**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

| x                                                           | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| **For the quarterly period ended December 31,  2005.** |
| o                                                           | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 333-117473**

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**MUELLER GROUP, LLC**

(Exact name of registrantas specified in its charter)

| **Delaware**(State or other jurisdiction of incorporation or  organization) | **37-1387813**(I.R.S. Employer identification No.) |
|-----------------------------------------------------------------------------|----------------------------------------------------|
| **500 West Eldorado Street**                                                |
| **Decatur,  IL 62522-1808**                                                 |
| (Address of  principal executive offices)                                   |

 

**(217) 423-4417**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act.

Large Accelerated Filer o   Accelerated Filer o   Non-accelerated Filer x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act). o Yes  x No

None of the Registrant’s voting stock was held bynon-affiliates as of February 21, 2006. As of February 21, 2006,Mueller Group, LLC had 1 unit outstanding.

 

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**PART I.   FINANCIALINFORMATION**

**ITEM 1.**   FINANCIALSTATEMENTS

**MUELLERGROUP, LLCUNAUDITED CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                      | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **(unaudited)**                     | ** ** | ** **                   | ** ** |
| ** **                                                                                                                                                      | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                                                                                                                      |       |                                |       |                         |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                      |       |                                | $          | 63.5                         |       |   |   | $ | — |   |   |
| Receivables, net of allowance for doubtful accounts  of $6.4 million and $0.9 million at December 31, 2005 and  September 30, 2005, respectively |       |                                | 267.0      |                         |       |   | 118.5 |   |   |
| Inventories                                                                                                                                                     |       |                                | 429.1      |                         |       |   | 147.2 |   |   |
| Deferred income  taxes                                                                                                                                          |       |                                | 58.8       |                         |       |   | 11.1 |   |   |
| Prepaid expenses                                                                                                                                                |       |                                | 32.1       |                         |       |   | 1.5 |   |   |
| Total current assets                                                                                                                                            |       |                                | 850.5      |                         |       |   | 278.3 |   |   |
| Property, plant  and equipment, net                                                                                                                             |       |                                | 344.8      |                         |       |   | 149.2 |   |   |
| Deferred financing  fees, net                                                                                                                                   |       |                                | 28.8       |                         |       |   | — |   |   |
| Deferred income  taxes                                                                                                                                          |       |                                | —     |                         |       |   | 9.5 |   |   |
| Due from Walter  affiliate                                                                                                                                      |       |                                | 20.0       |                         |       |   | — |   |   |
| Intangible assets,  net                                                                                                                                         |       |                                | 849.3      |                         |       |   | — |   |   |
| Goodwill                                                                                                                                                        |       |                                | 718.5      |                         |       |   | 58.4 |   |   |
| Total assets                                                                                                                                                    |       |                                | $          | 2,811.9                      |       |   |   | $ | 495.4 |   |   |
| **Liabilities**                                                                                                                                                 |       |                                |       |                         |       |   |   |   |   |
| Current portion of  long-term debt                                                                                                                              |       |                                | $          | 11.5                         |       |   |   | $ | — |   |   |
| Accounts payable                                                                                                                                                |       |                                | 105.9      |                         |       |   | 52.5 |   |   |
| Accrued expenses  and other liabilities                                                                                                                         |       |                                | 105.1      |                         |       |   | 34.7 |   |   |
| Payable to  affiliate, Sloss Industries                                                                                                                         |       |                                | —     |                         |       |   | 2.5 |   |   |
| Total current liabilities                                                                                                                                       |       |                                | 222.5      |                         |       |   | 89.7 |   |   |
| Long-term  debt                                                                                                                                                 |       |                                | 1,371.4    |                         |       |   | — |   |   |
| Payable to parent,  Walter Industries                                                                                                                           |       |                                | 2.6        |                         |       |   | 443.6 |   |   |
| Accrued pension  liability, net                                                                                                                                 |       |                                | 97.2       |                         |       |   | 53.6 |   |   |
| Accumulated  postretirement benefits obligation                                                                                                                 |       |                                | 52.8       |                         |       |   | 51.1 |   |   |
| Deferred income  taxes                                                                                                                                          |       |                                | 312.0      |                         |       |   | — |   |   |
| Other long-term  liabilities                                                                                                                                    |       |                                | 20.2       |                         |       |   | 12.6 |   |   |
| Total liabilities                                                                                                                                               |       |                                | 2,078.7    |                         |       |   | 650.6 |   |   |
| **Shareholder’s equity (deficit):**                                                                                                                        |       |                                |       |                         |       |   |   |   |   |
| Membership unit:                                                                                                                                                |       |                                |       |                         |       |   |   |   |   |
| (1 unit outstanding at  December 31, 2005 and September 30, 2005)                                                                                     |       |                                | —     |                         |       |   | — |   |   |
| Capital in excess  of par value                                                                                                                                 |       |                                | 998.8      |                         |       |   | 68.3 |   |   |
| Accumulated  deficit                                                                                                                                            |       |                                | (219.0     | )                            |       |   | (178.1 | ) |   |
| Accumulated other  comprehensive loss                                                                                                                           |       |                                | (46.6      | )                            |       |   | (45.4 | ) |   |
| Total  shareholder’s equity (deficit)                                                                                                                      |       |                                | 733.2      |                         |       |   | (155.2 | ) |   |
| Total liabilities  and shareholder’s equity (deficit)                                                                                                      |       |                                | $          | 2,811.9                      |       |   |   | $ | 495.4 |   |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

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**MUELLERGROUP, LLCUNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                      | ** ** | **Three months ended**    | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                      | ** ** | **December 31, 2005**     | ** ** | **December 31, 2004** | ** ** |
| ** **                                                                      | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                                       |       |                                | $          | 480.4 |   |   |   | $ | 130.3 |   |   |
| Cost of sales                                                                   |       |                                | 436.9      |   |   |   | 117.6 |   |   |
| Gross profit                                                                    |       |                                | 43.5       |   |   |   | 12.7 |   |   |
| Operating expenses:                                                             |       |                                |       |   |   |   |   |   |   |
| Selling, general and administrative                                             |       |                                | 57.1       |   |   |   | 13.2 |   |   |
| Related party corporate charges                                                 |       |                                | 1.8        |   |   |   | 1.9 |   |   |
| Facility rationalization, restructuring and related  costs                      |       |                                | 24.1       |   |   |   | — |   |   |
| Total operating expenses                                                        |       |                                | 83.0       |   |   |   | 15.1 |   |   |
| Loss from  operations                                                           |       |                                | (39.5      | ) |   |   | (2.4 | ) |   |
| Interest expense  arising from related party payable to Walter Industries  |       |                                | —     |   |   |   | (5.9 | ) |   |
| Interest expense,  net of interest income                                       |       |                                | (28.1      | ) |   |   | (0.1 | ) |   |
| Loss before income taxes                                                        |       |                                | (67.6      | ) |   |   | (8.4 | ) |   |
| Income tax expense  (benefit)                                                   |       |                                | (26.7      | ) |   |   | 1.1 |   |   |
| Net loss                                                                        |       |                                | $          | (40.9 | ) |   |   | $ | (9.5 | ) |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

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**MUELLERGROUP, LLCUNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (DEFICIT)FOR THE THREE MONTHS ENDED DECEMBER 31, 2005**

| ** **                                         | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income  (Loss)** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance at September 30, 2005                 |       |                                                | $          | 68.3                     |       |                              |       | $                                           | (178.1     | )         |       |   |   |   |   |   | $ | (45.4 | ) |   | $ | (155.2 | ) |
| Walter’s investment in subsidiary             |       |                                                | 943.4      |                     |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | 943.4 |   |
| Dividend to Walter                                 |       |                                                | (444.5)    |                     |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | (444.5) |   |
| Dividend to Walter for acquisition costs           |       |                                                | (12.0)     |                     |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | (12.0) |   |
| Forgiveness of U.S. Pipe payable to Walter         |       |                                                | 443.6      |                     |       |                              | —     |                                        |       |      |       |   |   |   | — |   |   | 443.6 |   |
| Comprehensive  loss                                |       |                                                |       |                     |       |                              |       |                                        |       |      |       |   |   |   |   |   |   |   |   |
| Net loss                                           |       |                                                | —     |                     |       |                              | (40.9      | )                                           |       |      | (40.9      | ) |   |   | — |   |   | (40.9 | ) |
| Unrealized loss on interest rate swaps, net of tax |       |                                                | —     |                     |       |                              | —     |                                        |       |      | (1.1       | ) |   |   | (1.1 | ) |   | (1.1 | ) |
| Foreign currency translation adjustments           |       |                                                | —     |                     |       |                              | —     |                                        |       |      | (0.1       | ) |   |   | (0.1 | ) |   | (0.1 | ) |
| Comprehensive loss                                 |       |                                                |       |                     |       |                              |       |                                        |       |      | $          | (42.1 | ) |   |   |   |   |   |   |   |
| Balance at December 31, 2005                  |       |                                                | $          | 998.8                    |       |                              |       | $                                           | (219.0     | )         |       |   |   |   |   |   | $ | (46.6 | ) |   | $ | 733.2 |   |
|                                                    |            |                                                     |            |                          |            |                                   |            |                                             |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the consolidated financial statements.

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**MUELLER GROUP, LLC UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                          | ** ** | **Three months ended**    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                          | ** ** | **December 31,  2005**         | ** ** | **December 31,  2004** | ** ** |
| ** **                                                                                          | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating activities**                                                            |       |                                |       |   |   |   |   |   |   |
| Net loss                                                                                            |       |                                | $          | (40.9 | ) |   |   | $ | (9.5 | ) |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                |       |   |   |   |   |   |   |
| Depreciation                                                                                        |       |                                | 17.1       |   |   |   | 6.5 |   |   |
| Amortization of  intangibles                                                                        |       |                                | 6.6        |   |   |   | — |   |   |
| Amortization of deferred  financing fees                                                            |       |                                | 1.1        |   |   |   | — |   |   |
| Amortization of tooling                                                                             |       |                                | 0.1        |   |   |   | — |   |   |
| Accretion resulting from  valuing acquired debt at fair value                                       |       |                                | (0.8       | ) |   |   | — |   |   |
| Gain on disposal of  property, plant and equipment                                                  |       |                                | (0.4       | ) |   |   | 0.7 |   |   |
| Impairments of property,  plant and equipment                                                       |       |                                | 19.2       |   |   |   | — |   |   |
| Provision for deferred  income taxes                                                                |       |                                | (25.7      | ) |   |   | — |   |   |
| Gain on interest rate  swaps                                                                        |       |                                | (0.4       | ) |   |   | — |   |   |
| Changes in assets and liabilities, net of the  effects of acquisitions:                             |       |                                |       |   |   |   |   |   |   |
| Receivables                                                                                         |       |                                | 28.9       |   |   |   | 16.5 |   |   |
| Inventories                                                                                         |       |                                | 91.2       |   |   |   | (4.2 | ) |   |
| Income taxes payable                                                                                |       |                                | —     |   |   |   | 10.7 |   |   |
| Prepaid expenses and  other current assets                                                          |       |                                | 1.0        |   |   |   | 0.4 |   |   |
| Pension and other  long-term liabilities                                                            |       |                                | (4.4       | ) |   |   | 2.5 |   |   |
| Accounts payable,  accrued expenses and other current liabilities                                   |       |                                | (17.7      | ) |   |   | (2.3 | ) |   |
| Other, net                                                                                          |       |                                | —     |   |   |   | 0.2 |   |   |
| Net cash provided by  operating activities                                                          |       |                                | 74.9       |   |   |   | 21.5 |   |   |
| **Cash flows from investing activities**                                                            |       |                                |       |   |   |   |   |   |   |
| Purchase of property,  plant and equipment                                                          |       |                                | (16.0      | ) |   |   | (7.9 | ) |   |
| Increase in amounts due  from Walter                                                                |       |                                | (20.0      | ) |   |   | (12.5 | ) |   |
| Net cash used in  investing activities                                                              |       |                                | (36.0      | ) |   |   | (20.4 | ) |   |
| **Cash flows from financing activities**                                                            |       |                                |       |   |   |   |   |   |   |
| Book cash overdrafts                                                                                |       |                                | 0.6        |   |   |   | (1.2 | ) |   |
| Proceeds from short-term  borrowings                                                                |       |                                | 55.9       |   |   |   | — |   |   |
| Retirement of short-term  debt                                                                      |       |                                | (55.9      | ) |   |   | — |   |   |
| Proceeds from long-term  debt                                                                       |       |                                | 1,050.0    |   |   |   | — |   |   |
| Retirement of long-term  debt, including capital lease obligations                                  |       |                                | (615.3     | ) |   |   | — |   |   |
| Payment of deferred  financing fees                                                                 |       |                                | (21.6      | ) |   |   | — |   |   |
| Dividend paid to Walter                                                                             |       |                                | (444.5     | ) |   |   | — |   |   |
| Dividend to Walter for  acquisition costs                                                           |       |                                | (12.0      | ) |   |   | — |   |   |
| Walter contribution of Predecessor  Mueller’s cash                                             |       |                                | 67.4       |   |   |   | — |   |   |
| Net cash used in  financing activities                                                              |       |                                | 24.6       |   |   |   | (1.2 | ) |   |
| Increase (decrease) in  cash and cash equivalents                                                   |       |                                | 63.5       |   |   |   | (0.1 | ) |   |
| **Cash and cash equivalents**                                                                       |       |                                |       |   |   |   |   |   |   |
| Beginning of period                                                                                 |       |                                | —     |   |   |   | 0.1 |   |   |
| End of period                                                                                       |       |                                | $          | 63.5 |   |   |   | $ | — |   |   |

 

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**MUELLER GROUP, LLC UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

Schedule ofnon-cash investing and financing activities:

On October 3,the Company’s parent, Walter Industries, purchased all of the outstandingcommon stock of Predecessor Mueller. This stock was contributed to the Companyby Walter as further described in Note 3.

| ** **                                     | ** ** | **(dollars in millions)** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| Contribution of Predecessor  Mueller by Walter |       |                                | $          | 943.4 |   |   |
| Less: Cash of Predecessor  Mueller received    |       |                                | (67.4      | ) |   |
| Total net assets  received, excluding cash     |       |                                | $          | 876.0 |   |   |

 

Subsequent to the Acquisition, the Company’s parent,Walter Industries, forgave an intercompany receivable with U.S. Pipe of $443.6 million.

The accompanying notes are an integral part of the consolidated financial statements.

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**MUELLER GROUP, LLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND DECEMBER 31,2004(UNAUDITED)**

**Note 1.**   Organization

Mueller Group, LLC (the “Company”) is a wholly-ownedsubsidiary of Mueller Water Products, Inc. (“Mueller Water”), a Delawarecorporation. Mueller Water is the surviving corporation of the merger on February 2,2006 of Mueller Water Products, LLC (Commission File Number:  333-116590) and Mueller Water ProductsCo-Issuer, Inc. with and into Mueller Holding Company, Inc., aDelaware corporation. See Note 15 for a detailed description of the merger.

