      |       | —                         |       | —                             |       | 0.3                 |       |
| Total assets                                       |       | $          | 979.2      |                     | $          | 806.1                          |       | $                                  | 97.5       |                | $          | (935.0 | ) | $ | 947.8 |   |
|                                               |       |       |       |                     |       |                           |       |                               |       |                |       |
| **Liabilities**                                    |       |       |       |                     |       |                           |       |                               |       |                |       |
| Accounts payable                                   |       | $          | 1.2        |                     | $          | 45.0                           |       | $                                  | 9.4        |                | —     |   | $ | 55.6 |   |
| Short-term borrowings                              |       | —     |       | —                   |       | —                         |       | —                             |       | —              |       |
| Current portion of long-term debt                  |       | 1.4        |       | 1.0                      |       | —                         |       | —                             |       | 2.4                 |       |
| Accrued expenses & other current  liabilities  |       | 8.7        |       | 53.4                     |       | 7.7                            |       | —                             |       | 69.8                |       |
| Total current liabilities                          |       | 11.3       |       | 99.4                     |       | 17.1                           |       | —                             |       | 127.8               |       |
| Intercompany accounts                              |       | 186.0      |       | (246.1                   | )          | 60.1                           |       | —                             |       | —              |       |
| Long-term debt, net of current portion             |       | 928.6      |       | 1.5                      |       | —                         |       | —                             |       | 930.1               |       |
| Accrued pension liability                          |       | —     |       | 36.8                     |       | (0.2                           | )          | —                             |       | 36.6                |       |
| Other long-term liabilities                        |       | 6.8        |       | —                   |       | —                         |       | —                             |       | 6.8                 |       |
| Total liabilities                                  |       | 1,132.7    |       | (108.4                   | )          | 77.0                           |       | —                             |       | 1,101.3             |       |
| **Shareholders’  equity**                     |       |       |       |                     |       |                           |       |                               |       |                |       |
| Total shareholders’ equity                    |       | (153.5     | )          | 914.5                    |       | 20.5                           |       | (935.0                             | )          | (153.5              | )          |
| Total liabilities & shareholders’  equity |       | $          | 979.2      |                     | $          | 806.1                          |       | $                                  | 97.5       |                | $          | (935.0 | ) | $ | 947.8 |   |

 

28

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#### **Condensed Consolidating Statement of Cash Flows**

**For the Nine Months Ended June 28, 2003**

 
| ** **                                           | ** ** | **Issuer** | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| Net cash provided by operating activities            |       | $          | (45.6      | )                        | $          | 84.2                           |       | $                               | (5.5       | )                | —     |   | $ | 33.1 |   |
| **Cash flows from  investing activities**            |       |       |       |                     |       |                           |       |                            |       |             |       |
| Capital expenditures                                 |       | —     |       | (10.7                    | )          | (1.9                           | )          |                            |       | (12.6            | )          |
| Loss on disposals                                    |       | —     |       | 0.5                      |       | —                         |       |                            |       | 0.5              |       |
| Acquisition of businesses                            |       | —     |       | (9.3                     | )          | (1.9                           | )          |                            |       | (11.2            | )          |
| Decrease in restricted cash                          |       | 11.6       |       | —                   |       | —                         |       | —                          |       | 11.6             |       |
| Net cash provided by (used in) investing  activities |       | 11.6       |       | (19.5                    | )          | (3.8                           | )          | —                          |       | (11.7            | )          |
| **Cash flows from  financing activities**            |       |       |       |                     |       |                           |       |                            |       |             |       |
| Intercompany change                                  |       | 59.7       |       | (64.0                    | )          | 4.3                            |       |                            |       | —           |       |
| Payment of long-term debt                            |       | (2.6       | )          | —                   |       | —                         |       |                            |       | (2.6             | )          |
| Financing assets through capital leases              |       | —     |       | (0.8                     | )          | —                         |       |                            |       | (0.8             | )          |
| Contributed capital                                  |       | 0.7        |       | —                   |       | —                         |       | —                          |       | 0.7              |       |
| Net cash used in financing activities                |       | 57.8       |       | (64.8                    | )          | 4.3                            |       | —                          |       | (2.7             | )          |
| Effect of exchange rate changes on cash              |       | —     |       | —                   |       | 10.7                           |       | —                          |       | 10.7             |       |
| Increase (decrease) in cash                          |       | 23.8       |       | (0.1                     | )          | 5.7                            |       | —                          |       | 29.4             |       |
| **Cash and cash  equivalents**                       |       |       |       |                     |       |                           |       |                            |       |             |       |
| Beginning of period                                  |       | 14.6       |       | (0.3                     | )          | 6.6                            |       | —                          |       | 20.9             |       |
| End of period                                        |       | $          | 38.4       |                     | $          | (0.4                           | )          | $                               | 12.3       |             | —     |   | $ | 50.3 |   |

 

29

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#### **Condensed Consolidating Statement of Cash Flows**

**For the Nine Months Ended June 26, 2004**

 
| ** **                                           | ** ** | **Issuer** | ** ** | **Guarantor  Companies  (1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| Net cash provided by operating activities            |       | $          | (57.8      | )                             | $          | 108.6                          |       | $                               | (0.1       | )                | —     |   | $ | 50.7 |   |
| **Cash flows from  investing activities**            |       |       |       |                          |       |                           |       |                            |       |             |       |
| Capital expenditures                                 |       | —     |       | (16.4                         | )          | (1.0                           | )          |                            |       | (17.4            | )          |
| Loss on disposals                                    |       | —     |       | 0.6                           |       | —                         |       |                            |       | 0.6              |       |
| Acquisition of businesses                            |       | —     |       | (19.8                         | )          | —                         |       |                            |       | (19.8            | )          |
| Net cash provided by (used in) investing  activities |       | —     |       | (35.6                         | )          | (1.0                           | )          | —                          |       | (36.6            | )          |
| **Cash flows from  financing activities**            |       |       |       |                          |       |                           |       |                            |       |             |       |
| Proceeds from short-term borrowings                  |       | 9.2        |       | —                        |       | —                         |       |                            |       | 9.2              |       |
| Payment of short-term borrowings                     |       | (9.2       | )          | —                        |       | —                         |       |                            |       | (9.2             | )          |
| Intercompany change                                  |       | 79.1       |       | (78.1                         | )          | (1.0                           | )          |                            |       | —           |       |
| Proceeds from long-term debt                         |       | 960.0      |       | —                        |       | —                         |       |                            |       | 960.0            |       |
| Payment of long-term debt                            |       | (603.4     | )          | —                        |       | —                         |       |                            |       | (603.4           | )          |
| Financing assets through capital leases              |       | —     |       | (1.0                          | )          | —                         |       |                            |       | (1.0             | )          |
| Payment of deferred financing fees                   |       | (30.7      | )          | —                        |       | —                         |       |                            |       | (30.7            | )          |
| Dividends Paid                                       |       | (387.3     | )          | —                        |       | —                         |       |                            |       | (387.3           | )          |
| Net cash used in financing activities                |       | 17.7       |       | (79.1                         | )          | (1.0                           | )          | —                          |       | (62.4            | )          |
| Effect of exchange rate changes on cash              |       | —     |       | —                        |       | 0.2                            |       | —                          |       | 0.2              |       |
| Increase (decrease) in cash                          |       | (40.1      | )          | (6.1                          | )          | (1.9                           | )          | —                          |       | (48.1            | )          |
| **Cash and cash  equivalents**                       |       |       |       |                          |       |                           |       |                            |       |             |       |
| Beginning of period                                  |       | 53.3       |       | 1.6                           |       | 16.5                           |       | —                          |       | 71.4             |       |
| End of period                                        |       | $          | 13.2       |                          | $          | (4.5                           | )          | $                               | 14.6       |             | —     |   | $ | 23.3 |   |

 

----

(1) Guarantors include the accounts of thefollowing direct and indirect subsidiaries of Mueller Group, Inc.:

 
| **Name**                            | ** ** | **State of Incorporation** |
|-------------------------------------|------------|----------------------------|
| AnvilStar, LLC                      |       | Delaware                   |
| Anvil International, Inc.           |       | Delaware                   |
| Henry Pratt Company                 |       | Delaware                   |
| Henry Pratt International Ltd       |       | Delaware                   |
| Hersey Meters Co.                   |       | Delaware                   |
| Hydro Gate Acquisition Corp.        |       | Delaware                   |
| James Jones Company                 |       | California                 |
| J.B. Smith Mfg. Co.                 |       | Oklahoma                   |
| Mueller Co.                         |       | Illinois                   |
| Mueller Service Co.                 |       | Delaware                   |
| Milliken Acquisition Corp.          |       | Delaware                   |
| Mueller International, Inc.         |       | Delaware                   |
| Mueller International, LLC          |       | Delaware                   |
| Mueller International Finance, Inc. |       | Delaware                   |
| Mueller International Finance, LLC  |       | Delaware                   |

 

30

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Certain information included or incorporated by reference in thisdocument may be deemed to be “forward looking statements” within the meaning ofthe federal securities laws.  Allstatements other than statements of historical fact are statements that couldbe deemed forward looking statements, including projections of revenue, grossmargin, expenses, earnings or losses from operations, synergies or otherfinancial items; any statements of the plans, strategies and objectives ofmanagement for future operations; any statement concerning developments,performance or industry rankings relating to products or services; anystatements regarding future economic conditions or performance; any statementsof assumptions underlying any of the foregoing; and any other statements thataddress activities, events or developments that Mueller Group, Inc. (“Mueller”,the “Company”, “we”, “us”, “our”) intends, expects, projects, believes oranticipates will or may occur in the future. Forward looking statements may be characterized by terminology such as“believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”,“estimates”, “projects”, “positioned”, “strategy”, and similar expressions.  These statements are based on assumptions andassessments made by the Company’s management in light of its experience and itsperception of historical trends, current conditions, expected futuredevelopments and other factors it believes to be appropriate.  These forward looking statements are subjectto a number of risks and uncertainties, including but not limited to:

 

•                  TheCompany’s ability to continue long-standing relationships with major customers;

•                  Increasedcompetition;

•                  Demandfor and market acceptance of new and existing products, including changes inregulations (particularly environmental regulations) which could affect demandfor products;

•                  Adversechanges in currency exchange rates or raw material prices, specifically steelscrap, steel pipe and brass ingot;

•                  Unanticipateddevelopments that could occur with respect to contingencies such as litigation,product liability exposures and environmental matters;

•                  Risksrelated to terrorist activities and the U.S. and international responsethereto;

•                  TheCompany’s ability to integrate acquired businesses into its operations, realizeplanned synergies and operate such businesses profitably in accordance withexpectations;

•                  Assumptionsrelating to pension costs;

•                  TheCompany’s ability to achieve projected levels of efficiencies and costreduction measures; and

•                  Otherrisks and uncertainties that affect the manufacturing sector generallyincluding, but not limited to, economic, political, governmental andtechnological factors affecting the Company’s operations, markets, products,services and prices.

 

Any such forward looking statements are not guarantees of futureperformances and actual results, developments and business decisions may differfrom those envisaged by such forward looking statements.  These forward looking statements speak onlyas of the date of this Quarterly Report. The company disclaims any duty to update any forward looking statement,all of which are expressly qualified by the foregoing.

 

31

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**Overview**

 

We are a leading North American manufacturer of a broad range of flowcontrol products for use in water distribution, water and wastewater treatmentfacilities, gas distribution systems and piping systems and maintain a largeinstalled base of products. We are comprised of two segments: Mueller Company(“Mueller Co.”), a leading manufacturer of hydrants, valves and other productsfor use in water and gas distribution systems; and Anvil International(“Anvil”), a leading manufacturer of fittings, pipe hangers and other productsfor use in piping system applications.

 

Our products are sold to a wide variety of end-users, includingmunicipalities, publicly and privately owned water and wastewater utilities,gas utilities and construction contractors. We believe that our sales aresubstantially driven by new residential and non-residential construction and byinfrastructure replacement, repair and upgrades. Even though our products aregenerally sold through distributors to contractors, for most of our Mueller Co.products it is the end-user who either chooses the brand to be used orspecifies the qualities that the required product must have, includingapprovals from industry standard-setting bodies. We believe that, because ofour reputation for quality and our large installed base of products, ourproducts are specified more often than those made by our competitors, whichprovides us with a competitive advantage and helps ensure that our market sharewill remain strong.

 

Our Mueller Co. segment has benefited from the relatively stableresidential construction market in the United States in recent years, as wellas new product introductions and, to a lesser extent, acquisitions, partiallyoffset by a slow down in state and local government spending to upgrade, repairand replace water and waste water distribution infrastructure due to budgetaryconstraints resulting from recent adverse economic conditions. We expectspending on infrastructure to increase as the economy continues to improve.

 

Overall demand for Anvil’s products is primarily driven bynon-residential construction in the United States and Canada which has beenimpacted during the recent downturn in the economy. Anvil competes in themarket for piping component products which are principally used in mechanicalapplications, such as HVAC systems, and fire protection applications, such assprinkler systems. We estimate that 70% of Anvil’s products are used inmechanical applications and the remainder in fire protection systems. Anvil hasbeen adversely impacted by increased foreign competition with respect to fireprotection products. These products compete primarily on price and are sold atlower prices by foreign manufacturers. Although imported products have beenaccepted in certain applications, many municipalities, end-users, andcontractors require the use of domestically manufactured products in theirprojects. For example, Pennsylvania requires that all state-funded projects usedomestically manufactured steel products. However, as part of our strategy to complementAnvil’s existing product offerings, we recently acquired the business andassets of the construction division of STAR, an importer of iron and groovedfittings produced in China, India and Malaysia. We believe that our acquisitionof STAR will allow Anvil to enter the market for lower cost, foreign-producedfire-protection products and grow Anvil’s overall market share. Anvil has alsoreduced the amount of purchased products that it sells, which are generallylower-margin, which has reduced its revenues while improving its profitability.We expect to benefit from improvements in economic conditions that have apositive impact on non-residential construction.

 

32

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**Results of Operations**

 

***Three Months Ended June 26, 2004 AsCompared to the Three Months Ended June 28, 2003***

 
| ** **                                        | ** ** | **Three months ended**    | ** ** | **FY04 Q3 vs. FY03 Q3**           | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **June 26, 2004**    | ** ** | **June 28, 2003**            | ** ** | ** ** | ** ** | **Change in** | ** ** |
| ** **                                        | ** ** | ** **                | ** ** | **Percentage  of net sales  (2)** | ** ** | ** ** | ** ** | **Percentage  of net sales  (2)** | ** ** | **Increase /  (decrease)** | ** ** | **percentage  of  net sales** | ** ** |
| ** **                                        | ** ** | **(dollars in millions)** | ** ** |
|                                              |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| **Net sales**                                     |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| Mueller Co.                                       |       | $                         | 172.4      |                              | 59.7       | % | $ | 136.0 |   | 58.5 | % | $ | 36.4 |   | 1.2 | % |
| Anvil                                             |       | 116.3                     |       | 40.3                              |       | 96.4 |   | 41.5 |   | 19.9 |   | (1.2 | ) |
| Consolidated                                      |       | 288.7                     |       | 100.0                             |       | 232.4 |   | 100.0 |   | 56.3 |   | — |   |
|                                              |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| **Gross profit**                                  |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| Mueller Co.                                       |       | 56.6                      |       | 32.8                              |       | 41.5 |   | 30.5 |   | 15.1 |   | 2.3 |   |
| Anvil                                             |       | 26.4                      |       | 22.7                              |       | 20.4 |   | 21.2 |   | 6.0 |   | 1.5 |   |
| Consolidated                                      |       | 83.0                      |       | 28.7                              |       | 61.9 |   | 26.6 |   | 21.1 |   | 2.1 |   |
|                                              |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| **Selling, general  and administrative expenses** |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| Mueller Co.                                       |       | 17.1                      |       | 9.9                               |       | 14.8 |   | 10.9 |   | 2.3 |   | (1.0 | ) |
| Anvil                                             |       | 19.9                      |       | 17.1                              |       | 15.5 |   | 16.1 |   | 4.4 |   | 1.0 |   |
| Corporate                                         |       | 10.5                      |       | 3.6                               |       | 8.9 |   | 3.8 |   | 1.6 |   | (0.2 | ) |
| Consolidated                                      |       | 47.5                      |       | 16.5                              |       | 39.2 |   | 16.9 |   | 8.3 |   | (0.4 | ) |
|                                              |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| **Stock compensation  expense**                   |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| Corporate                                         |       | 15.5                      |       | 5.4                               |       | 0.2 |   | 0.1 |   | 15.3 |   | 5.3 |   |
| **Facility  rationalization and related costs**   |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| Mueller Co.                                       |       | —                    |       | —                            |       | 0.1 |   | 0.6 |   | (0.1 | ) | (0.6 | ) |
| Anvil                                             |       | —                    |       | —                            |       | 0.1 |   | 1.1 |   | (0.1 | ) | (1.1 | ) |
| Consolidated                                      |       | —                    |       | —                            |       | 0.2 |   | 0.5 |   | (0.2 | ) | (0.5 | ) |
|                                              |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| **Operating Profit**                              |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| Mueller Co.                                       |       | 39.5                      |       | 22.9                              |       | 26.6 |   | 19.6 |   | 12.9 |   | 3.3 |   |
| Anvil                                             |       | 6.5                       |       | 5.6                               |       | 4.8 |   | 5.0 |   | 1.7 |   | 0.6 |   |
| Corporate                                         |       | (26.0                     | )          | (9.0                              | )          | (9.1 | ) | (3.9 | ) | (16.9 | ) | (5.1 | ) |
| Consolidated                                      |       | 20.0                      |       | 6.9                               |       | 22.3 |   | 9.6 |   | (2.3 | ) | (2.7 | ) |
| Interest expense                                  |       | (18.1                     | )          | (6.3                              | )          | (9.1 | ) | (3.9 | ) | (9.0 | ) | (2.4 | ) |
| Interest income                                   |       | 0.1                       |       | —                            |       | 0.1 |   | — |   | — |   | — |   |
| Income before inc taxes                           |       | 2.0                       |       | 0.7                               |       | 13.3 |   | 5.7 |   | (11.3 | ) | (5.0 | ) |
| Income tax expense                                |       | (3.2                      | )          | (1.1                              | )          | 5.5 |   | 2.4 |   | (8.7 | ) | (3.5 | ) |
| Net income                                        |       | $                         | 5.2        |                              | 1.8        | % | $ | 7.8 |   | 3.4 | % | $ | (2.6 | ) | (1.6 | ) |
| **EBITDA (1)**                                    |       |                      |       |                              |       |   |   |   |   |   |   |   |   |
| Mueller Co.                                       |       | 45.2                      |       | 26.2                              |       | 32.9 |   | 24.2 |   | 12.3 |   | 2.0 |   |
| Anvil                                             |       | 10.8                      |       | 9.3                               |       | 9.0 |   | 9.3 |   | 1.8 |   | — |   |
| Corporate                                         |       | (19.6                     | )          | (6.8                              | )          | (2.7 | ) | (1.2 | ) | (16.9 | ) | (5.6 | ) |
| Consolidated                                      |       | $                         | 36.4       |                              | 12.6       | % | $ | 39.2 |   | 16.9 | % | $ | (2.8 | ) | (4.3 | )% |

 

33

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----

(1)                                  EBITDA is defined asincome (loss) before cumulative effect of accounting change plus income taxexpense, interest expense (not net of interest income), depreciation andamortization expense.