On October 3, 2005, through a series oftransactions (the “Acquisition”), Walter Industries, Inc. (“Walter”),through a wholly-owned subsidiary, acquired all outstanding shares of capitalstock of our parent company, Mueller Water Products, Inc. (“PredecessorMueller Water”), which immediately was converted into Mueller Water Products,LLC, a Delaware limited liability company and contributed United States Pipeand Foundry Company, LLC, (“U.S. Pipe”), owned by Walter since 1969, to theacquired company’s wholly-owned subsidiary, Mueller Group, LLC (“PredecessorMueller Group”). In accordance with generally accepted accounting principles,for accounting purposes U.S. Pipe is treated as the acquirer of PredecessorMueller Group. Accordingly, effective October 3, 2005, U.S. Pipe’s basisof accounting is used for the Company and all financial data for periods priorto October 3, 2005 of the Company included in this report on Form 10-Q,is that of U.S. Pipe. The results of operations of Predecessor Mueller Groupare included in the Consolidated Statements of Operations beginning October 3,2005.

The Company was originally organized as United StatesPipe and Foundry Company, Inc. (“Inc.”) and was a wholly-owned subsidiaryof Walter Industries, Inc., a diversified New York Stock Exchange tradedcompany (NYSE: WLT). On September 23, 2005, Inc. was dissolved andUnited States Pipe and Foundry Company, LLC was organized in the state ofAlabama, and the operations of Inc. were conducted under the form of a limitedliability company.

In December 2005, U.S. Pipe changed its fiscalyear-end to September 30, which coincides with the fiscal year end ofPredecessor Mueller Group. Beginning with the quarter ended December 31,2005, the Company has three operating segments which are named after itsleading brands in each segment: Mueller, U.S. Pipe, and Anvil.

The consolidated financialstatements are prepared in conformity with accounting principles generallyaccepted in the United States of America, which requires management to makecertain estimates and assumptions that affect the reported amounts of assets,liabilities, sales and expenses for the reporting periods. Actual results forfuture periods could differ from those estimates used by management. In theopinion of management, all normal and recurring adjustments that are considerednecessary for a fair financial statement presentation have been made.

Certain amounts in the prior period’s consolidatedfinancial statements have been reclassified to conform to the current-periodpresentation.  On the ConsolidatedBalance Sheet as of September 30, 2005, prepaid pension cost of $19.3 millionhas been netted against accrued pension liability of $72.9 million and ispresented as accrued pension liability, net of $53.6 million.

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**Note2.**   Summary of Significant AccountingPolicies

*Revenue Recognition*—The Company recognizes revenue based on therecognition criteria set forth in the Securities and Exchange Commission’sStaff Accounting Bulletin 104 “Revenue Recognition in Financial Statements”,which is when delivery of product has occurred or services have been renderedand there is persuasive evidence of a sales arrangement, selling prices arefixed or determinable, and collectibility from the customer is reasonablyassured. Revenue from the sale of products via rail or truck is recognized whentitle passes upon delivery to the customer. Revenue earned for shipments viaocean vessel is recognized under international shipping standards as defined byIncoterms 2000 when title and risk of loss transfer to the customer. Sales arerecorded net of estimated cash discounts and rebates.

*Shipping and Handling*—Costs to ship products to customers are included incost of sales in the Consolidated Statements of Operations. Amounts billed tocustomers, if any, to cover shipping and handling costs are included in netsales.

*Customer Rebates*—Customerrebates are applied against net sales at the time the sales are recorded basedon estimates with respect to the deductions to be taken.

*Cash and Cash Equivalents*—The Company considers all highly liquid investmentswith original maturities of ninety days or less when purchased to be cashequivalents. Outstanding checks are netted against cash when there is asufficient balance of cash available in the Company’s accounts at the bank tocover the outstanding amount and the right of offset exists. Where there is noright of offset against cash balances, outstanding checks are classified alongwith accounts payable. At December 31, 2005 and September 30, 2005checks issued but not yet presented to the banks for payment (i.e. book cashoverdrafts) were $0.6 million and zero, respectively, and were recorded inaccounts payable.

*Receivables*—Receivables relate primarily to amounts due fromcustomers located in North America. To reduce credit risk, creditinvestigations are performed prior to accepting an order and, when necessary,letters of credit are required to ensure payment.

The estimated allowance for doubtful accountsreceivable is based, in large part, upon judgments and estimates of expectedlosses and specific identification of problem trade accounts. Significantlyweaker than anticipated industry or economic conditions could impact customers’ability to pay such that actual losses may be greater than the amounts providedfor in these allowances. The periodic evaluation of the adequacy of theallowance for doubtful accounts is based on an analysis of prior collectionexperience, specific customer creditworthiness and current economic trendswithin the industries served. In circumstances where a specific customer’sinability to meet its financial obligation is known to the Company (e.g.,bankruptcy filings or substantial downgrading of credit ratings), the Companyrecords a specific allowance to reduce the receivable to the amount the Companyreasonably believes will be collected.

*Inventories*—Inventoriesare recorded at the lower of cost (first-in, first-out) or market value.Additionally, the Company evaluates its inventory in terms of excess andobsolete exposures. This evaluation includes such factors as anticipated usage,inventory turnover, inventory levels and ultimate product sales value.Inventory cost includes an overhead component that can be affected by levels ofproduction and actual costs incurred. Management periodically evaluates theeffects of production levels and actual costs incurred on the costs capitalizedas part of inventory.

*Property, plant and equipment*—Property,plant and equipment is recorded at cost, less accumulated depreciation andamortization. Depreciation is recorded on the straight-line method over theestimated useful lives of the assets. Leasehold improvements are amortized onthe straight-line method over the lesser of the useful life of the improvementor the remaining lease term. Estimated useful lives used in computingdepreciation expense are 2 to 20 years for machinery and equipment and 3to 50 years for land 

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improvements andbuildings. Gains and losses upon disposition are reflected in the ConsolidatedStatements of Operations in the period of disposition.

Direct internal and external costs to implementcomputer systems and software are capitalized as incurred. Capitalized costsare amortized over the estimated useful life of the system or software,beginning when site installations or module development is complete and readyfor its intended use, which generally is 3 to 5 years.

The Company accounts for its asset retirementobligations related to plant and landfill closures in accordance with Statementof Financial Accounting Standards No. 143 (“SFAS 143”). UnderSFAS 143, liabilities are recognized at fair value for an asset retirementobligation in the period in which it is incurred and the carrying amount of therelated long-lived asset is correspondingly increased. Over time, the liabilityis accreted to its future value. The corresponding asset capitalized atinception is depreciated over the useful life of the asset.

*Toolin*g—Prepaid expenses include maintenance and toolinginventory costs. Perishable tools and maintenance items are expensed when putinto service. More durable items are amortized over their estimated usefullives, ranging from 4 to 10 years.

*Environmental Expenditures*—The Company capitalizes environmental expendituresthat increase the life or efficiency of property or that reduce or preventenvironmental contamination. The Company accrues for environmental expensesresulting from existing conditions that relate to past operations when thecosts are probable and reasonably estimable. The Company is indemnified by Tycofor all environmental liabilities associated with Predecessor Mueller as itexisted as of August 16, 1999, whether known or not.

*Accounting for theImpairment of Long-Lived Assets*—Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the book value of the asset may not be recoverable. Goodwill andintangible assets that have an indefinite life are not amortized, but insteadare tested for impairment annually (or more frequently if events orcircumstances indicate possible impairments) using both a discounted cash flowmethod and a market comparable method.

*Workers’ Compensation*—The Company is self-insured for workers’compensation benefits for work related injuries. Liabilities, including thoserelated to claims incurred but not reported, are recorded principally usingannual valuations based on discounted future expected payments and usinghistorical data of the Company or insurance industry data when historical datais limited. The Company is indemnified by Tyco for all liabilities associatedwith Predecessor Mueller that occurred prior to August 16, 1999. Workers’compensation liabilities were as follows (in millions):

| ** **                                                           | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Undiscounted  aggregated estimated claims to be paid                 |       |                        | $          | 27.0                         |       |   |   | $ | 14.4 |   |   |
| Workers’ compensation  liability recorded on a discounted basis |       |                        | $          | 22.8                         |       |   |   | $ | 11.9 |   |   |

 

The Company applies a discount rate at a risk-freeinterest rate, generally a U.S. Treasury bill rate, for each policy year. Therate used is one with a duration that corresponds to the weighted averageexpected payout period for each policy year. Once a discount rate is applied toa policy year, it remains the discount rate for that policy year until allclaims are paid. The use of this method decreases the volatility of theliability related solely to changes in the discount rate. The weighted averagerate used for discounting the liability at December 31, 2005 and September 30,2005 was 4.6%. At December 31, 2005, a one-percentage-point increase inthe discount rate on the discounted claims liability would decrease theliability 

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by $0.1 million,while a one-percentage-point decrease in the discount rate would increase theliability by $0.1 million.

*Warranty Costs*—The Company accrues for U.S. Pipe segment warrantyexpenses that include customer costs of repair and/or replacement, includinglabor, materials, equipment, freight and reasonable overhead costs, determinedon a case-by-case basis, whenever the Company’s products and/or services failto comply with published industry standards or mutually agreed upon customerrequirements.

The Company accrues for the estimated cost of productwarranties of the Mueller and Anvil segments at the time of sale based onhistorical experience. Adjustments to obligations for warranties are made aschanges in the obligations become reasonably estimable.

Activityin accrued warranty, included in the caption accrued expenses in theaccompanying Consolidated Balance Sheets, was as follows (in millions):

| ** **                               | ** ** | **Three months ended  December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Accrued balance  at beginning of period  |       | $                                                   | 4.7        |   | $ | 1.8 |   |
| Accrued warranty of  Predecessor Mueller |       | 1.6                                                 |       | — |   |
| Warranty expense                         |       | 0.4                                                 |       | 0.8 |   |
| Settlement of  warranty claims           |       | (1.7                                                | )          | (0.9 | ) |
| Balance at end of period                 |       | $                                                   | 5.0        |   | $ | 1.7 |   |

 

*Deferred Financing Fees*—Costs of debt financing included in othernon-current assets are amortized over the life of the related loan agreements,which range from five 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.”

*Income Taxes*—Deferred tax liabilities and assets are recognizedfor the expected future tax consequences of events that have been included inthe financial statements or tax returns. Deferred tax liabilities and assetsare determined based on the differences between the financial statements andthe tax basis of assets and liabilities, using tax rates in effect for theyears in which the differences are expected to reverse. A valuation allowanceis provided to offset any net deferred tax assets if, based upon the availableevidence, it is more likely than not that some or all of the deferred taxassets will not be realized.

*Research and Development*—Researchand development expenditures are expensed when incurred.

*Advertising*—Advertisingcosts are expensed when incurred.

*Translation of Foreign Currency*—Assetsand liabilities of the Company’s businesses operating outside of the UnitedStates of America which maintains accounts in a functional currency other thanU.S. dollars are translated into U.S. dollars using year-end exchange rates.Revenues and expenses are translated at the average exchange rates effectiveduring the year. Foreign currency translation gains and losses are included asa separate component of stockholders’ equity. Gains and losses resulting fromforeign currency transactions, the amounts of which are not material, areincluded in cost of sales.

*Derivative Instruments and HedgingActivities*—The Company currently uses interest rate swaps asrequired in the 2005 Mueller Credit Agreement to reduce the risk of interestrate volatility. The amount to be paid or received from interest rate swaps ischarged or credited to interest expense over the lives of the interest rateswap agreements. Changes in the fair value of derivatives are recorded eachperiod in earnings or Accumulated Other Comprehensive Income (Loss), dependingon whether or not a derivative is designated and effective as part of a hedgetransaction and meets the applicable requirements associated with Statement ofFinancial Accounting Standards No. 133 (“SFAS 133”) (see Note 6).

9

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Additionally, the Company utilizes forward contractsto mitigate its exposure to changes in foreign currency exchange rates fromthird party and intercompany forecasted transactions. The primary currency towhich the Company is exposed and to which it hedges the exposure is theCanadian 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 the Company’s Consolidated Statements of Operations.

*Related Party Transactions—*TheCompany purchases foundry coke from an affiliate, Sloss Industries, Inc.for an amount that approximates the market value of comparable transactions.Costs included in cost of sales related to purchases from Sloss Industries, Inc.were $5.7 million and $3.6 million for the three months ended December 31,2005 and 2004, respectively.

Other services that Sloss Industries, Inc.provides to the Company include the delivery of electrical power to one of theCompany’s facilities, rail car switching and the leasing of a distributionfacility. The total of these other services included in the Company’s operatingexpenses were $0.4 million and $0.4 million for the three monthsended December 31, 2005 and 2004, respectively.

*Related Party Allocations***—**Certain costs incurred by Walter such as insurance, executive salaries,professional service fees, human resources, transportation, healthcare andother centralized business functions are allocated to its subsidiaries. Certaincosts that were considered directly related to the U.S. Pipe segment werecharged to the Company and included in selling, general and administrativeexpenses. These costs were approximately $0.5 million and $0.3 millionfor the three months ended December 31, 2005 and 2004, respectively. Costsincurred by Walter that cannot be directly attributed to its subsidiaries areallocated to them based on estimated annual revenues. Such costs were allocatedto the Company and are recorded in the caption, related party corporatecharges, in the accompanying Consolidated Statements of Operations and wereapproximately $1.8 million and $1.9 million for the three monthsended December 31, 2005 and 2004, respectively.

While the Companyconsiders the allocation of such costs to be reasonable, in the event theCompany was not affiliated with Walter, these costs may increase or decrease.

**Note3.**   Acquisition of Predecessor Mueller byWalter Industries

On October 3, 2005, pursuant to the agreementdated June 17, 2005, Walter acquired all of the outstanding common stockof Predecessor Mueller Water for $943.4 million and assumed $1.05 billion ofindebtedness. Predecessor Mueller Water was converted into a limited liabilitycompany on October 3, 2005 and was merged with and into our parent,Mueller Water, on February 2, 2006. Transaction costs included in theacquisition price were $14.8 million. In conjunction with the acquisition, U.S.Pipe was contributed in a series of transactions to the Company, a wholly-ownedsubsidiary of Mueller Water, on October 3, 2005.

Walter’sacquisition of Predecessor Mueller Water has been accounted for as a businesscombination with U.S. Pipe considered the acquirer for accounting purposes. Assetsacquired and liabilities assumed were recorded at their fair values as of October 3,2005. The total purchase price of $943.4 million is comprised of (dollars inmillions):

| Acquisition of  the outstanding common stock of Predecessor Mueller Water |   | $    | 928.6  |   |
|---------------------------------------------------------------------------|--------|------|--------|--------|
| Acquisition-related  transaction costs                                    |   | 14.8 |   |
| Total purchase  price                                                     |   | $    | 943.4  |   |

 

Acquisition-related transaction costs includeinvestment banking, legal and accounting fees and other external costs directlyrelated to the Acquisition.

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Underbusiness combination accounting, the purchase price was allocated toPredecessor Mueller Water’s net tangible and identifiable intangible assetsbased on their fair values as of October 3, 2005. The excess of thepurchase price over the net tangible and identifiable intangible assets isrecorded as goodwill. Based on current fair values, the purchase price wasallocated as follows (dollars in millions):

| Receivables, net                 |   | $        | 177.4  |   |
|----------------------------------|--------|----------|--------|--------|
| Inventory                        |   | 373.2    |   |
| Property, plant  and equipment   |   | 215.5    |   |
| Identifiable  intangible assets  |   | 855.9    |   |
| Goodwill                         |   | 650.3    |   |
| Net other assets                 |   | 444.5    |   |
| Net deferred tax  liabilities    |   | (333.7   | )      |
| Debt                             |   | (1,411.1 | )      |
| Total purchase  price allocation |   | $        | 972.0  |   |

 

The purchase price allocation is preliminary and issubject to future adjustments to goodwill for the execution of certainrestructuring plans identified by Walter prior to the acquisition dateprimarily related to Predecessor Mueller Group facility rationalizationactions. These facility rationalization actions are expected to be completed byfiscal 2008.

Receivables are short-term trade receivables and theirnet book value approximates current fair value.

Finished goods inventory is valued at estimatedselling price less cost of disposal and reasonable profit allowance for the sellingeffort. Work in process inventory is valued at estimated selling price offinished goods less costs to complete, cost of disposal and a reasonable profitallowance for the completing and selling effort. Raw materials are valued atbook value, which approximates current replacement cost. The carrying value ofinventories include $70.2 million in excess of Predecessor Mueller’s carryingvalue, of which $58.4 million was charged to cost of sales during the threemonths ended December 31, 2005.

Property,plant and equipment are valued at the current replacement cost as follows (inmillions):

| ** **                           | ** ** | ** ** | ** ** | **Depreciation  Period** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------|------------|
| Land                                 |       | $          | 14.1       |                     | Indefinite |   |
| Buildings                            |       | 51.8       |       | 5 to  14 years           |       |
| Machinery and  equipment             |       | 136.4      |       | 3 to  5 years            |       |
| Other                                |       | 13.2       |       | 3  years                 |       |
| Total property,  plant and equipment |       | $          | 215.5      |                     |       |   |

 

Identifiable intangible assets acquired consist oftrade name, trademark, technology and customer relationships and were valued attheir current fair value. Trade name and trademark relate to Mueller®, Anvil®, HerseyTM, Henry PrattTM and James JonesTM. Technologyrepresents processes related to the design and development of products. Customerrelationships represent the recurring nature of sales to current distributors,municipalities, contractors and other end customers regardless of theircontractual nature.

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Identifiableintangible assets were as follows (dollars in millions):

| ** **                            | ** ** | ** ** | ** ** | **Amortization  Period** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------|------------|
| Trade name and  trademark             |       | $          | 403.0      |                     |       | Indefinite |   |   |
| Technology                            |       | 56.3       |       |                     | 10  years  |   |   |
| Customer  relationships               |       | 396.6      |       |                     | 19 years   |   |   |
| Total  identifiable intangible assets |       | $          | 855.9      |                     |       |   |   |   |

 

Goodwill represents the excess of the purchase priceover the fair value of tangible and identifiable intangible assets acquired. Goodwillis not amortized, but rather is tested for impairment at least annually. In theevent that we determine the book value of goodwill has become impaired, we willincur an accounting charge for the amount of impairment during the fiscalquarter in which such determination is made. The Company’s goodwill is not taxdeductible.

Net other assets include cash, prepaid expenses,deferred financing fees, accounts payable, accrued expenses and accrued pensionliability and were valued at their approximate current fair value. After thepurchase price allocation Predecessor Mueller Group paid a $444.5 milliondividend to Walter.

Net deferred tax liabilities include the tax effectsof fair value adjustments related to identifiable intangible assets and nettangible assets.

Debt is valued at fair market value as of October 3,2005.

The following table of unaudited pro forma results ofoperations of Predecessor Mueller Group and U.S. Pipe for the three monthsended December 31, 2004 is presented as if the Acquisition and borrowingsunder the 2005 Mueller Credit Agreement had taken place on October 1, 2004and were carried forward through December 31, 2004.

Theunaudited pro forma amounts are not intended to represent or be indicative ofthe consolidated results of operations that would have been reported had theAcquisition and borrowings under the 2005 Mueller Credit Agreement beencompleted as of the dates presented, and should not be taken as representativeof the future consolidated results of operations of the Company.

| ** ** | ** ** | **Three months  ended December 31,  2004** | ** ** |
|------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **(dollars in millions)  (unaudited)**          | ** ** |
| Net sales  |       |                                                      | $          | 386.4 |   |   |
| Net loss   |       |                                                      | $          | (8.4 | ) |   |

 

The pro forma amounts arebased on the historical results of operations and are adjusted for amortizationof definite-lived intangibles of $6.6 million, depreciation of property, plantand equipment of ($0.2) million, interest expense of $7.4 million andamortization of financing fees related to the 2005 Mueller Credit Agreement of$2.4 million.

**Note4.**   Facility Rationalization,Restructuring and Related Costs

On October 26,2005, Walter announced plans to close U.S. Pipe’s Chattanooga, Tennessee plantand transfer the valve and hydrant production of that plant to Mueller’sChattanooga, Tennessee and Albertville, Alabama plants. The eventual closure ofthe U.S. Pipe Chattanooga plant is expected to occur in calendar 2006,resulting in the termination of approximately 340 employees. Total estimatedrestructuring and impairment charges related to this closure are $29.3 million,of which $24.1 million was 

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expensed during the three months ended December 31,2005. Restructuring costs recognized in the Consolidated Statement ofOperations associated with this plant closure were as follows:

| ** **                                         | ** ** | ** **                                     | ** ** | **Restructuring & impairment  charges expensed**             | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Total Estimated  Restructuring  Costs** | ** ** | **For the three months ended  December 31, 2005** | ** ** |
| ** **                                         | ** ** | **(dollars in millions)**            | ** ** |
| Termination  benefits                              |       |                                           | $          | 3.6                                                                             |       |   |   | $ | 3.0 |   |   |
| Other  employee-related costs                      |       |                                           | 3.3        |                                                                            |       |   | — |   |   |
| Other associated  costs                            |       |                                           | 3.4        |                                                                            |       |   | 2.1 |   |   |
| Impairment of  property, plant and equipment  |       |                                           | 19.0       |                                                                            |       |   | 19.0 |   |   |
| Total                                              |       |                                           | $          | 29.3                                                                            |       |   |   | $ | 24.1 |   |   |

 

Termination benefits relating to the U.S. PipeChattanooga plant closure of $3.0 million consist primarily of severancerelated to staff reductions of hourly and salaried personnel. The Companyexpects to recognize an additional $0.6 million for severance expense duringthe remainder of fiscal 2006. In addition, the Company expects to recognizeother employee-related costs of approximately $3.3 million related to pensionand other postretirement benefit obligations during the first quarter of Walter’spension benefit measurement period, which begins on January 1, 2006.

Other associated costs of $2.1 million principallyinclude an increase to the estimated asset retirement obligation. The Companyexpects to recognize an additional $1.3 million of environmental-related costs,as those costs are incurred during fiscal 2006.

Fixed asset impairment charges of $19.0 million wererecorded during the three months ended December 31, 2005. These assetshave a net book value of $3.9 million at December 31, 2005.

Activityin accrued restructuring was as follows:

| ** **                          | ** ** | **For the three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **December 31,**                              | ** ** |
| ** **                          | ** ** | **2005**                                           | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                | ** ** |
| Beginning balance                   |       |                                               | $          | — |   |   |
| Restructuring  expenses accrued     |       |                                               | 5.1        |   |   |
| Restructuring  payments and charges |       |                                               | (1.3       | ) |   |
| Ending balance                      |       |                                               | $          | 3.8 |   |   |

In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant products was transferred to the Mueller segment. Throughthis transfer, it was determined that certain U.S. Pipe inventory would notultimately be sold. As a result, inventory obsolescence charges relating toU.S. Pipe valve and hydrant inventory of $10.7 million were recorded to cost ofsales during the three months ended December 31, 2005.

In addition, current period actual production outputat U.S. Pipe Chattanooga was significantly lower than normal capacity,resulting in additional facility expenses of $5.2 million charged to cost ofsales during the three months ended December 31, 2005.

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**Note 5.**   BorrowingArrangements

*Long-Term Debt**—Long-term***debtconsists of the following obligations:

| ** **                        | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(dollars in millions)** | ** ** |
| 2005 Mueller  Credit Agreement    |       |                                | $          | 1,047.4                      |       |   |   | $ | — |   |   |
| 10% senior  subordinated notes(1) |       |                                | 333.2      |                         |       |   | — |   |   |
| Capital lease  obligations        |       |                                | 2.3        |                         |       |   | — |   |   |
|                              |       |                                | 1,382.9    |                         |       |   | — |   |   |
| Less current  portion             |       |                                | (11.5      | )                            |       |   | — |   |   |
|                              |       |                                | $          | 1,371.41                     |       |   |   | $ | — |   |   |

----

*1)**              **The value of the 10% seniorsubordinated notes  were recorded at fairvalue at October 3, 2005 which was an increase of $18.9 million overPredecessor Mueller. This amount is amortized over the life of the notes as areduction to interest expense. As of December 31, 2005, the unamortizedfair value adjustment was $18.2 million.*

*2005Mueller Credit Agreement:**  *OnOctober 3, 2005, the Company entered into a credit agreement (the “2005Mueller Credit Agreement”) consisting of a $145 million senior securedrevolving credit facility maturing in October 2010 (the “2005 MuellerRevolving Credit Facility”) and a $1,050 million senior secured term loanmaturing in October 2012 (the “2005 Mueller Term Loan”). The 2005 MuellerCredit Agreement is a secured obligation of the Company and substantially allof its wholly-owned domestic subsidiaries, including U.S. Pipe. The 2005Mueller Term Loan requires quarterly principal payments of $2.6 million throughOctober 3, 2012, at which point in time the remaining principaloutstanding is due. The commitment fee on the unused portion of the 2005Mueller Revolving Credit Facility is 0.50% and the interest rate is a floatinginterest rate of 2.5% over LIBOR. The 2005 Mueller Term Loan carries a floatinginterest rate of 2.25% over LIBOR.

Proceeds from the 2005 Mueller Credit Agreement were$1,053.4 million, net of $21.6 million of underwriting fees and expenses whichwill be amortized over the life of the loans. The proceeds were used to financethe acquisition of our parent, Predecessor Mueller Water, by Walter and torefinance existing indebtedness.

The 2005 Mueller Credit Agreement contains customaryevents of default and covenants, including covenants that restrict the abilityof the Company and certain of its subsidiaries to incur certain additionalindebtedness, pay dividends, create or permit liens on assets, engage inmergers or consolidations, and certain restrictive financial covenants.

On January 24, 2006, the Company entered into anAmendment No. 1 (the “First Amendment”) to the 2005 Credit Agreement. TheFirst Amendment removes the requirement that the Company and its subsidiarieschange their fiscal year end to December 31 and, in the event of aninitial public offering of Mueller Water, provides the ability for the Companyto pay up to $8.5 million in cash dividends to Mueller Water for furtherdistribution to Mueller Water’s shareholders. Mueller Water is a wholly-ownedsubsidiary of Walter.

The debt instruments described below were liabilitiesof Predecessor Mueller Group prior to the Acquisition on October 3, 2005and continue as liabilities of the Company subsequent to the Acquisition.

*10%Senior Subordinated Notes:*   On April 23, 2004, the Company issued $315million principal face amount of 10% senior subordinated notes due 2012. Thesenior subordinated notes are guaranteed by each of the Company’sexisting domestic restricted subsidiaries. The subordinated notes containcustomary 

14

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covenants and events ofdefault, including covenants that limit the Company’s ability to incur debt,pay dividends and make investments.

On October 4, 2005, the Company notified theholders of the subordinated notes that the Acquisition was a change in controland that, as a result, the holders had a right to cause the Company torepurchase their senior subordinated notes on or before 5:00 p.m. easternstandard time, on November 4, 2005 at a price of 101% of the principalface amount of such notes. The change of control offer expired at 5:00 p.m.eastern standard time, on November 6, 2005, with no subordinated notesbeing validly tendered and not withdrawn and, accordingly, no subordinatednotes were purchased pursuant to the change of control offer.

*Capital Leases—**The*Company leases automobiles under capital leasearrangements that expire over the next four years.

**Interest Rate Swaps—**These hedges are described in Note 6 and comply withcovenants contained in the 2005 Mueller Credit Agreement.

**Distributions to MuellerWater—****Mueller Water** has no material assets other than its ownership ofthe Company’s capital stock and accordingly depends upon distributions from theCompany to satisfy its cash needs. Mueller Water’s principal cash needs will bedebt service on its senior discount notes due 2014. These senior discount notesdo not require cash interest payments until 2009 and contain restrictivecovenants that will, among other things, limit the ability of Mueller Water andits subsidiaries (including the Company) to incur debt, pay dividends and makeinvestments. Neither the Company nor any of its subsidiaries guarantee thesenotes. Mueller Water, however, is a holding company and its ability to payinterest on the notes will be dependent upon the receipt of dividends from itssubsidiaries. The Company is Mueller Water’s only direct subsidiary. However,the terms of the Company’s borrowing arrangements significantly restrict itsability to pay dividends to Mueller Water.

**Note6.**   Derivative Financial Instruments

*Interest Rate Swaps—*On October 27, 2005, the Company entered intosix interest rate hedge transactions with a cumulative notional amount of $350million. The swap terms are between one and seven years with five separatecounter-parties. The objective of the hedges is to protect the Company againstrising LIBOR interest rates that would have a negative effect on the Company’scash flows due to changes in interest payments on its 2005 Mueller Term Loan.The structure of the hedges are a one-year 4.617% LIBOR swap of $25 million, athree-year 4.740% LIBOR swap of $50 million, a four-year 4.800% LIBOR swap of$50 million, a five-year 4.814% LIBOR swap of $100 million, a six-year4.915% LIBOR swap of $50 million, and a seven year 4.960% LIBOR swap of $75million. These swap agreements call for the Company to make fixed rate paymentsover the term at each swap’s stated fixed rate and to receive payments based onthree month LIBOR from the counter-parties. These swaps will be settledquarterly over their lives and will be accounted for as cash flow hedges. Assuch, changes in the fair value of these swaps that take place through the dateof maturity will be recorded in Accumulated Other Comprehensive Income (Loss).These hedges comply with covenants contained in the 2005 Mueller CreditAgreement.