(2)                                  Percentagesare by segment, if applicable.

 

* Net Sales.*  Net sales for the three months endedJune 26, 2004 were $288.7 million, or a 24.2% increase from$232.4 million for the three months ended June 28, 2003.

 

Mueller Co. net sales for the three months ended June 26, 2004were $172.4 million, or a 26.8% increase from $136.0 million for thethree months ended June 28, 2003. The increase in net sales was primarilydriven by volume growth, as well as increased selling prices, particularly iniron fire hydrants, water valve products and brass water products.  Volume growth for these products wasapproximately $32.5 million and was driven by strong residential construction,favorable weather conditions and improved general economic conditions.  Increased prices were due to a price increaseannounced by the company in February.

 

Anvil net sales for the three months ended June 26, 2004 were$116.3 million, or a 20.6% increase from $96.4 million for the threemonths ended June 28, 2003. The acquisition of STAR accounted for $6.2million of this increase.  The remainingincrease in Anvil net sales was primarily driven by continued improvement inthe non-residential construction markets, as well as a sales price increaseannounced in the second quarter.

 

 *GrossProfit.*  Gross profit for thethree months ended June 26, 2004 was $83.0 million, or a 34.1%increase from $61.9 million for the three months ended June 28, 2003.Gross profit, as a percentage of net sales, or gross margin, increased from26.6% in 2003 to 28.7% in 2004.

 

Mueller Co. gross profit for the three months ended June 26, 2004was $56.6 million, or a 36.4% increase from $41.5 million for the threemonths ended June 28, 2003. Gross margin increased 2.3% from 30.5% in 2003to 32.8% in 2004. The increase in Mueller Co. gross profit was primarily drivenby increased selling prices on iron water valves, hydrants, and brass waterproducts, increased sales volume, increased fixed overhead absorption due tohigher production levels, and a favorable product mix.  These positive factors were partly offset byincreased warranty expense and continued high raw material prices.

 

Anvil gross profit for the three months ended June 26, 2004 was$26.4 million, or a 29.4% increase from $20.4 million for the threemonths ended June 28, 2003. Gross margin increased 1.5% from 21.2% to22.7%.  The acquisition of STARcontributed $1.0 million.  The remainingincrease was primarily due to the impact of the price and volume increasesdiscussed in Net Sales, partially offset by increased manufacturing costs, mostnotably steel pipe and steel scrap costs.

 

 *Selling,General & Administrative Expense.*  Selling, General and Administrative expenses(“SG&A”) for the three months ended June 26, 2004 were$47.5 million, or a 21.2% increase from $39.2 million for the threemonths ended June 28, 2003. As a percentage of net sales, SG&Adecreased from 16.9% in 2003 to 16.5% in 2004.

 

34

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Mueller Co. SG&A for the three months ended June 26, 2004 was$17.1 million, or a 15.5% increase from $14.8 million for the threemonths ended June 28, 2003. As a percentage of net sales, SG&Adecreased from 10.9% in 2003 to 9.9% in 2004. The increase in SG&A costsare mainly attributable to $0.6 million increase in amortization expenserelated to intangibles acquired in 2003 and 2004, maintenance and toolingassets, increased product redesign costs of $0.9 million and increasedcompensation expense.

 

Anvil SG&A for the three months ended June 26, 2004 was$19.9 million, or a 28.4% increase from $15.5 million for the threemonths ended June 28, 2003. As a percentage of net sales, SG&Aincreased from 16.1% in 2003 to 17.1% in 2004. The STAR acquisition contributed $1.1 million of new selling expense and$0.3 million in amortization expense. Increased compensation expense and sales and warehousing costsassociated with increased sales volume accounted for the remainder of theincrease.

 

Corporate expenses for the three months ended June 26, 2004 were$10.5 million as compared to $8.9 million for the three months endedJune 28, 2003, an increase of $1.6 million.  This was primarily due to legal andaccounting fees incurred in 2004 in connection with the recapitalization of theCompany, and increased compensation costs. Corporate expenses consist primarily of corporate staff, benefits, legaland facility costs.

 

*Stock Compensation Expense. *Corporatestock compensation expense for the three months ended June 26, 2004 was$15.5 million as compared to $0.2 million for the three months endedJune 28, 2003.  This was primarilydue to $15.5 million of compensation charges ($12.6 million cash and $2.9million non-cash) for employee optionholders made in connection with therecapitalization of the Company during the third quarter of 2004.

 

 *FacilityRationalization and Related Costs.* There were no facility rationalization costs for the three months endedJune 26, 2004, as compared to $0.2 million for the three months endedJune 28, 2003.

 

 *InterestExpense.*  Interest expense forthe three months ended June 26, 2004 was $18.1 million, or a $9.0million increase from $9.1 million for the three months endedJune 28, 2003. This was primarily due to $6.6 million of deferredfinancing fees written off for the partial extinguishment of term debt and $6.7million of interest expense on the newly issued $315.0 million and $100.0million of subordinated notes.  This wasoffset by $1.7 million of interest expense in 2003 on $50.0 million ofsubordinated notes which were retired in November 2003, and an additional$1.0 million reduction in interest expense in 2004 related to the valuation ofinterest rate swaps.

 

 *Income TaxExpense.*  The effective taxrates, excluding discrete third quarter items, for the three months endedJune 26, 2004 and for the three months ended June 28, 2003 were 40%and 41%, respectively. Discrete third quarter events which include theconclusion of the federal and certain state tax examinations and expiration ofcertain state statutes of limitation allowed the Company to adjust tax accrualsof approximately $6.4 million.  Partiallyoffsetting these items were $2.3 million of charges related to Foreign Tax Creditsand the effects of other items, including changes in the effective rate onprior period deferred tax balances.

 

 *EBITDA.*  EBITDA for the three months endedJune 26, 2004 was $36.4 million, or a 7.1% decrease from$39.2 million for the three months ended June 28, 2003. EBITDA margindecreased from 16.9% to 12.6%.

 

35

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Mueller Co. EBITDA for the three months ended June 26, 2004 was$45.2 million, which was $12.3 million or 37.4% higher than the $32.9 millionfor the three months ended June 28, 2003. This increase was driven by improved sales volume and price andincreased production as described above. This was partially offset by increased manufacturing costs, most notablysteel scrap and brass ingot.

 

Anvil EBITDA was $10.8 million for the three months ended June 26,2004, which was $1.8 million higher than the $9.0 million reported for thethree months ended June 28, 2003. The acquisition of STAR contributed $0.2 million, with the remainder ofthe increase being driven by price and volume increases as described in the NetSales section.  These increases werepartially offset by increased manufacturing costs, most notably steel pipe andsteel scrap costs.

 

Corporate EBITDA was $(19.6) million for the three months endedJune 26, 2004 compared to $(2.7) million for the prior year period.  This increased expense was primarily drivenby compensation charges for employee optionholders and fees related to therecapitalization of the company and increased compensation costs as describedin the SG&A and stock compensation expense sections above.