The Company also has two interest rate hedgeagreements that existed as of October 3, 2005: a two-year 3.928% LIBORswap that matures in May 2007 and a two-year 4.249% LIBOR swap thatmatures in April 2007. The changes in fair value of these two swaps wererecorded as interest expense in the Statements of Operations until achievinghedge effectiveness in October 2005 and November 2005, respectively,at which times such changes in fair value were recorded in Accumulated OtherComprehensive Income (Loss).

The Company recorded anunrealized loss from its swap contracts, net of tax, of $1.1 million at December 31,2005 in Accumulated Other Comprehensive Income (Loss).

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*Forward ForeignCurrency Exchange Contracts*

The Company entered into forward exchange contractsprimarily to hedge currency fluctuations from transactions (primarilyanticipated inventory purchases) denominated in foreign currencies, therebylimiting the risk that would otherwise result from changes in foreign currencyexchange rates. The majority of the Company’s exposure to currency movements isin Canada. All of the foreign currency exchange contracts have maturity datesin 2006. Gains and losses on the forward foreign currency exchange contractsare expected to be offset by losses / gains in recognized net underlyingforeign currency exchange transactions. As of December 31, 2005, theCompany had entered into one forward contract at a notional amount of less than$0.1 million, selling U.S. dollars and purchasing euros at an exchange rate of$1.3635.

Subsequent to December 31,2005, the Company entered into forward foreign currency exchange contracts at anotional amount of $9.1 million primarily to protect anticipated inventorypurchases by its Canadian operations. With these hedges, the Company purchasesU.S. dollars and sells Canadian dollars at an average exchange rate of $0.867.

*Natural Gas Swap*

On January 12, 2006,the Company entered into a swap contract to hedge anticipated purchases ofnatural gas from February 2006 through March 2006 totaling 0.4million mmbtu, or approximately 80% of expected natural gas consumption, at aprice of $9.41 per mmbtu. This swap contract effectively converts a portion of forecastedpurchases at market prices to a fixed price basis. Any change in the fair valueof this swap contract will be recorded in Accumulated Other ComprehensiveIncome (Loss).

**Note7.**   Interest Expense Arising from RelatedParty Payable to Walter Industries

Interest expenseassociated with the outstanding debt payable to Walter was allocated to theCompany up to the date of the Acquisition based upon the outstanding balance ofthe intercompany note. An intercompany note to Walter of $443.6 millionwas forgiven and contributed to capital. Intercompany interest expense was zeroand $5.9 million for the three months ended December 31, 2005 and 2004,respectively.

**Note8.**   Pension and Other PostretirementBenefits

Thecomponents of net periodic benefit cost for pension and postretirement benefitsfor the three months ended December 31, 2005 and December 31, 2004are as follows:

| ** **                                | ** ** | **Pension Benefits**                                             | ** ** | **Other Benefits**                                          | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                | ** ** | **For the three months  ended December 31,** | ** ** | **For the three months  ended December 31,** | ** ** |
| ** **                                | ** ** | **2005**                                                              | ** ** | **2004**                                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(dollars in millions)**                                   | ** ** |
| Components of net  periodic benefit cost: |       |                                                                  |       |                                                             |       |   |   |   |   |
| Service cost                              |       | $                                                                     | 2.0        |                                                             | $          | 1.1 |   | $ | 0.2 |   | $ | 0.1 |   |
| Interest cost                             |       | 4.7                                                                   |       | 3.2                                                              |       | 0.3 |   | 0.4 |   |
| Expected return on plan assets            |       | (4.9                                                                  | )          | (3.1                                                             | )          | — |   | — |   |
| Amortization of prior service cost        |       | 0.1                                                                   |       | 0.1                                                              |       | (0.6 | ) | (0.7 | ) |
| Amortization of net loss (gain)           |       | 1.9                                                                   |       | 0.8                                                              |       | (0.2 | ) | (0.2 | ) |
| Curtailment settlement loss               |       | —                                                                |       | —                                                           |       | — |   | 0.3 |   |
| Net periodic  benefit cost                |       | $                                                                     | 3.8        |                                                             | $          | 2.1 |   | $ | (0.3 | ) | $ | (0.1 | ) |

 

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For the three months endedDecember 31, 2005, the Company had no contributions to its pension plans.The Company presently anticipates contributing approximately $0.5 millionto fund its pension plans in fiscal 2006 and may make further discretionarypayments.

**Note9.**   Goodwill and Identifiable Intangibles

Goodwill and intangible assets that have an indefinitelife are not amortized, but instead are tested for impairment annually (or morefrequently if events or circumstances indicate possible impairments) using botha discounted cash flow method and a market comparable method. Definite-livedintangible assets are amortized over their respective estimated useful livesand reviewed for impairment if events or circumstances indicate possibleimpairment. The Company uses an estimate of future undiscounted net cash flowsof the related asset or asset grouping over the remaining life in measuringwhether the assets are recoverable.

Identifiableintangible assets consist of the following:

| ** **                              | ** ** | **December 31, 2005**     | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **Cost**                            | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                              | ** ** | **(dollars in millions)** | ** ** |
| **Definite-lived intangible  assets**   | ** ** | ** **                          | ** ** |   | ** ** | ** ** |   |
| Technology                              |       | $                                   | 56.3       |   |   | $ | 1.4 | ** ** |   |
| Customer  relationships                 |       | 396.6                               |       |   | 5.2 | ** ** |   |
|                                    |       | 452.9                               |       |   | 6.6 | ** ** |   |
| **Indefinite lived intangible  assets** | ** ** | ** **                          | ** ** |   | ** ** | ** ** |   |
| Trade name and  trademarks              |       | 403.0                               |       |   | — | ** ** |   |
|                                    |       | $                                   | 855.9      |   |   | $ | 6.6 | ** ** |   |

 

Goodwill was $718.5million at December 31, 2005, compared to $58.4 million at September 30,2005. The increase of $660.1 million represents goodwill identified during theallocation of the purchase price of the Acquisition. Goodwill is expected toincrease over the next twelve months as the Company implements facilityrationalizations that were formally identified prior to the Acquisition. Certainfacility rationalization costs, primarily related to severance, will berecorded as a liability at the time identified as permitted under accountingprinciples generally accepted in the United States of America, with acorresponding increase in goodwill. All closure costs related to the shut-downof the U.S. Pipe Chattanooga facility (as described in Note 4) have beencharged to operating expenses and not reflected as a component of goodwill.

**Note10.**   Supplementary Balance SheetInformation

Selectedsupplementary balance sheet information is presented below:

| ** **                                  | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                             | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Purchased  materials and manufactured parts |       |                                | $          | 74.9                         | ** ** |   |   | $ | 30.6 | ** ** |   |
| Work in process                             |       |                                | 111.3      | ** **                   |       |   | 15.5 | ** ** |   |
| Finished goods                              |       |                                | 242.9      | ** **                   |       |   | 101.1 | ** ** |   |
|                                        |       |                                | $          | 429.1                        | ** ** |   |   | $ | 147.2 | ** ** |   |

 

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| ** **                        | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(dollars in millions)** | ** ** |
| **Property, plant and equipment** | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Land                              |       |                                | $          | 25.5                         |       |   |   | $ | 11.3 |   |   |
| Buildings                         |       |                                | 86.0       |                         |       |   | 33.8 |   |   |
| Machinery and  equipment          |       |                                | 540.0      |                         |       |   | 401.7 |   |   |
| Other                             |       |                                | 20.5       |                         |       |   | 16.2 |   |   |
| Accumulated  depreciation         |       |                                | (327.2     | )                            |       |   | (313.8 | ) |   |
|                              |       |                                | $          | 344.8                        |       |   |   | $ | 149.2 |   |   |

 

| ** **                                              | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **(dollars in millions)** | ** ** |
| **Accrued expenses and other  liabilities**             | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Vacations and  holidays                                 |       |                                | $          | 14.3                         |       |   |   | $ | 4.5 | ** ** |   |
| Workers’  compensation and comprehensive liability |       |                                | 6.3        |                         |       |   | 2.9 | ** ** |   |
| Accrued payroll  and bonus                              |       |                                | 10.9       |                         |       |   | 3.9 | ** ** |   |
| Accrued sales  commissions                              |       |                                | 3.3        |                         |       |   | 1.0 | ** ** |   |
| Accrued other  taxes                                    |       |                                | 6.1        |                         |       |   | 2.1 | ** ** |   |
| Accrued warranty  claims                                |       |                                | 5.0        |                         |       |   | 4.7 | ** ** |   |
| Accrued  environmental claims                           |       |                                | 4.0        |                         |       |   | 4.0 | ** ** |   |
| Accrued income  taxes                                   |       |                                | (1.1       | )                            |       |   | 5.5 | ** ** |   |
| Accrued cash  discounts and rebates                     |       |                                | 24.2       |                         |       |   | 4.8 | ** ** |   |
| Accrued interest                                        |       |                                | 12.2       |                         |       |   | — | ** ** |   |
| Other                                                   |       |                                | 19.9       |                         |       |   | 1.3 | ** ** |   |
|                                                    |       |                                | $          | 105.1                        |       |   |   | $ | 34.7 | ** ** |   |

 

**Note11.**   Supplementary Income StatementInformation

Thecomponents of interest expense, net of interest income are presented below:

| ** **                                      | ** ** | **Three months ended**    | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **December 31,  2005**         | ** ** | **December 31,  2004** | ** ** |
| ** **                                      | ** ** | **(dollars in millions)** | ** ** |
| **Interest  expense, net of interest income:**  | ** ** |                                | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Contractual interest expense                    |       |                                | $          | 25.2 |   |   |   | $ | 0.1 | ** ** |   |
| Deferred financing fee amortization             |       |                                | 1.1        |   |   |   | — | ** ** |   |
| Write off of bridge loan commitment fees        |       |                                | 2.5        |   |   |   | — | ** ** |   |
| Interest rate swap gains                        |       |                                | (0.4       | ) |   |   | — | ** ** |   |
| Interest expense                                |       |                                | 28.4       |   |   |   | 0.1 | ** ** |   |
| Interest income                                 |       |                                | (0.3       | ) |   |   | — | ** ** |   |
| Total interest expense,  net of interest income |       |                                | $          | 28.1 |   |   |   | $ | 0.1 | ** ** |   |

 

The bridge loan commitmentfees represent fees paid to lenders to make available to the Company a bridgeloan facility to repurchase the 10% senior subordinated notes from the holdersof such notes under the terms of the change of control provisions of theindentures, as described in Note 5. No notes were tendered under the offer andthe bridge loan was not used. The related commitment fees were charged tointerest expense during the three months ended December 31, 2005.

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**Note 12**   Income Taxes

The Company files a consolidated federal income taxreturn with Walter. The tax provision has been determined under FAS 109 “Accountingfor Income Taxes” taking into account the intercompany tax sharing agreement.

The components of pretax earnings are as follows(dollars in millions):

| ** **    | ** ** | **For the  quarter ended  December 31,** | ** ** |
|---------------|------------|---------------------------------------------------------|------------|
| ** **    | ** ** | **2005**                                                | ** ** | **2004** | ** ** |
| United States |       | $                                                       | (70.4      | ) | $ | (8.5 | ) |
| Foreign       |       | $                                                       | 2.8        |   | — |   |
|               |            |                                                         |            |  |  |  |  |

 

Incometax expense (benefit) applicable to continuing operations consists of thefollowing components (dollars in millions):

| ** **      | ** ** | **12/31/05** | ** ** | **12/31/04** | ** ** |
|-----------------|------------|--------------|------------|--------------|------------|
| ** **      | ** ** | **Current**  | ** ** | **Deferred** | ** ** | **Total** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
| Federal         |       |         | $          | (3.9         | )          |   |   | $ | (20.0 | ) |   | $ | (24.2 | ) |   | $ | (3.6 | ) |   |   | $ | (0.1 | ) |   | $ | (3.7) |   |
| State and local |       |         | 2.1        |         |       |   | (5.6 | ) |   | (3.5 | ) |   | (0.6 | ) |   |   | 5.4 |   |   | 4.8 |   |
| Foreign         |       |         | 1.1        |         |       |   | (0.1 | ) |   | 1.0 |   |   | — |   |   |   | — |   |   | — |   |
| Total           |       |         | $          | (1.0         | )          |   |   | $ | (25.7 | ) |   | $ | (26.7 | ) |   | $ | (4.2 | ) |   |   | $ | 5.3 |   |   | $ | 1.1 |   |

 

The company estimates its annual effective tax rate inaccordance with APB Opinion 28 “Interim Financial Reporting”. Theestimated effective tax rate differs from the statutory rate is due to nondeductible interest and on state income taxes.

The reduction in valuation allowance from$9.0 million to zero during the three months ended December 31, 2005consists of $7.5 million of state income tax benefits at U.S. Pipe forwhich the Company believes is more likely than not to be realized and$1.5 million of assets that expired during the current period due to thepassage of time or as a result of the Acquisition. These valuation allowancereductions were not recorded as a component of income tax expense.

The Company has gross deferred tax assets of $113.7 millionand gross deferred tax liabilities of $366.9 million as of December 31,2005.

The Company has Federal and State net operating losscarryforwards of approximately $8.1 million and $77.0 millionrespectively that expire in 2024. If certain changes in ownership occur,utilization of the net carryforwards may be limited.

Undistributed earnings of the company’s foreignsubsidiaries amounted to approximately $80.2 million at December 31,2005. Deferred taxes have not been provided on the foreign earnings because theCompany intends to reinvest those earnings indefinitely.

A controversy exists with regard to federal incometaxes allegedly owned by the Walter consolidated group, which includes the Company,for fiscal years 1980 through 1994. It is estimated that the amount of taxpresently claimed by the IRS is approximately $34.0 million for issuescurrently in dispute in bankruptcy court for matters unrelated to the Company.This amount is subject to interest and penalties. Under tax law, the Company isjointly and severally liable for any final tax determination. However, Walterand its affiliates believe that their tax filing positions have substantialmerit and intend to defend vigorously any claims asserted. Walter believes thatit has sufficient accruals to address any claims, including interest andpenalties and furthermore these matters do not relate to the Company. There areno changes or 

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accruals into the Company’saccounts related to these issues since these matters do not relate to theoperations of the Company.

**Note 13.**   Segment Information

Prior to the Acquisition on October 3, 2005, theCompany had one segment—U.S. Pipe. As of December 31, 2005, the Company’soperations consisted of three operating segments: Mueller, U.S. Pipe and Anvil.These segments are organized based on products and are consistent with how theoperating segments are managed, how resources are allocated, and howinformation is used by the chief operating decision maker. The Mueller segmentis a manufacturer of valves, fire hydrants and other related products utilizedin the distribution of water and gas and in water and wastewater treatmentfacilities. The U.S. Pipe segment is a manufacturer of ductile iron pressurepipe, fittings and other cast iron products used primarily for major water andwastewater transmission and collection systems. The Anvil segment is amanufacturer of cast iron and malleable iron pipe fittings, ductile ironcouplings and fittings, pipe hangers and other related products for the fireprotection, plumbing, heating, mechanical, construction, retail hardware andother related industries. The accounting policies of the segments are the sameas those described in the summary of significant accounting policies.