 

***Nine Months Ended June 26, 2004 AsCompared to Nine Months Ended June 28, 2003***

 
| ** **                                        | ** ** | **Nine months ended**     | ** ** | ** **                        | ** ** | ** **        | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **June 26, 2004**         | ** ** | **June 28, 2003**                 | ** ** | **2004 vs. 2003** | ** ** |
| ** **                                        | ** ** | ** **                | ** ** | **Percentage  of net sales  (2)** | ** ** | ** **        | ** ** | **Percentage  of net sales  (2)** | ** ** | **Increase /  (decrease)** | ** ** | **Change in  percentage  of  net sales** | ** ** |
| ** **                                        | ** ** | **(dollars in millions)** | ** ** |
|                                              |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| **Net sales**                                     |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| Mueller Co.                                       |       | $                         | 432.7      |                              | 58.2       | %                 | $          | 384.2 |   | 57.2 | % | $ | 48.5 |   | 1.0 | % |
| Anvil                                             |       | 310.9                     |       | 41.8                              |       | 287.2             |       | 42.8 |   | 23.7 |   | (1.0 | ) |
| Consolidated                                      |       | 743.6                     |       | 100.0                             |       | 671.4             |       | 100.0 |   | 72.2 |   | — |   |
|                                              |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| **Gross profit**                                  |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| Mueller Co.                                       |       | 139.5                     |       | 32.2                              |       | 114.3             |       | 29.8 |   | 25.2 |   | 2.4 |   |
| Anvil                                             |       | 70.4                      |       | 22.6                              |       | 61.7              |       | 21.5 |   | 8.7 |   | 1.1 |   |
| Consolidated                                      |       | 209.9                     |       | 28.2                              |       | 176.0             |       | 26.2 |   | 33.9 |   | 2.0 |   |
|                                              |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| **Selling, general  and administrative expenses** |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| Mueller Co.                                       |       | 46.0                      |       | 10.6                              |       | 37.5              |       | 9.8 |   | 8.5 |   | 0.8 |   |
| Anvil                                             |       | 53.4                      |       | 17.2                              |       | 50.0              |       | 17.4 |   | 3.4 |   | (0.2 | ) |
| Corporate                                         |       | 27.1                      |       | 3.6                               |       | 26.4              |       | 3.9 |   | 0.7 |   | (0.3 | ) |
| Consolidated                                      |       | 126.5                     |       | 17.0                              |       | 113.9             |       | 17.0 |   | 12.6 |   | — |   |
|                                              |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| **Stock compensation  expense**                   |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| Corporate                                         |       | 15.8                      |       | 2.1                               |       | 0.5               |       | 0.1 |   | 15.3 |   | 2.0 |   |
| **Facility  rationalization and related costs**   |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| Mueller Co.                                       |       | —                    |       | —                            |       | 1.0               |       | 0.3 |   | (1.0 | ) | (0.3 | ) |
| Anvil                                             |       | 0.9                       |       | 0.3                               |       | 0.7               |       | 0.2 |   | 0.2 |   | 0.1 |   |
| Consolidated                                      |       | 0.9                       |       | 0.1                               |       | 1.7               |       | 0.3 |   | (0.8 | ) | (0.2 | ) |
|                                              |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| **Operating Profit**                              |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| Mueller Co.                                       |       | 93.5                      |       | 21.6                              |       | 75.8              |       | 19.7 |   | 17.7 |   | 1.9 |   |
| Anvil                                             |       | 16.1                      |       | 5.2                               |       | 11.0              |       | 3.8 |   | 5.1 |   | 1.4 |   |
| Corporate                                         |       | (42.9                     | )          | (5.8                              | )          | (26.9             | )          | (4.0 | ) | (16.0 | ) | (1.8 | ) |
| Consolidated                                      |       | 66.7                      |       | 9.0                               |       | 59.9              |       | 8.9 |   | 6.8 |   | 0.1 |   |
| Interest expense                                  |       | (39.3                     | )          | (5.3                              | )          | (28.3             | )          | (4.2 | ) | (11.0 | ) | (1.1 | ) |
| Interest income                                   |       | 0.3                       |       | —                            |       | 0.4               |       | 0.1 |   | (0.1 | ) | (0.1 | ) |
| Income before inc taxes                           |       | 27.7                      |       | 3.7                               |       | 32.0              |       | 4.8 |   | (4.3 | ) | (1.1 | ) |
| Income tax expense                                |       | 7.1                       |       | 1.0                               |       | 13.0              |       | 1.9 |   | (5.9 | ) | (0.9 | ) |
| Net income                                        |       | $                         | 20.6       |                              | 2.8        | %                 | $          | 19.0 |   | 2.8 | % | $ | 1.6 |   | — | % |
| **EBITDA (1)**                                    |       |                      |       |                              |       |              |       |   |   |   |   |   |   |
| Mueller Co.                                       |       | 111.4                     |       | 25.7                              |       | 94.0              |       | 24.5 |   | 17.4 |   | 1.2 |   |
| Anvil                                             |       | 28.8                      |       | 9.3                               |       | 23.5              |       | 8.2 |   | 5.3 |   | 1.1 |   |
| Corporate                                         |       | (23.7                     | )          | (3.2                              | )          | (7.5              | )          | (1.1 | ) | (16.2 | ) | (2.1 | ) |
| Consolidated                                      |       | $                         | 116.5      |                              | 15.7       | %                 | $          | 110.0 |   | 16.4 | % | $ | 6.5 |   | (0.7 | )% |

 

36

----

 

----

(1)          EBITDA is defined asincome (loss) before cumulative effect of accounting change plus income taxexpense, interest expense (not net of interest income), depreciation andamortization expense.

(2)          Percentages are bysegment, if applicable.

 

 *Net Sales.*  Net sales for the nine months endedJune 26, 2004 increased by $72.2 million, or 10.8%, from$671.4 million in 2003 to $743.6 million in 2004.

 

Mueller Co. net sales for the nine months ended June 26, 2004increased by $48.5 million, or 12.6%, from $384.2 million in 2003 to$432.7 million in 2004. The increase in net sales was primarily driven byvolume and pricing growth, particularly in iron fire hydrants, water valve andbrass water products.  This growth wasdriven by the continued strength in the residential construction market,favorable weather conditions and improved general economic conditions.  Increased prices were due to a price increaseannounced by the company in February. The Milliken Valve acquisition, completedin January 2003, contributed $3.6 million.

 

Anvil net sales for the nine months ended June 26, 2004 increasedby $23.7 million, or 8.3%, from $287.2 million in 2003 to$310.9 million in 2004. The STAR acquisition accounted for $11.4 millionof increased sales.  The USnon-residential construction market experienced increased activity which as ledto increased sales volume offset by softening of power plant construction.  In addition, sales price increasescontributed to the revenue growth.

 

 *GrossProfit.*  Gross profit for thenine months ended June 26, 2004 increased $33.9 million, from$176.0 million in 2003 to $209.9 million in 2004. Gross marginincreased from 26.2% to 28.2%.

 

Mueller Co. gross profit for the nine months ended June 26, 2004increased $25.2 million, from $114.3 million in 2003 to$139.5 million in 2004. Gross margin increased from 29.8% in 2003 to 32.2%in 2004. The increase in gross profit was primarily driven by increased sellingprices and volumes on iron fire hydrants, water valves and brass waterproducts, favorable product mix, increase fixed overhead absorption due tohigher production levels, the acquisition of Milliken

 

37

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Valve (which contributed $1.2 million), focused efforts to reducespending, and the strength of the Canadian dollar (relative to the US dollar).

 

Anvil gross profit for the nine months ended June 26, 2004increased $8.7 million, from $61.7 million in 2003 to$70.4 million in 2004. Gross margin increased 1.1% from 21.5% to 22.6%.The STAR acquisition contributed $2.0 million. The remaining increase was primarily driven by price increases announcedin the second quarter of fiscal year 2004 and the strength of the Canadiandollar relative to the US dollar.  Thiswas partially offset by increased raw material costs.

 

 *Selling,General & Administrative Expense.*  SG&A for the nine months endedJune 26, 2004 increased $12.6 million, from $113.9 million in2003 to $126.5 million in 2004. As a percentage of net sales, SG&Aremained stable at 17.0%.

 

Mueller Co. SG&A for the nine months ended June 26, 2004 was$46.0 million, or a 22.7% increase from $37.5 million for the nine monthsended June 28, 2003.  As apercentage of net sales, SG&A increased from 9.8% in 2003 to 10.6% in 2004.This increase in SG&A expense as a percentage of net sales was driven inpart by the Milliken acquisition, which contributed $0.7 million of newexpense. Excluding the impact of the Milliken acquisitions, SG&A expenseincreased $7.0 million, driven by a $1.9 million increase in amortizationexpense related to intangibles acquired in 2003 and 2004, and maintenance andtooling inventory, higher sales commission and other compensation costs, theaddition of sales personnel and a new local sales office, increased provisionsfor doubtful accounts due to higher sales volumes, increased product redesigncosts of $0.4 million, and higher year-over-year group medical costs due to anincrease in claims activity.

 

Anvil SG&A for the nine months ended June 26, 2004 increased$3.4 million, or 6.8%, from $50.0 million in 2003 to$53.4 million in 2004. As a percentage of net sales, SG&A decreasedfrom 17.4% in 2003 to 17.2% in 2004.  TheSTAR acquisition added $2.1 million of new expense.  The remaining increase was driven byincreased compensation expense and sales and warehousing costs associated withhigher sales.  These increases wereoffset by continued cost reductions and facility rationalization related toAnvil’s US distribution network, a decrease in severance costs paid as part ofAnvil’s facility rationalization and other costs incurred with a fire loss inColumbia in the first quarter of fiscal year 2003.

 

Corporate expenses for the nine months ended June 26, 2004 were$27.1 million as compared to $26.4 million in 2003, an increase of$0.7 million primarily due to increased compensation charges and legal andaccounting fees related to the recapitalization of the Company in 2004.

 

*Stock Compensation Expense. *Corporatestock compensation expense for the nine months ended June 26, 2004 was$15.8 million, an increase of $15.3 million from 2003.  This was due to a $15.5 million charge ($12.6million cash and $2.9 million non-cash) for employee optionholders inconnection with the recapitalization of the Company.

 

 *Facilityrationalization and related costs.* Mueller Co. facility rationalization costs decreased $1.0 millionin 2004 as compared to 2003, reflecting lower asset impairment charges. Anvilcosts increased $0.2 million in 2004 as compared to 2003, reflecting higherfacility consolidation and cost reduction activity.

 

 *InterestExpense.*  Interest expense forthe nine months ended June 26, 2004 was $39.3 million, or a 38.9%increase from $28.3 million for 2003. In November 2003, $50.0 million of senior

 

38

----

 

subordinated notes due 2009 were redeemed.  As a result, interest expense for the ninemonths ending June 26, 2004 increased relative to the prior period due toa $7.0 million prepayment premium and a $0.4 million write-off of deferredfinancing fees.  This was partiallyoffset by a $4.4 million reduction in interest expense as a result of theredemption of our senior subordinated notes due 2009.  Also, in April 2004 the term debt wasrefinanced and new bonds for $315.0 million and $100.0 million wereissued.  This resulted in an additionalwrite-off of term debt deferred financing fees of $6.6 million, $6.7 million ofinterest expense on the new bonds, and $1.2 million of increased amortizationon a larger balance of deferred financing fees. These increases were partly offset by a $5.1 million decrease in termdebt interest expense due to lower interest rates.

 

 *Income TaxExpense.*  Income tax expensefor the nine months ended June 26, 2004 was $7.1 million as comparedto $13.0 million in 2003. The effective tax rate, excluding discrete itemsin 2004, was 40% in both years.  Discretethird quarter events allowed the Company to adjust tax accruals, as describedin the quarterly comparison section.

 

 *EBITDA.*  EBITDA for the nine months endedJune 26, 2004 increased by $6.5 million, or 5.9%, from$110.0 million in 2003 to $116.5 million in 2004. EBITDA margindecreased from 16.4% in 2003 to 15.7% in 2004.

 

Mueller Co. EBITDA for the nine months ended June 26, 2004 was$111.4 million, a $17.4 million increase over the $94.0 million of EBITDAreported for the nine months ended June 28, 2003.  This increase was primarily driven byincreased sales volumes and selling prices on water valves and hydrants,increased absorption of fixed overhead costs due to higher production volumes,the strength of the Canadian dollar relative to the US dollar and theacquisition of Milliken Valve (contributing $0.5 million).  These increases were partially offset byhigher raw material prices (brass ingot and steel scrap) and selling, generaland administrative expenses as described in the Mueller Co. SG&Asection above.

 

Anvil EBITDA increased $5.3 million to $28.8 million for the ninemonths ended June 26, 2004.  This isa 22.6% increase over the $23.5 million of EBITDA for the same period in2003.  This increase was primarily drivenby increased selling prices in the second quarter of fiscal 2004, the strengthof the Canadian dollar relative to the US dollar, and the acquisition ofSTAR.  These increases were partiallyoffset by rising raw material prices and weaker sales volumes in the firstquarter of fiscal 2004.

 

Corporate EBITDA changed by $(16.2) million from $(7.5) million for thenine months ended June 28, 2003 to $(23.7) million for the nine monthsended June 26, 2004.  This wasprimarily due to compensation charges as described in the Corporate StockCompensation Expense section above.

 

**Liquidity and Capital Resources**

** **

Our principal sources of liquidity are cash flow from operations andborrowings under our senior credit facility. Our principal uses of cash will bedebt service requirements as described below, capital expenditures, workingcapital requirements, dividends to our parent company and possibleacquisitions.

 

*Debt Service*

* *

As of June 26, 2004 we had: (a) total indebtedness ofapproximately $932.5 million; and (b) approximately $61.0 million ofborrowings available under our senior credit facility, subject to customaryconditions. As of June 26, 2004 we had obtained $18.9 million in lettersof credit, which reduces

 

39

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availability for borrowingsthereunder. Our significant debt service obligations could have materialconsequences to our security holders. Our key financial covenants are dependent on attaining certain levels ofEBITDA, as defined in the respective debt arrangements.  The most restrictive covenant in effect atJune 26, 2004 related to our leverage ratio, as defined in the debtarrangements, which required approximately $155 million of EBITDA over thetrailing twelve months, based on our net debt outstanding.  Our EBITDA, as defined in the agreements,exceeded $190 million over the trailing twelve months.

 

*Senior CreditFacility.*  The senior credit facility includes a$545.0 million amortizing term loan maturing April 22, 2011 and an$80.0 million revolving credit facility that will terminate April 22,2009. The revolving credit facility and/or the term loan facility is subject toa potential, although uncommitted, increase of up to an aggregate of$50.0 million at our request at any time prior to maturity. In addition,although uncommitted, a sub-facility may be made available to one or more ofour restricted foreign subsidiaries in an aggregate principal amount of up to$30.0 million or the foreign currency equivalent of thereof. This increase andthe additional foreign currency sub-facility will only be available if one ormore financial institutions agree to provide them.

 

*Borrowings* under the senior credit facility bearinterest based on a margin over, at our option, the base rate or thereserve-adjusted London-interbank offered rate, or LIBOR. The applicable marginis 3.25% over LIBOR and 2.00% over the base rate for borrowings under therevolving senior credit facility and 3.25% over LIBOR and 2.00% over the baserate for term loans. Beginning at a time set forth in the senior creditfacility, the applicable margin for revolving credit loans varies based uponour ratio of consolidated debt to EBITDA, as defined in the senior creditfacility. Our obligations under the senior credit facility are guaranteed byour parent company and all our existing or future domestic restrictedsubsidiaries and are secured by substantially all of the assets of our companyand the subsidiary guarantors, including a pledge of the capital stock of allour existing and future domestic subsidiaries, a pledge of no more than 65.0%of the voting stock of any foreign subsidiary, a pledge of all intercompanyindebtedness in favor of our company and our domestic restricted subsidiaries,and a pledge of our company’s capital stock by our parent company. The seniorcredit facility contains customary covenants, including covenants that limitour ability to incur debt and liens, pay dividends and make investments andcapital expenditures, and events of default.

 

*SecuredNotes.*  The secured notes will mature in 2011 and areguaranteed by each of our existing domestic restricted subsidiaries and securedby second-priority liens on the assets securing our senior credit facility(other than certain subsidiary stock and assets of our parent company).Interest on the secured notes will be payable quarterly in cash at a rate equalto three-month LIBOR plus 4.75%. The secured notes contain customary covenantsand events of default, including covenants that limit our ability to incurdebt, pay dividends and make investments and also include a maintenancecovenant limiting our senior total leverage as a multiple of EBITDA, as definedin the indenture.

 

*SubordinatedNotes.*  The subordinated notes will mature in 2012and are guaranteed by each of our existing domestic restricted subsidiaries.Interest on the subordinated notes is payable semi-annually in cash. Thesubordinated notes contain customary covenants and events of default, includingcovenants that limit our ability to incur debt, pay dividends and makeinvestments.

 

*CapitalExpenditures*

 

The senior credit facilitycontains restrictions on our ability to make capital expenditures. Based oncurrent estimates, management believes that the amount of capital expenditurespermitted to be made under the senior credit facility will be adequate tomaintain the properties and business of our continuing operations.

 

*Distributionsto our Parent Company*

 

Our parent company has nomaterial assets other than its ownership of our capital stock and accordinglydepends upon distributions from us to satisfy its cash needs. Our parentcompany’s principal cash needs will be debt service on its Senior DiscountNotes due 2014. The parent company notes do not require cash interest paymentsuntil 2009 and contain restrictive covenants that will, among other things, 

 

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limit the ability of MuellerHoldings and its subsidiaries (including us) to incur debt, pay dividends andmake investments. Neither we nor any of our subsidiaries will guarantee theparent company notes. Mueller Holdings, however, is a holding company and itsability to pay interest on the parent company notes will be dependent upon thereceipt of dividends from its subsidiaries. We are currently Mueller Holdings’only direct subsidiary. However, the terms of our borrowing arrangementssignificantly restrict our ability to pay dividends to Mueller Holdings.  Such dividends are permitted in an amount notto exceed $2.0 million in any fiscal year to allow Holdings to pay its overheadexpenses.

 

*Sources ofFunds*

 

We anticipate that ouroperating cash flow, together with permitted borrowings under the senior creditfacility, will be sufficient to meet our anticipated future operating expenses,capital expenditures and debt service obligations as they become due for atleast the next twelve months. However, our ability to make scheduled paymentsof principal of, to pay interest on or to refinance our indebtedness and tosatisfy our other debt obligations will depend upon our future operatingperformance, which will be affected by general economic, financial,competitive, legislative, regulatory, business and other factors beyond ourcontrol.

 

From time to time we mayexplore additional financing methods and other means to lower our cost ofcapital, 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 provided in the form of additional debtor equity financing or a combination thereof. There can be no assurance thatany additional financing will be available to us on acceptable terms.

 

*Cash flows from operating activities.*  Net cash provided by operations was$50.7 million for the first nine months of 2004, an increase of$17.6 million compared to the first nine months of 2003. The improvementwas primarily the result of increased earnings before depreciation,amortization and non-cash charges, and a rise in accounts payable caused byincreased production to meet demand. This was partially offset by increases in accounts receivable due tohigher sales in the third quarter of fiscal 2004.