Intersegment sales and transfers are made atestablished intersegment selling prices generally intended to cover costs. Ourdetermination of segment earnings does not reflect allocations of certaincorporate expenses not directly attributable to segment operations andintersegment eliminations, which we designate as Corporate in the segmentpresentation, and is before interest expense, net of interest income, andincome taxes. Corporate expenses include those costs incurred by Mueller’scorporate function and do not include any allocated costs from Walter. Corporatecosts include those costs related to financial and administrative matters,treasury, risk management, human resources, legal counsel, and tax functions.Corporate assets include cash, deferred tax assets and deferred financing fees.These assets have not been pushed down to our segments and are maintained asCorporate items. Therefore, segment earnings are not reflective of results on astand-alone basis. See also Note 2 regarding Related Party Allocationsfrom Walter which are reflected in the Company’s SG&A expenses.

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Segmentassets consist primarily of accounts receivable, inventories, property, plantand equipment, goodwill, and identifiable intangibles. Summarized financialinformation for our segments follows:

| ** **                              | ** ** | **For the three months ended:** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **December 31,  2005**                         | ** ** | **December 31,  2004** | ** ** |
| ** **                              | ** ** | **(dollars in millions)**                           | ** ** |
| Net sales:                              |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | 176.7 |   |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | 171.1      |   |   |   | 130.3 |   |   |
| Anvil                                   |       |                                                | 132.6      |   |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | 480.4 |   |   |   | $ | 130.3 |   |   |
| Loss from  operations:                  |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | (3.8 | ) |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | (27.8      | ) |   |   | (2.4 | ) |   |
| Anvil                                   |       |                                                | (1.5       | ) |   |   | — |   |   |
| Corporate expense(1)                    |       |                                                | (6.4       | ) |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | (39.5 | ) |   |   | $ | (2.4 | ) |   |
| Depreciation and  amortization expense: |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | 12.0 |   |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | 6.3        |   |   |   | 6.5 |   |   |
| Anvil                                   |       |                                                | 5.4        |   |   |   | — |   |   |
| Corporate                               |       |                                                | 0.1        |   |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | 23.8 |   |   |   | $ | 6.5 |   |   |
| Capital  expenditures:                  |       |                                                |       |   |   |   |   |   |   |
| Mueller                                 |       |                                                | $          | 6.0 |   |   |   | $ | — |   |   |
| U.S. Pipe                               |       |                                                | 7.4        |   |   |   | 7.9 |   |   |
| Anvil                                   |       |                                                | 2.5        |   |   |   | — |   |   |
| Corporate                               |       |                                                | 0.1        |   |   |   | — |   |   |
| Consolidated                            |       |                                                | $          | 16.0 |   |   |   | $ | 7.9 |   |   |

----

(1)          Includescertain expenses not allocated to segments.

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| ** **                 | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|----------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **(dollars in millions)** | ** ** |
| Total assets:              |       |                                |       |                         |       |   |   |   |   |
| Mueller                    |       |                                | $          | 1,741.3                      |       |   |   | $ | — |   |   |
| U.S. Pipe                  |       |                                | 431.8      |                         |       |   | 495.4 |   |   |
| Anvil                      |       |                                | 472.8      |                         |       |   | — |   |   |
| Corporate                  |       |                                | 166.0      |                         |       |   | — |   |   |
| Consolidated               |       |                                | $2,811.9   |                         |       |   | $ | 495.4 |   |   |
| Goodwill:                  |       |                                |       |                         |       |   |   |   |   |
| Mueller                    |       |                                | $          | 587.5                        |       |   |   | $ | — |   |   |
| U.S. Pipe                  |       |                                | 58.4       |                         |       |   | 58.4 |   |   |
| Anvil                      |       |                                | 72.6       |                         |       |   | — |   |   |
| Consolidated               |       |                                | $          | 718.5                        |       |   |   | $ | 58.4 |   |   |
| Identifiable  intangibles: |       |                                |       |                         |       |   |   |   |   |
| Mueller                    |       |                                | $          | 759.6                        |       |   |   | $ | — |   |   |
| U.S. Pipe                  |       |                                | —     |                         |       |   | — |   |   |
| Anvil                      |       |                                | 89.7       |                         |       |   | — |   |   |
| Consolidated               |       |                                | $          | 849.3                        |       |   |   | $ | — |   |   |

 

Geographical areainformation with respect to net sales, as determined by the location of thecustomer invoiced, and property, plant and equipment—net, as determined by thephysical location of the assets, were as follows:

| ** **      | ** ** | **For the three months ended:** | ** ** |
|-----------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **December 31,  2005**                         | ** ** | **December 31,  2004** | ** ** |
| ** **      | ** ** | **(dollars in millions)**                 | ** ** |
| Net sales:      |       |                                                |       |   |   |   |   |   |   |
| United States   |       |                                                | $          | 430.1 |   |   |   | $ | 126.8 |   |   |
| Canada          |       |                                                | 48.1       |   |   |   | — |   |   |
| Other Countries |       |                                                | 2.2        |   |   |   | 3.5 |   |   |
|            |       |                                                | $          | 480.4 |   |   |   | $ | 130.3 |   |   |

 

| ** **                           | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **(dollars in millions)** | ** ** |
| Property, plant  and equipment, net: |       |                                |       |                         |       |   |   |   |   |
| United States                        |       |                                | $          | 325.7                        |       |   |   | $ | 149.2 |   |   |
| Canada                               |       |                                | 17.6       |                         |       |   | — |   |   |
| Other Countries                      |       |                                | 1.5        |                         |       |   | — |   |   |
|                                 |       |                                | $          | 344.8                        |       |   |   | $ | 149.2 |   |   |

 

**Note14.**   Commitments and Contingencies

**Income TaxLitigation**

A controversy exists withregard to federal income taxes allegedly owed by the Walter consolidated group,which includes the U.S. Pipe segment, for fiscal years 1980 through 1994. It isestimated that the amount of tax presently claimed by the IRS is approximately$34.0 million for issues currently in dispute in bankruptcy court formatters unrelated to the Company. This amount is subject to interest andpenalties. In addition, the Internal Revenue Service has issued a Notice ofProposed Deficiency assessing additional 

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tax of$80.4 million for the fiscal years ended May 31, 2000, December 31, 2000, andDecember 31, 2001. The proposed adjustments relate primarily to Walter’s methodof recognizing revenue on the sale of homes and related interest income on theinstalment notes receivable. Under tax law, the Company is jointly andseverally liable for any final tax determination. However, Walter and itsaffiliates believe that their tax filing positions have substantial merit andintend to defend vigorously any claims asserted. Walter believes that it has anaccrual sufficient to cover the estimated probable loss, including interest andpenalties. There are no charges or accruals in the Company’s accounts relatedto these issues since these matters do not relate to the operations of theCompany.

**EnvironmentalMatters**

The Company issubject to a wide variety of laws and regulations concerning the protection ofthe environment, both with respect to the construction and operation of many ofits plants and with respect to remediating environmental conditions that mayexist at its own and other properties. The Company believes that it is insubstantial compliance with federal, state and local environmental laws and regulations.The Company accrues for environmental expenses resulting from existingconditions that relate to past operations when the costs are probable andreasonably estimable. Expenses charged to the statement of operations forcompliance of ongoing operations and for remediation of environmentalconditions arising from past operations in the three months endedDecember 31, 2005 and 2004 were approximately $0.4 million and $0.2million, respectively. Because environmental laws and regulations continue to evolveand because conditions giving rise to obligations and liabilities underenvironmental laws are in some circumstances not readily identifiable, it isdifficult to forecast the amount of such future environmental expenditures orthe effects of changing standards on future business operations or results.Consequently, the Company can give no assurance that such expenditures will notbe material in the future. The Company capitalizes environmental expendituresthat increase the life or efficiency of property or that reduces or preventsenvironmental contamination. Capital expenditures for environmentalrequirements are anticipated to average approximately $2.0 million per year inthe next five years. Capital expenditures for the three months ended December 31,2005 and 2004 for environmental requirements were approximately $0.6 millionand $1.2 million, respectively.

The Company hasimplemented an Administrative Consent Order (“ACO”) for its Burlington, NewJersey plant that was required under the New Jersey Environmental CleanupResponsibility Act (now known as the Industrial Site Recovery Act). The ACOrequired soil and ground water cleanup, and the Company has completed, and hasreceived final approval on, the soil cleanup required by the ACO. U. S. Pipe iscontinuing to address ground water issues at this site. Further remediationcould be required. These remediation costs are expected to be minimal.Long-term ground water monitoring will be required to verify naturalattenuation. It is not known how long ground water monitoring will be required.Management does not believe monitoring or further cleanup costs, if any, willhave a material adverse effect on the financial condition or results ofoperations of the Company.

The FederalComprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)generally imposes liability, which may be joint and several and is withoutregard to fault or the legality of waste generation or disposal, on certainclasses of persons, including owners and operators of sites at which hazardoussubstances are released into the environment (or pose a threat of suchrelease), persons that disposed or arranged for the disposal of hazardoussubstances at such sites, and persons who owned or operated such sites at the timeof such disposal. CERCLA authorizes the EPA, the States and, in somecircumstances, private entities to take actions in response to public health orenvironmental threats and to seek to recover the costs they incur from the sameclasses of persons. Certain governmental authorities can also seek recovery fordamages to natural resources. Currently, U.S. Pipe has been identified as apotentially responsible party (“PRP”) by the EPA under CERCLA with respect tocleanup of hazardous substances. U.S. Pipe is among many PRP’s at the site anda significant number of the PRP’s 

23

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are substantial companies. With respect to the site located inAnniston, Alabama, the PRP’s have negotiated an administrative consent orderwith the EPA. Based on these negotiations, management estimates the Company’sshare of liability for cleanup, after allocation among several PRP’s, will beapproximately $4.0 million, which was accrued in 2004. Civil litigation inrespect of the site is also ongoing, including a putative class action lawsuitalleging property damage and personal injury. Management does not believe thatU.S. Pipe’s share of any additional liability will have a material adverseeffect on the financial condition of the Company, but could be material toresults of operations in future reporting periods.

The Company’ssegment entered into a Consent Order with Georgia Department of NaturalResources regarding alleged hazardous waste violations at Anvil’s formerfoundry facility in Statesboro, Georgia. Pursuant to the Consent Order, Anvilagreed to pay a settlement of $50,000 and perform a supplemental environmentalproject. Anvil has also agreed to perform various investigatory and remedialactions at the foundry and its landfill. The total costs are estimated to be between$1.2 million and $1.4 million. The Company maintains an adequate reserve tocover these estimated costs.

Over the next twoyears, the Company could potentially incur between $8.5 million and $12.5 million of capital costs at its ironfoundries to comply with the United States Environmental Protection Agency’sNational Emissions Standards for Hazardous Air Pollutants which were issued April 22,2004. The Company is in the process of analyzing the impact of this standardand the costs associated with compliance.

Although noassurances can be given that the Company will not be required in the future tomake material expenditures relating to these or other sites, management doesnot believe at this time that the cleanup costs, if any, associated with theseor other sites will have a material adverse effect on the financial conditionor results of operations of the Company, but such cleanup costs could bematerial to results of operations in a reporting period.

In 2004, theCompany entered into a settlement and release agreement with a former insurerwhereby the former insurer paid $1.9 million, net of legal fees, to the Companyfor historical insurance claims, previously expensed as incurred by the Company.Such claims had not previously been submitted to the insurance company forreimbursement. The Company released the insurer of both past and future claims,and recorded a $1.9 million reduction to selling, general andadministrative expenses in 2004.

In 2005, theCompany entered into a settlement and release agreement with a former insurerwhereby the former insurer agreed to pay $5.1 million, net of legal fees, to the Company for historical insuranceclaims previously expensed as incurred by the Company. Such claims had notpreviously been submitted to the insurance company for reimbursement. TheCompany released the insurer of both past and future claims. During 2005, theCompany received $2.8 million in cash and the remainder isexpected to be received in the second quarter of fiscal 2006. The Companyrecorded a $5.1 million reduction to selling, general andadministrative expenses in 2005.

Under the terms of the agreement whereby Tyco International soldthe Company in August 1999 to our prior owners (the “August 1999 TycoTransaction”), Tyco agreed to indemnify Predecessor Mueller Water and itsaffiliates for all “Excluded Liabilities”. Excluded Liabilities include, amongother things, substantially all environmental liabilities relating to the timeprior to the August 1999 Tyco Transaction. The indemnity survives indefinitely,is not subject to any deductibles or caps, and continues with respect to ourcurrent operations, other than those operations acquired since the August 1999Tyco Transaction, including the operations of our U.S. Pipe segment. If Tycoever becomes financially unable to, or otherwise fails to comply with the termsof the indemnity, we may be responsible for the Tyco-indemnified obligations.In addition, Tyco’s indemnity does not cover environmental liabilities to theextent caused by us or Predecessor Mueller or the operation of the PredecessorMueller business after the August 1999 Tyco Transaction, nor does it coverenvironmental liabilities arising with respect to businesses or sites 

24

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acquired after the August 1999 TycoTransaction, which would include the U.S. Pipe business and facilities.

**MiscellaneousLitigation**

In 2003, theCompany increased its accruals for outstanding litigation by approximately $6.5 million, principally related to the settlement of a class actionemployment matter. The settlement was finalized in May 2004 for an amountapproximating the accrual.

In the purchaseagreement relating to the August 1999 sale by Tyco of the PredecessorMueller Group business to our prior owners, Tyco agreed to indemnify PredecessorMueller and its affiliates for all “Excluded Liabilities.” Excluded Liabilitiesinclude, among other things, substantially all liabilities relating to the timeprior to the August 1999 Tyco sale. The indemnity survives indefinitelyand is not subject to any deductibles or caps. However, we may be responsiblefor these liabilities in the event that Tyco (or any successor entity) everbecomes financially unable or fails to comply with, the terms of the indemnity.In addition, Tyco’s indemnity does not cover environmental liabilities to theextent caused by us or Predecessor Mueller or the operation of the PredecessorMueller business after the August 1999 Tyco sale, nor does it coverenvironmental liabilities arising with respect to businesses or sites acquiredafter the August 1999 Tyco sale, which would include the U.S. Pipebusiness and facilities.

Our subsidiary,James Jones Company, and its former parent company are defendants in a falseclaims 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. Our subsidiary, Mueller Co., which had also been named asa defendant, brought a summary judgment motion and was dismissed from thislitigation in January 2004. On September 15, 2004, the trial courtruled against the intervention of approximately 30 municipalities that hadfailed to intervene within the time deadlines previously specified by theCourt. The trial court also ruled that the majority of municipalities that hadpurchased James Jones products from contractors or distributors, were not in privitywith the James Jones Company and were not entitled to punitive damages.Following the Court’s ruling, the water districts and municipalities filed anew action against the James Jones Company, Mueller Co. and Watts (formerparent company of James Jones Company), alleging fraud and intentionalmisrepresentation. This lawsuit is based on the same underlying facts as thefalse claims lawsuit. Any liability associated with these lawsuits is coveredby the Tyco indemnity, and the defense is being paid for and conducted by Tyco.

Some of oursubsidiaries have been named as defendants in a small number of asbestos-relatedlawsuits. We do not believe these lawsuits, either individually or in theaggregate, are material to our financial position or results of operations.

The Company is a party to a number of other lawsuits arising inthe ordinary course of business. The Company provides for costs relating tothese matters when a loss is probable and the amount is reasonably estimable. Theeffect of the outcome of these matters on the Company’s future results ofoperations cannot be predicted with certainty as any such effect depends onfuture results of operations and the amount and timing of the resolution ofsuch matters. While the results of litigation cannot be predicted withcertainty, the Company believes that the final outcome of such other litigationwill not have a materially adverse effect on the Company’s financialstatements.

**Note 15.**   Subsequent Events

In January 2006,the Company’s Mueller segment completed two acquisitions. On January 4,2006, the Company acquired Hunt Industries, Inc. (“Hunt”) for $6.8 millionin cash. Hunt is a manufacturer of meter pits and meter yokes, based in Murfreesboro,Tennessee, which are sold by our Mueller segment. On 

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January 27, 2006, theCompany acquired the operating assets of CCNE, L.L.C., a Connecticut-basedmanufacturer of check valves for sale to the water and wastewater treatmentmarkets, for $8.8 million in cash. TheCCNE assets will be operated by our Milliken Valve Company and Henry PrattCompany subsidiaries.

On January 26, 2006, the Company announced plansto close its Henry Pratt valve manufacturing facility in Dixon, Illinois by theend of 2006. The process of transferring the Dixon plant’s operations to otherHenry Pratt facilities has begun.

On January 31, 2006, Mueller Holding Company, Inc.,a Delaware corporation (“Holdco”), Mueller Water Products, LLC, a Delaware limitedliability company (“Mueller LLC”), and Mueller Water Products Co-Issuer, Inc.,a Delaware corporation (“Co-Issuer”), entered into an Agreement and Plan ofMerger (the “Merger Agreement”). On February 2, 2006, pursuant to theterms of the Merger Agreement, Mueller LLC and Co-Issuer merged (the “Merger”)with and into Holdco, which was the surviving corporation and which changed itsname, upon merger, to Mueller Water Products, Inc. In the Merger, eachlimited liability company interest of Mueller LLC and each share of commonstock of Co-Issuer outstanding immediately prior to the Merger was cancelledand retired and ceased to exist, and each share of common stock of Holdcoremained unchanged and continued to remain outstanding after the Merger.

On February 3, 2006,Mueller Water filed with the Securities and Exchange Commission a registrationstatement on Form S-1 (Registration No. 333-131536)relating to a proposed initial public offering of Mueller Water’s Series Acommon stock.

**Note16.**   New Accounting Pronouncements

In November 2004, the Financial AccountingStandards Board issued SFAS No. 151, “Inventory Costs,” which clarifiesthe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material. This Statement requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. The Company adopted SFAS No. 151on October 1, 2005, the beginning of its 2006 fiscal year. The impact ofthe adoption of SFAS No. 151 on the Company’s financial statements mayhave a material impact on our operating income in the event actual productionoutput is significantly higher or lower than normal capacity. In the eventactual production capacity is significantly different than normal capacity, theCompany may be required to recognize certain amounts of facility expense,freight, handling costs or wasted materials as a current period expense**.**

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”), which is an interpretation of FASB No. 143, “Accountingfor Asset Retirement Obligations” (“SFAS 143”). This interpretationclarifies terminology within SFAS 143 and requires companies to recognizea liability for the fair value of a conditional asset retirement obligationwhen incurred if the liability’s fair value can be reasonably estimated. FIN 47is effective for fiscal years beginning after December 15, 2005. Thisstandard is not expected to have a material impact on the Company’s financialcondition or results of operations.

In June 2005, theFASB issued FASB No. 154, “Accounting Changes and Error Corrections”,which changes the requirements for accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of a voluntary change in accounting principleunless it is impracticable. SFAS 154 also requires that a change in methodof depreciation, amortization or depletion for long-lived, nonfinancial assetsbe accounted for as a change in accounting estimate that is affected by achange in accounting principle. SFAS 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005. Theadoption of SFAS 154 is not expected to have a material impact on theCompany’s financial condition or results of operations.

26

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**Note17.**   Consolidating Guarantor andNon-Guarantor Financial Information

The following information is included as a result ofthe guarantee by certain of the Company’s wholly owned U.S. subsidiaries (“GuarantorCompanies”) of the senior subordinated notes issued by Predecessor MuellerGroup prior to the Acquisition on October 3, 2005 that have continued tobe liabilities of the Company subsequent to the Acquisition. None of theCompany’s other subsidiaries guarantee the debt. Each of the guarantees isjoint and several and full and unconditional. “Mueller Group, LLC” (“Issuer”)includes the consolidated financial results of Mueller Group, LLC with allof its wholly-owned subsidiaries accounted for under the equity method.

Prior to the Acquisition on October 3, 2005, U.S.Pipe was not a Guarantor Company of the senior subordinated notes issued byPredecessor Mueller Group. See Note 18 for further discussion of PredecessorMueller Group. The Consolidating Statements of Operations and Cash Flows forthe three-month period ended December 31, 2005 and the ConsolidatingBalance Sheet as of December 31, 2005 reflect the results of the Company,including U.S. Pipe.

27

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**ConsolidatingStatement of OperationsFor Mueller Group, LLCFor the Three Months Ended December 31, 2005**

| ** **                                                 | ** ** | **Issuer**                | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                  |       | $                         | —     |                        |       | $                            | 425.7      |                           |       |             | $          | 54.7 |   |   |   | $ | — |   |   |   | $ | 480.4 |   |   |
| Cost of sales                                              |       | —                    |       |                        | 392.6      |                         |       |                           | 44.3       |             |       |   | — |   |   |   | 436.9 |   |   |
| Gross profit                                               |       | —                    |       |                        | 33.1       |                         |       |                           | 10.4       |             |       |   | — |   |   |   | 43.5 |   |   |
| Selling, general  and administrative                       |       | —                    |       |                        | 49.2       |                         |       |                           | 7.9        |             |       |   | — |   |   |   | 57.1 |   |   |
| Related party  corporate charges                           |       | —                    |       |                        | 1.8        |                         |       |                           | —     |             |       |   | — |   |   |   | 1.8 |   |   |
| Facility  rationalization, restructuring and related costs |       | —                    |       |                        | 24.1       |                         |       |                           | —     |             |       |   | — |   |   |   | 24.1 |   |   |
| Income (loss)  from operations                             |       | —                    |       |                        | (42.0      | )                            |       |                           | 2.5        |             |       |   | — |   |   |   | (39.5 | ) |   |
| Interest expense,  net of interest income                  |       | (28.3                     | )          |                        | —     |                         |       |                           | 0.2        |             |       |   | — |   |   |   | (28.1 | ) |   |
| Income (loss)  before income tax expense (benefit)         |       | (28.3                     | )          |                        | (42.0      | )                            |       |                           | 2.7        |             |       |   | — |   |   |   | (67.6 | ) |   |
| Income tax  expense (benefit)                              |       | (11.1                     | )          |                        | (16.6      | )                            |       |                           | 1.0        |             |       |   | — |   |   |   | (26.7 | ) |   |
| Equity income  from subsidiaries                           |       | (23.7                     | )          |                        | 1.7        |                         |       |                           | —     |             |       |   | 22.0 |   |   |   | — |   |   |
| Net income                                                 |       | $                         | (40.9      | )                           |       | $                            | (23.7      | )                              |       |             | $          | 1.7 |   |   |   | $ | 22.0 |   |   |   | $ | (40.9 | ) |   |

 

28

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**ConsolidatingBalance SheetFor Mueller Group, LLCDecember 31, 2005**

| ** **                                                 | ** ** | **Issuer**                | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                 |       |                      |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                 |       | $                         | 24.6       |                        |       | $                            | 10.8       |                            |       |             | $          | 28.1 |   |   |   | $ | — |   |   |   | $ | 63.5 |   |   |
| Receivables, net                                           |       | —                    |       |                        | 239.9      |                         |       |                            | 27.1       |             |       |   | — |   |   |   | 267.0 |   |   |
| Inventories                                                |       | —                    |       |                        | 375.0      |                         |       |                            | 54.1       |             |       |   | — |   |   |   | 429.1 |   |   |
| Deferred income  taxes                                     |       | —                    |       |                        | 58.8       |                         |       |                            | —     |             |       |   | — |   |   |   | 58.8 |   |   |
| Prepaid expenses                                           |       | —                    |       |                        | 29.9       |                         |       |                            | 2.2        |             |       |   | — |   |   |   | 32.1 |   |   |
| Total current  assets                                      |       | 24.6                      |       |                        | 714.4      |                         |       |                            | 111.5      |             |       |   | — |   |   |   | 850.5 |   |   |
| Property, plant  and equipment,  net                       |       | 2.8                       |       |                        | 329.0      |                         |       |                            | 13.0       |             |       |   | — |   |   |   | 344.8 |   |   |
| Deferred  financing fees, net                              |       | 28.8                      |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 28.8 |   |   |
| Due from Walter affiliates                                 |       | —                    |       |                        | 20.0       |                         |       |                            | —     |             |       |   | — |   |   |   | 20.0 |   |   |
| Identifiable  intangibles, net                             |       | —                    |       |                        | 849.3      |                         |       |                            | —     |             |       |   | — |   |   |   | 849.3 |   |   |
| Goodwill                                                   |       | —                    |       |                        | 718.5      |                         |       |                            | —     |             |       |   | — |   |   |   | 718.5 |   |   |
| Investment in  subsidiaries                                |       | 2,556.2                   |       |                        | 42.7       |                         |       |                            | —     |             |       |   | (2,598.9 | ) |   |   | — |   |   |
| Total assets                                               |       | $                         | 2,612.4    |                        |       | $                            | 2,673.9    |                            |       |             | $          | 124.5 |   |   |   | $ | (2,598.9 | ) |   |   | $ | 2,811.9 |   |   |
| **Liabilities**                                            |       |                      |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                           |       | $                         | 1.5        |                        |       | $                            | 93.9       |                            |       |             | $          | 10.5 |   |   |   | $ | — |   |   |   | $ | 105.9 |   |   |
| Current portion  of long-term debt                         |       | 10.5                      |       |                        | 1.0        |                         |       |                            | —     |             |       |   | — |   |   |   | 11.5 |   |   |
| Accrued expenses                                           |       | 12.2                      |       |                        | 88.2       |                         |       |                            | 4.7        |             |       |   | — |   |   |   | 105.1 |   |   |
| Total current  liabilities                                 |       | 24.2                      |       |                        | 183.1      |                         |       |                            | 15.2       |             |       |   | — |   |   |   | 222.5 |   |   |
| Intercompany  accounts                                     |       | 484.9                     |       |                        | (550.0     | )                            |       |                            | 65.1       |             |       |   | — |   |   |   | — |   |   |
| Long-term  debt                                            |       | 1,370.1                   |       |                        | 1.3        |                         |       |                            | —     |             |       |   | — |   |   |   | 1,371.4 |   |   |
| Payable to  parent, Walter Industries                 |       | —                    |       |                        | 2.6        |                         |       |                            | —     |             |       |   | — |   |   |   | 2.6 |   |   |
| Accrued pension  liability                                 |       | —                    |       |                        | 97.9       |                         |       |                            | (0.7       | )                |       |   | — |   |   |   | 97.2 |   |   |
| Accumulated  postretirement benefits obligation            |       | —                    |       |                        | 52.8       |                         |       |                            | —     |             |       |   | — |   |   |   | 52.8 |   |   |
| Deferred income  taxes                                     |       | —                    |       |                        | 309.8      |                         |       |                            | —     |             |       |   | — |   |   |   | 312.0 |   |   |
| Other long-term  liabilities                               |       | —                    |       |                        | 20.2       |                         |       |                            | 2.2        |             |       |   | — |   |   |   | 20.2 |   |   |
| Total liabilities                                          |       | 1,879.2                   |       |                        | 117.7      |                         |       |                            | 81.8       |             |       |   | — |   |   |   | 2,078.7 |   |   |
| **Shareholder’s  equity (deficit)**                   |       |                      |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Total  shareholder’s equity (deficit)                 |       | 733.2                     |       |                        | 2,556.2    |                         |       |                            | 42.7       |             |       |   | (2,598.9 | ) |   |   | 733.2 |   |   |
| Total liabilities and  shareholder’s equity (deficit) |       | $                         | 2,612.4    |                        |       | $                            | 2,673.9    |                            |       |             | $          | 124.5 |   |   |   | $ | (2,598.9 | ) |   |   | $ | 2,811.9 |   |   |

 

29

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**ConsolidatingStatement of Cash FlowsFor Mueller Group, LLCFor the Three Months Ended December 31, 2005**

| ** **                                                         | ** ** | **Issuer**                 | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **(dollars  in millions)** | ** ** |
| Net cash provided by (used  in) operating activities               |       | $                          | (4.9       | )                           |       | $                            | 144.0      |                            |       |             | $          | (64.2 | ) |   |   | — |   |   |   | $ | 74.9 |   |   |
| **Cash flows from investing activities**                           |       |                       |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                               |       | —                     |       |                        | (14.8      | )                            |       |                            | (1.2       | )                |       |   | — |   |   |   | (16.0 | ) |   |
| Increase in amounts due  from Walter                               |       | —                     |       |                        | (20.0      | )                            |       |                            | —     |             |       |   | — |   |   |   | (20.0 | ) |   |
| Acquisition of businesses                                          |       |                       |       |                        |       |                         |       |                            | —     |             |       |   | — |   |   |   | 0.0 |   |   |
| Increase (decrease)  in equity investment                          |       |                       |       |                        |       |                         |       |                            | —     |             |       |   |   |   |   |   | — |   |   |
| Net cash provided by  (used in) investing activities               |       |                       |       |                        | (34.8      | )                            |       |                            | (1.2)      |             |       |   |   |   |   |   | (36.0 | ) |   |
| **Cash flows from financing activities**                           |       |                       |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book cash overdrafts                                               |       | 0.6                        |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 0.6 |   |   |
| Intercompany change                                                |       | (6.9                       | )          |                        | (86.6      | )                            |       |                            | 93.5       |             |       |   |   |   |   |   | — |   |   |
| Proceeds from short-term  borrowings                               |       | 55.9                       |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 55.9 |   |   |
| Retirement of short-term  debt                                     |       | (55.9                      | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (55.9 | ) |   |
| Proceeds from long-term  debt                                      |       | 1,050.0                    |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 1,050.0 |   |   |
| Retirement of long-term  debt, including capital lease obligations |       | (615.5                     | )          |                        | 0.2        |                         |       |                            | —     |             |       |   | — |   |   |   | (615.3 | ) |   |
| Payment of  deferred financing fees                                |       | (21.6                      | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (21.6 | ) |   |
| Dividend paid to Walter                                            |       | (444.5                     | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (444.5 | ) |   |
| Dividend to Walter  for acquisition costs                          |       | —                     |       |                        | (12.0      | )                            |       |                            | —     |             |       |   | — |   |   |   | (12.0 | ) |   |
| Walter contribution of  Predecessor Mueller’s cash            |       | 67.4                       |       |                        |       |                         |       |                            | —     |             |       |   | — |   |   |   | 67.4 |   |   |
| Net cash provided by  (used in) financing activities               |       | 29.5                       |       |                        | (98.4      | )                            |       |                            | 93.5       |             |       |   |   |   |   |   | 24.6 |   |   |
| Effect of exchange rate  changes on cash                           |       | —                     |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | — |   |   |
| Increase in cash                                                   |       | 24.6                       |       |                        | 10.8       |                         |       |                            | 28.1       |             |       |   | — |   |   |   | 63.5 |   |   |
| **Cash and cash equivalents**                                      |       |                       |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of period                                                |       | —                     |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | — |   |   |
| End of period                                                      |       | $                          | 24.6       |                        |       | $                            | 10.8       |                            |       |             | $          | 28.1 |   |   |   | — |   |   |   | $ | 63.5 |   |   |

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(1)           Guarantors include the accounts of the following directand indirect subsidiaries of Mueller Group, LLC:

| **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   |                                 |       |
| *United States  Pipe and Foundry Company, LLC |       |       | Alabama    |                                 |       |

----

*                     Applicable only for periods beginning October 3,2005.