 

*Cash flows used in investing activities.*  In the first nine months of 2004 we had netcash used in investing activities of $36.6 million compared to net cashused in the first nine months of 2003 of $11.7 million. This was primarilydue to the decrease in restricted cash of $11.6 million in the first ninemonths of 2003 as the final royalty payment was made to Tyco. Also, cash paidfor acquired companies increased from $11.2 million in 2003 to $19.8 million in2004, and capital expenditures were $4.8 million higher in 2004.

 

*Cash flows from financing activities.*  Cash flows used in financing activitiesincreased from $2.7 million in the first nine months of 2003 to $62.4 millionin the first nine months of 2004. This was primarily due to early payment of$50 million of subordinated notes due 2009 and $30.0 million of earlypayments on our senior credit facility term debt.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. Inaddition, we do not have any undisclosed borrowings or debt, and we have notentered into any derivative contracts (other than those described in“—Qualitative and Quantitative Disclosure About Market Risk—Interest Rate Risk”)or synthetic leases. We are, therefore, not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.

 

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We utilize letters of credit andsurety bonds in the ordinary course of business to ensure our performance ofcontractual obligations. As of June 26, 2004, we had $18.9 million ofletters of credit and $10.9 million of surety bonds outstanding.

 

**ContractualObligations**

 

Our contractual obligations asof June 26, 2004:

 

**Payments Dueby 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           |       | $                         | 1.4        |          | $          | 10.9          |       | $                 | 10.9       |      | $          | 906.8 |   | $ | 930.0 |   |
| Interest  on long-term debt(1)         |       | 60.4                      |       | 120.8         |       | 120.8         |       | 154.7             |       | 456.7     |       |
| Capital  lease obligations             |       | 1.0                       |       | 1.5           |       | —        |       | —            |       | 2.5       |       |
| Operating  leases                      |       | 8.2                       |       | 12.2          |       | 5.4           |       | 2.2               |       | 28.0      |       |
| Unconditional  purchase obligations(2) |       | 8.0                       |       | —        |       | —        |       | —            |       | 8.0       |       |
| Other  long-term obligations(3)        |       | —                    |       | —        |       | —        |       | —            |       | —    |       |
| Total  contractual cash obligations    |       | $                         | 79.0       |          | $          | 145.4         |       | $                 | 137.1      |      | $          | 1,063.7 |   | $ | 1,425.2 |   |

 

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(1)          Interest on the senior credit facilityand secured notes is calculated using LIBOR of 1.34%, the rate in effect onJune 26, 2004. 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 rate 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.

 

(2)          Includes contractual obligations forpurchases of raw materials and capital expenditures.

 

(3)          Excludes the deferred payment portion ofthe purchase price for Star. The Star purchase price is subject to adjustmentto reflect, among other things, a deferred payment to be made by us to theextent that the gross profit of the business exceeds the target gross profitfrom February 1, 2004 to January 31, 2007. Although the maximumamount payable is $23 million, we estimate that the total deferred payment willbe approximately $11.0 to $13.0 million. This calculation of the potentialStar purchase price adjustment is based on management’s best estimate; however,the actual adjustment may be materially different.

 

**Effect of Inflation; Seasonality**

 

We do not believe that generalinflation has had a material impact on our financial position or results ofoperations, with the exception of recent increases in the cost of our rawmaterials.

 

Our business is dependent uponthe construction industry, which is very seasonal due to the impact of winteror wet weather conditions. Our net sales and operating income have historicallybeen lowest, and our working capital needs have been highest, in the threemonth periods ending December 31 and March 31, when the northernUnited States and all of Canada generally face weather that restrictssignificant construction activity and we build working capital in anticipationof the peak construction season, during which time our working capital tends tobe reduced.

 

**CriticalAccounting Policies**

 

Our significant accountingpolicies are described in our audited consolidated financial statements for theyear ended September 30, 2003 as seen in our registration statement filedon Form S-4 (File No. 333-117473). While all significant accounting policiesare important to our 

 

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consolidated financialstatements, some of these policies may be viewed as being critical. Suchpolicies are those that are both most important to the portrayal of ourfinancial condition and require our most difficult, subjective and complexestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosure of contingent assets andliabilities. These estimates are based upon our historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Our actual results may differ from these estimates underdifferent assumptions or conditions. An update of certain of our most criticalaccounting policies since September 30, 2003 is as follows:

 

***Pensions***

 

We sponsor a number of definedbenefit retirement plans. The liabilities and annual income or expense of ourplans is determined using methodologies that involve several actuarialassumptions, the most significant of which are the discount rate and thelong-term rate of asset return.

 

In developing the expectedlong-term rate of return assumption for pension fund assets, we evaluated inputfrom our actuaries, including their review of asset class return expectationsas well as long-term inflation assumptions. Projected returns are based onhistorical returns of broad equity and bond indices. We also considered ourhistorical 10-year compound returns. We anticipate that, as the economyrecovers, our investment managers will continue to generate long-term rates ofreturn of 7.9%. Our expected long-term rate of return is based on an assumedasset allocation of 65% equity funds and 35% fixed-income funds.

 

The discount rate that weutilize for determining future pension obligations is based on a review oflong-term bonds that receive one of the two highest ratings given by arecognized rating agency. The discount rate determined on this basis hasdecreased to 6.0% at September 30, 2003 from 6.8% at September 30,2002.

 

Lowering the expected long-termrate of return by 0.5% (from 7.9% to 7.4%) would have increased our pensionexpense for the year ended September 30, 2003 by approximately$0.3 million. Lowering the discount rate assumptions by 0.5% would haveincreased our pension expense for the year ended September 30, 2003 byapproximately $0.4 million.

 

***Revenue Recognition***

 

Revenue is recognized whentitle and risk of loss is transferred to the customer, which is generally uponreceipt of the product by the customer. Revenue is reduced at the time of salefor cash discounts and rebates. We review cash discounts and rebates, salesreturns and bad debts and maintain reserves based on the historical trends. Ifcash discounts and rebates, returns or bad debts were to increase, additionalreserves could be required.

 

***Inventories***

 

Inventories are recorded at thelower of cost (first-in, first-out) or market value. We maintain a reserve forpotential losses on the disposal of our obsolete and slow moving inventorybased on regular analysis of our historical usage levels. If our evaluation isincorrect, we could be required to take larger reserves.

 

***Income Taxes***

 

Deferred tax liabilities andassets are recognized for the expected future tax consequences of events thathave been included in the financial statements or tax returns. Deferred taxliabilities and assets are determined based on the differences between thefinancial statements and the tax basis of assets and liabilities, using taxrates in effect for the years in which the differences are expected to reverse.A valuation allowance is provided to offset any net deferred tax assets if,based upon the available evidence, it is more likely than not that some or allof the deferred tax assets will not be realized. If we were to reduce ourestimates of future taxable income, we could be required to record a valuationallowance against our deferred tax assets.

 

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The Company has recordedprovisions associated with income tax exposures.  Such provisions require significant judgmentand are adjusted when events or circumstances occur that would require a changein the estimated accrual.

 

***Impairment of Long-Lived Assets***

 

We evaluate our long-livedassets, including intangible assets, for impairments whenever events or changesin circumstances indicate that the carrying amounts of these assets may not berecoverable, and, in any event, at least annually. We consider the carryingvalue of a long-lived asset to have been impaired if the anticipatedundiscounted cash flows from such an asset is less than its carrying value. Ifour operating performance declines significantly, we may need to recordimpairment charges to reduce the carrying value of our long-lived assets.Effective October 1, 2001, the Company adopted SFAS No. 142, whichrequires that goodwill no longer be amortized, but instead be tested forimpairment at least annually and also allows indefinite lived intangibles, suchas tradenames, to no longer be amortized. SFAS No. 142 also requiresrecognized intangible assets to be amortized over their respective estimateduseful lives and reviewed for impairment. Any recognized intangible assetdetermined to have an indefinite useful life will not be amortized, but insteadtested for impairment in accordance with the standard until its life isdetermined to no longer be indefinite. Goodwill is tested for impairment atleast annually, using both a discounted cash flow method and a marketcomparable method. As of October 1, 2001, September 30, 2002 and2003, no impairment was indicated.

 

***Stock-Based Compensation***

 

We account for our stock-basedcompensation plan under Accounting Principles Board Opinion No. 25 (“APBNo. 25”), “Accounting for Stock Issued to Employees,” which requiresrecognizing compensation costs based upon the intrinsic value of the equityinstrument at the grant date. The FASB issued SFAS No. 123, “Accountingfor Stock-Based Compensation,” which encourages companies to recognizecompensation costs based upon the fair value of the equity instrument at thegrant date. However, SFAS No. 123 allows companies to continue to applythe provisions of APB No. 25 and make pro forma disclosures assuming ahypothetical fair value application. We have adopted the pro forma disclosureprovisions of SFAS No. 123.

 

We recognize compensation costfor stock-based compensation arrangements equal to the difference, if any,between the fair value of the stock option and the exercise price at the dateof the grant in accordance with the provisions of APB No. 25. All optionsgranted under the Management Incentive Plan were issued at fair value at thedate of grant. Fair value is determined by a committee of the board of MuellerHoldings (or the board of Mueller Holdings as a whole, if no committee isconstituted), which will take into account as appropriate recent sales ofshares of Mueller Holdings’ common stock, recent valuations of such shares, anydiscount associated with the absence of a public market for such shares andsuch other factors as the committee (or the board, as the case may be) deemsrelevant or appropriate in its discretion.