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**Note18.   Supplemental Data—Predecessor Mueller Group Financial Statements**

Prior to the October 3,2005 Acquisition, Predecessor Mueller Group was a registrant filing reportswith the U.S. Securities and Exchange Commission (“SEC”). The followingfinancial statements were derived from reports previously filed with the SEC(Commission File Number 333-117473). The unaudited ConsolidatedStatements of Operations and Cash Flows for the three months ended January 1,2005 shown below are derived from the Quarterly Report on Form 10-Q/Aof Mueller Group, LLC (formerly known as Mueller Group, Inc.) for thequarterly period ended January 1, 2005, as filed with the SEC on February 3,2006. The audited Consolidated Balance Sheet as of September 30, 2005shown below is derived from the Annual Report on Form 10-K ofMueller Group, LLC (formerly known as Mueller Group, Inc.) for the fiscalyear ended September 30, 2005, as filed with the SEC on December 19,2005. This information is presented as supplemental data in this Form 10-Qto support the prior period Predecessor Mueller Group Guarantor FinancialStatements. In this footnote, each of theterms “Group,” the “Company,” “we,” “us” or “our” refers to Predecessor MuellerGroup, LLC and its subsidiaries, except where the context makes clear that thereference is only to Predecessor Mueller Group itself, and is not inclusive ofits subsidiaries.

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**PREDECESSORMUELLER GROUPUNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS**

| ** **                                                                         | ** ** | **Three months ended  January 1, 2005** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in millions)**                         | ** ** |
| Net sales                                                                          |       |                                                        | $          | 256.1 |   |   |
| Cost of sales                                                                      |       |                                                        | 181.9      |   |   |
| Gross profit                                                                       |       |                                                        | 74.2       |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       |                                                        | 41.8       |   |   |
| Facility  rationalization, restructuring and related costs                         |       |                                                        | 0.1        |   |   |
| Operating income                                                                   |       |                                                        | 32.3       |   |   |
| Interest expense,  net of interest income                                          |       |                                                        | (16.1      | ) |   |
| Income before  income taxes                                                        |       |                                                        | 16.2       |   |   |
| Income tax  expense                                                                |       |                                                        | 6.3        |   |   |
| Net income                                                                         |       |                                                        | $          | 9.9 |   |   |

 

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**PREDECESSORMUELLER GROUPCONSOLIDATED BALANCE SHEET**

| ** **                                                            | ** ** | **September 30,  2005**        | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                            | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                            | ** ** |                                | ** ** | ** ** |   |
| Cash and cash equivalents                                             |       |                                | $          | 112.8 |   |   |
| Receivables, net                                                      |       |                                | 177.4      |   |   |
| Inventories                                                           |       |                                | 303.0      |   |   |
| Income tax  receivable                                                |       |                                | —     |   |   |
| Deferred income  taxes                                                |       |                                | 27.7       |   |   |
| Prepaid expenses                                                      |       |                                | 31.1       |   |   |
| Total current assets                                                  |       |                                | 652.0      |   |   |
| Property, plant  and equipment, net                                   |       |                                | 168.0      |   |   |
| Deferred  financing fees, net                                         |       |                                | 29.0       |   |   |
| Deferred income  taxes                                                |       |                                | 10.9       |   |   |
| Other long-term  assets                                               |       |                                | 1.5        |   |   |
| Identifiable  intangibles, net                                        |       |                                | 52.4       |   |   |
| Goodwill                                                              |       |                                | 163.2      |   |   |
| Total assets                                                          |       |                                | $          | 1,077.0 |   |   |
| **Liabilities**                                                       | ** ** |                                | ** ** | ** ** |   |
| Accounts payable                                                      |       |                                | $          | 63.3 |   |   |
| Current portion  of long-term debt                                    |       |                                | 3.8        |   |   |
| Accrued expenses                                                      |       |                                | 103.0      |   |   |
| Total current liabilities                                             |       |                                | 170.1      |   |   |
| Long-term  debt                                                       |       |                                | 926.2      |   |   |
| Accrued pension  liability                                            |       |                                | 37.7       |   |   |
| Other long-term  liabilities                                          |       |                                | 1.5        |   |   |
| Total liabilities                                                     |       |                                | 1,135.5    |   |   |
| Commitments and  contingencies (Note 9)                               |       |                                | —     |   |   |
| **Shareholders’  deficit:**                                      |       |                                |       |   |   |
| Common  stock—$0.01 par value (100 shares authorized and issued) |       |                                | —     |   |   |
| Accumulated  deficit                                                  |       |                                | (48.9      | ) |   |
| Accumulated other  comprehensive loss                                 |       |                                | (9.6       | ) |   |
| Total shareholders’ deficit                                      |       |                                | (58.5      | ) |   |
| Total liabilities  and shareholders’ deficit                     |       |                                | $          | 1,077.0 |   |   |

 

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**PREDECESSORMUELLER GROUPUNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS**

| ** **                                                                                   | ** ** | **Three months ended**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                   | ** ** | **January 1,  2005**           | ** ** |
| ** **                                                                                   | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating  activities**                                                    |       |                                |       |   |   |
| Net income                                                                                   |       |                                | $          | 9.9 |   |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation                                                                                 |       |                                | 11.2       |   |   |
| Amortization of intangibles                                                                  |       |                                | 0.8        |   |   |
| Amortization of deferred financing fees                                                      |       |                                | 1.1        |   |   |
| Amortization of tooling                                                                      |       |                                | 0.6        |   |   |
| Write off of deferred financing fees                                                         |       |                                | —     |   |   |
| (Gain) loss on disposal of property, plant and  equipment                                    |       |                                | 0.1        |   |   |
| Deferred income taxes                                                                        |       |                                | 0.6        |   |   |
| Stock compensation (non-cash amounts)                                                        |       |                                | —     |   |   |
| Unrealized gain on interest rate swaps                                                       |       |                                | (2.3       | ) |   |
| Changes in assets and  liabilities, net of the effects of acquisitions:                      |       |                                |       |   |   |
| Receivables                                                                                  |       |                                | 22.2       |   |   |
| Inventories                                                                                  |       |                                | (25.5      | ) |   |
| Income taxes receivable                                                                      |       |                                | 3.7        |   |   |
| Prepaid expenses and other current assets                                                    |       |                                | (0.6       | ) |   |
| Pension, net                                                                                 |       |                                | 1.6        |   |   |
| Accounts payable, accrued expenses and other current  liabilities                            |       |                                | (22.6      | ) |   |
| Other, net                                                                                   |       |                                | (0.3       | ) |   |
| Net cash provided  by (used in) operating activities                                         |       |                                | 0.5        |   |   |
| **Cash  flows from investing activities**                                                    |       |                                |       |   |   |
| Purchase of  property, plant and equipment                                                   |       |                                | (4.7       | ) |   |
| Net cash used in  investing activities                                                       |       |                                | (4.7       | ) |   |
| **Cash  flows from financing activities**                                                    |       |                                |       |   |   |
| Book overdrafts                                                                              |       |                                | (0.7       | ) |   |
| Payment of long-term  debt                                                                   |       |                                | —     |   |   |
| Payment of  deferred financing fees                                                          |       |                                | —     |   |   |
| Financing of  assets through capital leases                                                  |       |                                | (0.3       | ) |   |
| Net cash used in  financing activities                                                       |       |                                | (1.0       | ) |   |
| Effect of  exchange rate changes on cash                                                     |       |                                | 0.9        |   |   |
| Decrease in cash  and cash equivalents                                                       |       |                                | (4.3       | ) |   |
| **Cash and cash equivalents**                                                                |       |                                |       |   |   |
| Beginning of  period                                                                         |       |                                | 60.5       |   |   |
| End of period                                                                                |       |                                | $          | 56.2 |   |   |

 

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**PREDECESSOR MUELLERGROUPNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Organization**

Mueller Group, LLC (formerly Mueller Group, Inc.)(“Group” or the “Company”) is a wholly-owned subsidiary of Mueller WaterProducts, LLC (formerly Mueller Water Products, Inc.) (“Mueller Water”).As of September 30, 2005, the Company has two reporting and operatingsegments, Mueller and Anvil. Our Mueller segment (formerly called “Waterinfrastructure”) is a manufacturer of valves, fire hydrants and other relatedproducts utilized in the distribution of water and gas and in water andwastewater treatment facilities. Our Anvil segment segment (formerly called “Pipingsystems”) is a manufacturer of cast iron and malleable iron pipe fittings,ductile iron couplings and fittings, pipe hangers and other related productsfor the plumbing, heating, mechanical, construction retail hardware and otherrelated industries. Both segments have operations in the United States andCanada.

*Fiscal Year End**—The*fiscal year of the Company ends on September 30.

**Segment Information**

As of September 30, 2005, the Company’soperations consisted of two operating segments: Mueller and Anvil. Thesesegments are organized around differences in products and are consistent withhow the operating entities are managed, how resources are allocated, and howinformation is used by the chief operating decision maker. The Mueller segmentis a manufacturer of valves, fire hydrants and other related products utilizedin the distribution of water and gas and in water and wastewater treatmentfacilities. The Anvil segment is a manufacturer of cast iron and malleable ironpipe fittings, ductile iron couplings and fittings, pipe hangers and otherrelated products for the plumbing, heating, mechanical, construction retail hardwareand other related industries. Both segments have operations in the UnitedStates and Canada.

Intersegment sales and transfers are made atestablished intersegment selling prices generally intended to cover costs. Ourdetermination of segment earnings does not reflect allocations of certaincorporate expenses not directly attributable to segment operations andintersegment eliminations, which we designate as Corporate in the segmentpresentation, and is before interest expense, net, and income taxes. Corporateexpenses include costs related to financial and administrative matters,treasury, risk management, human resources, legal counsel, and tax functions.Corporate assets include items recorded at the date of the Company’s inceptionin 1999 related to purchase accounting valuation adjustments associated withproperty, plant and equipment and non-compete agreements with the predecessorparent company, as well as intangibles associated with intellectual property.These assets and any related depreciation or amortization expense have not beenpushed down to our segments and are maintained as Corporate items. Therefore,segment earnings are not reflective of results on a stand-alone basis.

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Segmentassets consist primarily of accounts receivable, inventories, property, plantand equipment, net, goodwill, and identifiable intangibles, net. Summarizedfinancial information for our segments follows:

| ** **                             | ** ** | **Three months ended**    | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **January 1, 2005**       | ** ** |
| ** **                             | ** ** | **(dollars in millions)** | ** ** |
| Net Sales:                             |       |                                |       |   |   |
| Mueller segment                        |       |                                | $          | 138.6 |   |   |
| Anvil segment                          |       |                                | 117.5      |   |   |
| Consolidated                           |       |                                | $          | 256.1 |   |   |
| Intersegment sales:                    |       |                                |       |   |   |
| Mueller segment                        |       |                                | $          | 3.4 |   |   |
| Anvil segment                          |       |                                | 0.2        |   |   |
| Consolidated                           |       |                                | $          | 3.6 |   |   |
| Operating income (expense):            |       |                                |       |   |   |
| Mueller segment                        |       |                                | $          | 28.8 |   |   |
| Anvil segment                          |       |                                | 11.8       |   |   |
| Corporate expense(1)                   |       |                                | (8.3       | ) |   |
| Consolidated                           |       |                                | $          | 32.3 |   |   |
| Depreciation and amortization expense: |       |                                |       |   |   |
| Mueller segment                        |       |                                | $          | 6.0 |   |   |
| Anvil segment                          |       |                                | 4.3        |   |   |
| Corporate                              |       |                                | 2.3        |   |   |
| Consolidated                           |       |                                | $          | 12.6 |   |   |
| Capital expenditures:                  |       |                                |       |   |   |
| Mueller segment                        |       |                                | $          | 2.8 |   |   |
| Anvil segment                          |       |                                | 1.8        |   |   |
| Corporate                              |       |                                | 0.1        |   |   |
| Consolidated                           |       |                                | $          | 4.7 |   |   |

----

(1)          Includes certainexpenses not allocated to segments.