 

Certain of our employees heldoptions in Mueller Holdings shares. In connection with the refinancing, MuellerHoldings modified these stock option awards to accelerate vesting uponcompletion of a refinancing. A portion of the dividend distribution to MuellerHoldings was used to make a payment to its employee optionholders of the excessof the per share dividend to Mueller Holdings’ common stockholders over theexercise price of their options, or approximately $12.6 million in theaggregate, and the options were cancelled. The option buy-out resulted in anadditional charge of approximately $14.8 million ($12.6 million cash charge and$2.2 million non-cash charge) in the third quarter of 2004.  Additionally, Mueller Holdings recorded anon-cash compensation charge of approximately $0.7 million related to the loanportion of the shares purchased pursuant to the Mueller Holdings’ DirectInvestment Program. These charges total $15.5 million.

 

***Derivative Instruments and Hedging Activities***

 

We currently use interest rateswaps as required in our existing senior credit facility to reduce the risk ofinterest rate volatility. The amount to be paid or received from interest rateswaps is charged or credited to interest expense over the lives of the interestrate swap agreements. Changes in the fair value of 

 

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derivatives are recorded eachperiod in earnings or Accumulated Other Comprehensive Income (Loss), dependingon whether a derivative is designated and effective as part of a hedgetransaction and meets the applicable requirements associated with SFAS No. 133.All gains or losses since the adoption of SFAS No. 133 associated withinterest rate swaps have been included in earnings and not Accumulated OtherComprehensive Income (Loss).

 

For a derivative to qualify asa hedge at inception and throughout the hedge period, we must formally documentthe nature and relationships between the hedging instruments and hedged items,as well as its risk-management objectives, strategies for undertaking thevarious hedge transactions and method of assessing hedge effectiveness. Anyfinancial instruments qualifying for hedge accounting must maintain a specifiedlevel of effectiveness between the hedging instrument and the item beinghedged, both at inception and throughout the hedged period.

 

Additionally, we utilize forwardcontracts to mitigate our exposure to changes in foreign currency exchangerates from third-party and intercompany forecasted transactions. The primarycurrency to which we are exposed and as to which we seek to hedge our exposureis the Canadian Dollar. The effective portion of unrealized gains and lossesassociated with forward contracts are deferred as a component of AccumulatedOther Comprehensive Income (Loss) until the underlying hedged transactions arereported in our consolidated statement of earnings.  As of June 26, 2004, we had forwardforeign exchange contracts outstanding with a notional principal amount of $3.0million to hedge our Canadian operations’ exposure to currency fluctuations onproducts purchased from U.S. suppliers.

 

**Recently IssuedAccounting Standards**

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable InterestEntities.” Interpretation No. 46 requires a variable interest entity to beconsolidated by a company if that company is subject to a majority of the riskof loss from the variable interest entity’s activities or is entitled toreceive a majority of the entity’s residual return or both. InterpretationNo. 46 also provides criteria for determining whether an entity is avariable interest entity subject to consolidation. Interpretation No. 46requires immediate consolidation of variable interest entities created afterJanuary 31, 2003. For variable interest entities created prior toFebruary 1, 2003, consolidation is required on July 1, 2003. InterpretationNo. 46 did not have a material impact on our consolidated financialstatements at the date of adoption or at September 30, 2003.  On December 24, 2003, the FASB issued arevision to Staff Interpretation (FIN) No. 46 (revised 2003), which clarifiedsome of the provisions of the original Interpretation No. 46 and exemptedcertain entities from its requirements. The application of revised FIN 46 isrequired in financial statements of public entities that have interests invariable interest entities commonly referred to as special purpose entities forperiods ending after December 15, 2003. Application by public entities,other than small business entities, for all other types of entities is requiredin financial statements for periods ending March 15, 2004. We do notbelieve the revised FIN No. 46 will have a material effect on our financialcondition or results of operations and we will provide the disclosures, whereappropriate, as provided for in revised FIN No. 46.  At June 26, 2004 we did not have anyentities that would be considered variable interest entities.

 

On December 23, 2003, theFASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures aboutPensions and Other Postretirement Benefits.” SFAS No. 132 retains thedisclosures required by the original Statement No. 132, which standardizedthe disclosure requirements for pensions and other postretirement benefits tothe extent practicable and required additional information on changes in thebenefit obligations and fair values of plan assets. Additional disclosures havebeen added in response to concerns expressed by users of financial statements.Those disclosures include information describing the types of plan assets,investment strategy, measurement date(s), plan obligations, cash flows, andcomponents of net periodic benefit cost recognized during interim periods. Theprovisions of Statement 132 remain in effect until the provisions of therevised Statement 132 are adopted. This revised Statement is effective forfinancial statements with fiscal years ending after December 15, 2003. Theinterim-period disclosures required by this revised Statement are effective forinterim periods beginning after December 15, 2003. We have provided theadditional required disclosure information.

 

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On December 17, 2003, theSecurities and Exchange Commission issued Staff Accounting BulletinNo. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101, RevenueRecognition in Financial Statements. SAB 104’s primary purpose is to rescindaccounting guidance contained in SAB 101 related to multiple element revenuearrangements, superceded as a result of the issuance of Emerging Issues TaskForce (EITF) 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” Additionally, SAB 104 rescinds the SEC’s Revenue Recognition inFinancial Statements Frequently Asked Questions and Answers issued with SAB 101that had been codified in SEC Topic 13, Revenue Recognition. The adoption ofthis bulletin did not have an impact on our financial condition or results ofoperations.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments WithCharacteristics of Both Liabilities and Equity.” SFAS 150 establishesstandards for how a company classifies and measures certain financialinstruments with characteristics of both liabilities and equity. It requiresthat a company classify a financial instrument that is within its scope as aliability (or an asset in some circumstances). Mueller Holdings issued 16%Senior Exchangeable Preferred Stock in connection with its formation whichwould be subject to SFAS 150 for the fiscal year beginning October 1,2004.  The preferred stock was redeemedby Mueller Holdings on April 23, 2004. Therefore, the adoption of this statement will not have any impact onour financial condition or result of operations.

 

**ITEM 3.QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK**

 

We are exposed to variousmarket risks, which are potential losses arising from adverse changes in marketrates and prices, such as interest rates and foreign exchange fluctuations. Wedo not enter into derivatives or other financial instruments for trading orspeculative purposes.

 

Our primary financialinstruments are cash and cash equivalents. This includes cash in banks andhighly rated, liquid money market investments and U.S. government securities.We believe that those instruments are not subject to material potentialnear-term losses in future earnings from reasonably possible near-term changesin market rates or prices.

 

***Interest Rate Risk***

 

At June 26, 2004 we hadfixed rate debt of $317.5 million and variable rate debt of$615.0 million. The pre-tax earnings and cash flows impact resulting froma 100 basis point increase in interest rates on variable rate debt, holdingother variables constant and excluding the impact of the hedging agreementsdescribed below, would be approximately $6.2 million per year.

 

We have entered into interestrate swap agreements with a notional principal amount of $150.0 million inorder to reduce interest rate risks and manage interest expense. The swapagreements, which mature between July 2004 and July 2005, effectivelyconvert floating rate debt under our credit facility into fixed-rate debt andcarry an average fixed interest rate of 7.55% at June 26, 2004. We plan toretain these interest rate swaps and intend to enter into additional interestrate swaps or other interest rate hedging instruments to protect againstinterest rate fluctuations on our new floating rate debt.

 

The senior credit facilityrequires us to enter into interest rate protection agreements no later thanJanuary 23, 2005 that have the effect of causing the interest on at least halfof our total long-term, non-revolving debt to be fixed.

 

***Currency Risk***

 

Outside of the United States,we maintain assets and operations in Canada and, to a much lesser extent,China. The results of operations and financial position of our foreignoperations are principally measured in their respective currency and translatedinto U.S. dollars. As a result, exposure to foreign currency gains and lossesexists. The reported income of these subsidiaries will be higher or lowerdepending on a weakening or strengthening of the U.S. dollar against therespective foreign currency. Our subsidiaries and affiliates also purchase andsell products and services in various currencies. As a result, we may beexposed to cost increases relative to the local currencies in the markets inwhich we sell. Because a different percentage of our revenues is in foreigncurrency than our costs, a change in the relative value of the U.S. 

 

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dollar could have adisproportionate impact on our revenues compared to our cost, which couldimpact our margins.

 

A portion of our assets arebased in our foreign locations and are translated into U.S. dollars at foreigncurrency exchange rates in effect as of the end of each period, with the effectof such translation reflected in other comprehensive income (loss).Accordingly, our consolidated stockholder’s equity will fluctuate dependingupon the weakening or strengthening of the U.S. dollar against the respectiveforeign currency.

 

Our strategy for management ofcurrency risk relies primarily on conducting our operations in a country’srespective currency and may, from time to time, involve currency derivatives,primarily forward foreign exchange contracts, to reduce our exposure tocurrency fluctuations. As of June 26, 2004, we had forward foreignexchange contracts outstanding with a notional principal amount of$3.0 million to hedge our Canadian operations’ exposure to currencyfluctuations on products purchased from U.S. suppliers.

 

***Raw Materials Risk***

 

Our products are made from severalbasic raw materials, including sand, resin, brass ingot, steel pipe, and scrapsteel and iron, whose prices fluctuate as market supply and demand change.Accordingly, product margins and the level of profitability can fluctuate if weare not able to pass raw material costs on to our customers. Historically, wehave been able to obtain an adequate supply of raw materials and do notanticipate any shortage of these materials. We generally purchase raw materialsat spot prices but may, from time to time, enter into commodity derivatives toreduce our exposure to fluctuation in the price of raw materials. As ofJune 26, 2004, we had no open contracts to hedge our exposure to pricechanges of raw materials.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

We became subject to the requirements of theExchange Act and the rules promulgated thereunder on August 10, 2004.  As part of the process of complying withapplicable laws and rules, we performed an evaluation of our disclosure controlsand procedures as of June 26, 2004.  InAugust 2004, we advised our Audit Committee that a significant deficiency ininternal controls had been noted related to unauthorized journal entries foundat one of our Anvil facilities totaling $1.1 million made in fiscal 2003 and2004.  Additionally, in August 2004, weadvised the Audit Committee of a material weakness related to the subsequentrevision of interim financial statements that we provided to our note holdersunder the indenture agreement prior to the filing of the Form 10-Q.

 

Regarding the significant deficiency, weconducted an in-depth investigation of the circumstances underlying theunauthorized journal entries and took appropriate remedial actions.  Our principal executive officer and principalfinancial officer believe that procedures we performed provide reasonableassurance that the identified deficiency did not lead to material misstatementsin the company’s consolidated financial statements for the third quarter of2004 Form 10-Q or any prior period.

 

The material weakness related to the timelyand accurate preparation of the interim financial statements.  The financial statements provided to noteholders on August 10, 2004 were subsequently revised primarily to increaseincome tax expense by $5.1 million, upon completion of the third quarterinterim review procedures by PricewaterhouseCoopers (PwC).  At this time, we are taking additional stepsto implement an internal control structure and procedures for financialreporting, including those contemplated by Section 404 of the Sarbanes-OxleyAct, that would allow us to produce financial statements and related disclosurewithin the time periods and in the form required under the Exchange Act,including on a quarterly basis.  In orderto comply with these requirements, we are in the process of hiring additionalaccounting and finance staff and implementing new financial systems andprocedures.

 

Other than the changes described in this Item4, there has been no change in our internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f)) identified in connection with theevaluation by our CEO and CFO during the quarter ended June 26, 2004 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.  Thecompany will continue to improve its processes and procedures as appropriate inorder to monitor and support its financial reporting and internal controlprocedures.

 

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Our Chief Executive Officer and Chief Financial Officer, based on theevaluation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d -15(e) of the Securities and Exchange Act of 1934, asamended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June26, 2004, and taking into account the matters discussed above, including theanalysis and testing we have performed, have concluded that the Company’sdisclosure controls and procedures were effective (except as described above)to ensure the timely collection, evaluation and disclosure of informationrelating to the company that is required to be disclosed under the SecuritiesExchange Act of 1934, as amended, and the rules and regulations promulgatedthereunder.

 

The effectiveness of any system of disclosure controls and proceduresis subject to various inherent limitations, including judgments used indecision making, assumptions about the likelihood of future events, thesoundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that anysystem of disclosure controls and procedures will be successful in preventingall errors or fraud, or in making all material information known in a timelymanner to the appropriate levels of management.

 

**PART II OTHER INFORMATION**

 

**Item 6. Exhibits andReports on Form 8-K**

 

(a)  **Exhibits**

 
| 3.1    |   | Certificate  of Incorporation of Mueller Group, Inc. is incorporated herein by reference  to Exhibit 3.1 of our Registration Statement on Form S-4 as filed with the  Commission on July 19, 2004 (No. 333-117473).                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2    |   | By-Laws of  Mueller Group, Inc. is incorporated herein by reference to Exhibit 3.2 of our  Registration Statement on Form S-4 as filed with the Commission on July 19,  2004 (No. 333-117473).                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1    |   | Indenture,  dated as of April 23, 2004 among Mueller Group, Inc., the Guarantors party  thereto and Law Debenture Trust Company of New York for the Second Priority  Senior Secured Floating Rate Notes due 2011 is incorporated herein by  reference to Exhibit 4.1 to Mueller Holdings (N.A.), Inc.’s Registration  Statement on Form S-1 as filed with the Commission on June 17, 2004 (No.  333-116590).         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.2    |   | Indenture,  dated as of April 23, 2004 among Mueller Group, Inc., the Guarantors party  thereto and Law Debenture Trust Company of New York for the 10% Senior  Subordinated Notes due 2012 is incorporated herein by reference to Exhibit  4.2 to Mueller Holdings (N.A.), Inc.’s Registration Statement on Form S-1 as  filed with the Commission on June 17, 2004 (No. 333-116590).                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.3    |   | Intercreditor  Agreement, dated as of April 23, 2004, among Mueller Group, Inc., Credit  Suisse First Boston and Law Debenture Trust Company of New York is  incorporated herein by reference to Exhibit 4.3 to our Registration Statement  on Form S-4 as filed with the Commission on July 19, 2004 (No. 333-117473).                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1   |   | Amended and  Restated Mueller Holdings (N.A.), Inc. Management Incentive Plan effective as  of February 10, 2003 is incorporated herein by reference to Exhibit 10.1 to  Mueller Holdings (N.A.), Inc.’s Registration Statement on Form S-1 as filed  with the Commission on June 17, 2004 (No. 333-116590).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2   |   | Mueller  Holdings (N.A.), Inc. Direct Investment Program, effective as of August 31,  2000 is incorporated herein by reference to Exhibit 10.2 to Mueller Holdings  (N.A.), Inc.’s Registration Statement on Form S-1 as filed with the  Commission on June 17, 2004 (No. 333-116590).                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.3   |   | Amended and  Restated Credit Agreement, dated as of April 23, 2004, among the Company, the  Guarantors party thereto and the lenders party thereto is incorporated herein  by reference to Exhibit 10.3 to Mueller Holdings (N.A.), Inc.’s Registration  Statement on Form S-1 as filed with the Commission on June 17, 2004 (No.  333-116590).                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.4   |   | Executive  Employment Agreement, dated August 16, 1999, between Mueller Group, Inc. and  Dale B. Smith is incorporated herein by reference to Exhibit 10.4 to Mueller  Holdings (N.A.), Inc.’s Registration Statement on Form S-1 as filed with the  Commission on June 17, 2004 (No. 333-116590).                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5   |   | Employment  Agreement, dated February 1, 2003, between Mueller Group, Inc. and George P.  Bukuras is incorporated herein by reference to Exhibit 10.5 to Mueller  Holdings (N.A.), Inc.’s Registration Statement on Form S-1 as filed with the  Commission on June 17, 2004 (No. 333-116590).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.6   |   | Mueller  Group, Inc. Key Employee Severance Plan, effective as of March 1, 2003 is  incorporated herein by reference to Exhibit 10.6 to Mueller Holdings (N.A.),  Inc.’s Registration Statement on Form S-1 as filed with the Commission on  June 17, 2004 (No. 333-116590).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7   |   | Financial  Advisory Agreement, dated July 23, 1999, between Hydrant Acquisition Corp.,  Mueller Group, Inc. and Credit Suisse First Boston LLC as successor to  Donaldson, Lufkin & Jenrette Securities Corporation is incorporated  herein by reference to Exhibit 10.7 to Mueller Holdings (N.A.), Inc.’s  Registration Statement on Form S-1 as filed with the Commission on June 17,  2004 (No. 333-116590). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7.1 |   | Assignment  of Financial Advisory Agreement, dated April 27, 2004, between Hydrant  Acquisition Corp., Credit Suisse First Boston LLC and DLJ Merchant Banking  II, Inc. is incorporated herein by reference to Exhibit 10.7.1 to Mueller  Holdings (N.A.), Inc.’s Registration Statement on Form S-1 as filed with the  Commission on June 17, 2004 (No. 333-116590).                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.8   |   | First  Amendment to Credit Agreement entered into on August 26, 2004 is incorporated  herein by reference to Exhibit 99.1 to our Form 8-K as filed with the  Commission on August 27, 2004.                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |

 

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| 32.1   |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 32.2   |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuantto the 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  GROUP, INC. |
|-------------------------------------|--------|--------|--------|----------------------|
|                                |   |   |   |                 |   |   |
| Date:  September 10, 2004 |   |   | By:    | /s/  Dale B. Smith   |   |
|                                |   |   |   |                 |   |   |
|                                |   |   |   |                 | Dale  B. Smith |   |
|                                |   |   |   |                 | President  and Chief Executive Officer |
|                                |   |   |   |                 |   |   |
| Date:  September 10, 2004 |   |   | By:    | /s/  Darrell M. Jean |   |
|                                |   |   |   |                 |   |   |
|                                |   |   |   |                 | Darrell  M. Jean |   |
|                                |   |   |   |                 | Vice  President and Chief Financial Officer |

 

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