36

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| ** **                | ** ** | **At September 30,**      | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2005**                            | ** ** |
| ** **                | ** ** | **(dollars in millions)** | ** ** |
| Total assets:             |       |                                |       |   |   |
| Mueller segment           |       |                                | $          | 516.6 |   |   |
| Anvil segment             |       |                                | 303.6      |   |   |
| Corporate                 |       |                                | 256.8      |   |   |
| Consolidated              |       |                                | $          | 1,077.0 |   |   |
| Goodwill:                 |       |                                |       |   |   |
| Mueller segment           |       |                                | $          | 149.1 |   |   |
| Anvil segment             |       |                                | 14.1       |   |   |
| Consolidated              |       |                                | $          | 163.2 |   |   |
| Identifiable intangibles: |       |                                |       |   |   |
| Mueller segment           |       |                                | $          | 4.4 |   |   |
| Anvil segment             |       |                                | 5.3        |   |   |
| Corporate                 |       |                                | 42.7       |   |   |
| Consolidated              |       |                                | $          | 52.4 |   |   |

 

Geographicalarea information with respect to net sales, as determined by the location ofthe customer invoiced, and property, plant and equipment—net, as determined bythe physical location of the assets, were as follows for the three months endedJanuary 1, 2005:

| ** **      | ** ** | **Three months  ended**        | ** ** |
|-----------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **January 1, 2005**       | ** ** |
| ** **      | ** ** | **(dollars in millions)** | ** ** |
| Net sales:      |       |                                |       |   |   |
| United States   |       |                                | $          | 210.4 |   |   |
| Canada          |       |                                | 44.4       |   |   |
| Other Countries |       |                                | 1.3        |   |   |
|            |       |                                | $          | 256.1 |   |   |

 

| ** **                           | ** ** | **At September 30, 2005** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in millions)**      | ** ** |
| Property, plant and  equipment, net: |       |                                     |       |   |   |
| United States                        |       |                                     | $          | 152.8 |   |   |
| Canada                               |       |                                     | 12.6       |   |   |
| Other Countries                      |       |                                     | 2.6        |   |   |
|                                 |       |                                     | $          | 168.0 |   |   |

 

**Summaryof Significant Accounting Policies**

Fiscal Year—The Company’s fiscal year ends on September 30.The Company’s first quarter ends on the Saturday closest to December 31.

Inventory—Inventories are recorded at the lower ofcost (first-in, first-out) or market value. Additionally, the Company evaluatesits inventory 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.

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WarrantyCosts—The Company accrues for the estimated cost of product warranties at thetime of sale based on historical experience. Adjustments to obligations forwarranties are made as changes in the obligations become reasonably estimable.The following table summarizes information concerning the Company’s productwarranty:

| ** **                      | ** ** | **Three months ended**    | ** ** |
|---------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **January 1, 2005**       | ** ** |
| ** **                      | ** ** | **(dollars in millions)** | ** ** |
| Balance at  beginning of period |       |                                | $          | 1.6 |   |   |
| Accruals for  warranties        |       |                                | 0.6        |   |   |
| Settlement of  warranty claims  |       |                                | (0.9       | ) |   |
| Balance at end of period        |       |                                | $          | 1.3 |   |   |

 

Comprehensive Income—The Company’s comprehensiveincome for the three months ended January 1, 2005 includes foreigncurrency translation adjustments of $4.0 million.

Related Party Transactions—TheCompany paid $0.1 million to Credit Suisse First Boston for the threemonths ended January 1, 2005 for management advisory services.

**Borrowing Arrangements**

*Long-Term Debt—**Long-term***debt consists of the following obligations:

| ** **                                          | ** ** | **September 30,**              | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2005**                            | ** ** |
| ** **                                          | ** ** | **(dollars in millions)** | ** ** |
| Senior credit  facility term loans                  |       |                                | $          | 512.8 |   |   |
| Second priority  senior secured floating rate notes |       |                                | 100.0      |   |   |
| 10% senior  subordinated notes                      |       |                                | 315.0      |   |   |
| Capital lease  obligations                          |       |                                | 2.2        |   |   |
|                                                |       |                                | 930.0      |   |   |
| Less current  portion                               |       |                                | (3.8       | ) |   |
|                                                |       |                                | $          | 926.2 |   |   |

 

Aschedule of debt maturities as of September 30, 2005 is as follows:

| ** **                            | ** ** | **Less than  1 year**     | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **After  5 years** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|-----------|------------|
| ** **                            | ** ** | **(dollars in millions)** | ** ** |
| Senior credit  facility term loans    |       |                                | $          | 2.9            |       |           |       | $                       | 5.8        |      |       |   | $ | 5.8 |   |   | $ | 498.3 |   | $ | 512.8 |   |
| Second Priority  Senior Secured Notes |       |                                | —     |           |       |           | —     |                    |       |      | —     |   |   | 100.0 |   | 100.0 |   |
| 10% Senior  Subordinated Notes        |       |                                | —     |           |       |           | —     |                    |       |      | —     |   |   | 315.0 |   | 315.0 |   |
| Capital lease  obligations            |       |                                | 0.9        |           |       |           | 1.2        |                    |       |      | 0.1        |   |   | — |   | 2.2 |   |
| Total debt maturities                 |       |                                | $          | 3.8            |       |           |       | $                       | 7.0        |      |       |   | $ | 5.9 |   |   | $ | 913.3 |   | $ | 930.0 |   |

 

*2004Mueller Credit Facility:*   The Company entered intoa senior credit facility, which includes a $545 million amortizing seniorcredit facility term loan ($32.2 million of which has since been repaid)maturing seven years after closing and an $80.0 million revolving creditfacility that will terminate five years after closing. The revolving creditfacility and/or the term loan facility are subject to a potential, althoughuncommitted, increase of up to an aggregate of $50.0 million at theCompany’s request at any time prior to maturity. In addition, althoughuncommitted, a foreign currency sub-facility may be made available to one ormore of the Company’s restricted foreign subsidiaries in an aggregate principalamount of up to the U.S. dollar equivalent of $30.0 million. This increaseand the additional foreign currency sub-

38

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facility will only beavailable if one or more financial institutions agree to provide them. TheCompany had no borrowings under the revolving credit facility at September 30,2005.

Borrowings 2004 Mueller Credit Facility bore interestbased on a margin over, at the Company’s option, the base rate or LIBOR. Theapplicable margin was 2.75% over LIBOR and 1.50% over the base rate for termloans. The applicable margin under the revolving senior credit facility was arange of 2.25% to 3.25% over LIBOR and a range of 1.00% to 2.00% over the baserate, depending on our ratio of consolidated debt to EBITDA as defined in thesenior credit facility. At September 30, 2005 the applicable margin on therevolving senior credit facility was 2.75% over LIBOR and 1.50% over the baserate. The Company’s obligations under the senior credit facility are guaranteedby Mueller Water and all of the Company’s existing or future domesticrestricted subsidiaries and is secured by substantially all of the assets of theCompany and its subsidiary guarantors, including a pledge of the capital stockof all of the Company’s existing and future domestic subsidiaries, a pledge ofno more than 65.0% of the voting stock of any of the Company’s foreignsubsidiaries, a pledge of all intercompany indebtedness in favor of the Companyand its domestic restricted subsidiaries, and a pledge of its capital stock byMueller Water. The 2004 Mueller Credit Facility contained customary covenants,including covenants that limit the Company’s ability to incur debt and liens,pay dividends and make investments and capital expenditures, and events ofdefault. Mueller Group was permitted to make payments of up to$2.0 million in any fiscal year to Mueller Water Products to pay overheadexpenses of Mueller Water Products. These restrictions expired October 3,2005 in connection with the acquisition by Walter.

*SecondPriority Senior Secured Floating Rate Notes:*   TheCompany issued $100 million of such notes. Interest on the secured notesis payable at a rate equal to the three-month reserve-adjustedLondon-interbank offered rate, or LIBOR, which is reset quarterly, plus4.75% on February 1, May 1, August 1 and November 1 of eachyear, beginning on August 1, 2004. The interest rate for the interest periodbeginning August 1, 2005 is 8.44% per annum. The secured notes mature in2011 and are guaranteed by each of the existing domestic restrictedsubsidiaries and secured by second-priority liens on the assets securingthe senior credit facility (other than certain subsidiary stock and assets ofWater). The secured notes contain customary covenants and events of default,including covenants that limit the Company’s ability to incur debt, paydividends and make investments and also include a maintenance covenant limitingthe Company’s senior total leverage as a multiple of EBITDA, as defined in theindenture.

*10%Senior Subordinated Notes:*   The Company issued$315 million of such notes. Interest on the subordinated notes is payableat an annual rate of 10% on May 1 and November 1 of each year,beginning on November 1, 2004. The subordinated notes mature in 2012 andare guaranteed by each of the Company’s existing domestic restrictedsubsidiaries. The subordinated notes contain customary covenants and events ofdefault, including covenants that limit the Company’s ability to incur debt,pay dividends and make investments. Generally, the notes only permit us to paydividends if there is no default or event of default and our fixed charge ratio(as defined) is at least 2.5 to 1, and the maximum amount we may paycannot exceed 50% of our cumulative net income (as defined) since January 1,2004, subject to specified exceptions. The Company is permitted to makedividends or loans to Mueller Water of up to $2 million in any fiscal year forcosts and expenses incurred by Mueller Water in its capacity as a holdingcompany for services rendered on behalf of the Company.

*CapitalLeases—**The*Company leases automobilesunder capital lease arrangements that expire over the next four years.

39

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Futureminimum lease payments under scheduled capital leases that have initial orremaining non-cancelable terms in excess of one year are as follows:

| ** **                        | ** ** | **(dollars in millions)** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| Fiscal 2006                       |       |                                | $          | 1.1 |   |   |
| Fiscal 2007                       |       |                                | 0.9        |   |   |
| Fiscal 2008                       |       |                                | 0.5        |   |   |
| Fiscal 2009                       |       |                                | 0.1        |   |   |
| Total minimum  lease payments     |       |                                | 2.6        |   |   |
| Amount  representing interest     |       |                                | (0.4       | ) |   |
| Obligations under  capital leases |       |                                | 2.2        |   |   |
| Obligations due  within one year  |       |                                | (0.9       | ) |   |
| Long term obligations             |       |                                | $          | 1.3 |   |   |

** **

**Interest Rate Swap**—The Company has entered into interestrate swap agreements in order to reduce interest rate risks and manage interestexpense. As of September 30, 2005, a notional principal amount of$100 million in swap agreements is still outstanding and scheduled tomature in April 2007 and May 2007. At September 30, 2005, thefair value of interest rate swaps was an asset of $0.5 million. The swapagreements effectively convert floating-rate debt into fixed-rate debt andcarry an average fixed interest rate of 4.09% at September 30, 2005. Interestdifferentials to be paid or received because of swap agreements are reflectedas an adjustment to interest expense over the related debt period. For thethree months ended January 1, 2005 Group recorded gains on interest rateswaps of $2.3 million. While Group is exposed to credit loss on its interestrate swaps in the event of non-performance by the counterparties to such swaps,management believes such nonperformance is unlikely to occur given thefinancial resources of the counterparties.

**Distributions to Water**—Mueller Water has no material assetsother than its ownership of the Company’s capital stock and accordingly dependsupon distributions from the Company to satisfy its cash needs. Mueller Water’sprincipal cash needs will be debt service on its Senior Discount Notes due2014. These notes do not require cash interest payments until 2009 and containrestrictive covenants that will, among other things, limit the ability ofMueller Water and its subsidiaries (including the Company) to incur debt, paydividends and make investments. Neither the Company nor any of its subsidiariesguarantee these notes. Mueller Water, however, is a holding company and itsability to pay interest on the notes will be dependent upon the receipt ofdividends from its subsidiaries. The Company is Mueller Water’s only directsubsidiary. However, the terms of the Company’s borrowing arrangementssignificantly restrict its ability to pay dividends to Mueller Water.

**Fair Value of Debt**—Basedon the level of interest rates prevailing at September 30, 2005, the fairvalue of the Company’s fixed-rate debt exceeded its carrying value byapproximately $18.9 million. Unrealized gains or losses on debt do not resultin the realization or expenditure of cash and generally are not recognized forfinancial reporting purposes unless the debt is retired prior to its maturity.

**NetPeriodic Benefit Cost—Defined Benefit Plans**

For a detailed disclosure on the Company’s pension andemployee benefits plans, please refer to Note 10 of the Company’s AuditedConsolidated Financial Statements for the year ended September 30, 2005,as found on Form 10-K (File No. 333-117473).

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Thefollowing sets forth the components of net periodic benefit cost of thedomestic non-contributory defined benefit plans for the three months ended January 1,2005:

| ** **                          | ** ** | **Three months ended**    | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **January 1,  2005**           | ** ** |
| ** **                          | ** ** | **(dollars in millions)** | ** ** |
| Service cost                        |       |                                | $          | 0.8 |   |   |
| Interest cost                       |       |                                | 1.3        |   |   |
| Expected return  on plan assets     |       |                                | (1.3       | ) |   |
| Amortization of  prior service cost |       |                                | 0.1        |   |   |
| Amortization of  net actuarial loss |       |                                | 0.7        |   |   |
| Net periodic benefit  cost          |       |                                | 1.6        |   |   |

 

No contributions were madeduring the three months ended January 1, 2005. The Company presentlyanticipates contributing $0.1 million to fund its pension plans in 2005and may make further discretionary payments.

**SupplementaryBalance Sheet Information**

Selectedsupplementary balance sheet information is presented below:

| ** **                                  | ** ** | **September 30,**              | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **2005**                            | ** ** |
| ** **                                  | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                             |       |                                |       |   |   |
| Purchased  materials and manufactured parts |       |                                | $          | 33.5 |   |   |
| Work in process                             |       |                                | 90.6       |   |   |
| Finished goods                              |       |                                | 178.9      |   |   |
|                                        |       |                                | $          | 303.0 |   |   |
| **Property, plant and equipment**           |       |                                |       |   |   |
| Land                                        |       |                                | $          | 9.2 |   |   |
| Buildings                                   |       |                                | 63.0       |   |   |
| Machinery and  equipment                    |       |                                | 300.0      |   |   |
| Other                                       |       |                                | 14.9       |   |   |
| Accumulated  depreciation                   |       |                                | (219.1     | ) |   |
|                                        |       |                                | $          | 168.0 |   |   |
| **Accrued expenses and other  liabilities** |       |                                |       |   |   |
| Vacations and  holidays                     |       |                                | $          | 9.7 |   |   |
| Workers  compensation                       |       |                                | 8.8        |   |   |
| Accrued interest                            |       |                                | 15.2       |   |   |
| Accrued payroll  and bonus                  |       |                                | 20.0       |   |   |
| Accrued sales  commissions                  |       |                                | 3.8        |   |   |
| Accrued cash  discounts and rebates         |       |                                | 15.8       |   |   |
| Accrued federal  and state income taxes     |       |                                | 4.4        |   |   |
| Accrued other  taxes                        |       |                                | 4.1        |   |   |
| Accrued medical  claims                     |       |                                | 4.0        |   |   |
| Other                                       |       |                                | 17.2       |   |   |
|                                        |       |                                | $          | 103.0 |   |   |

 

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**SupplementaryIncome Statement Information**

Thecomponents of interest expense are presented below:

| ** **                                      | ** ** | **Three months ended**    | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **January 1, 2005**       | ** ** |
| ** **                                      | ** ** | **(dollars in millions)** | ** ** |
| Interest expense,  net of interest income:      |       |                                |       |   |   |
| Contractual  interest expense                   |       |                                | $          | 17.7 |   |   |
| Deferred  financing fee amortization            |       |                                | 1.1        |   |   |
| Interest rate  swap gains                       |       |                                | (2.3       | ) |   |
| Interest expense                                |       |                                | 16.5       |   |   |
| Interest income                                 |       |                                | (0.4       | ) |   |
| Total interest expense,  net of interest income |       |                                | $          | 16.1 |   |   |

 

**FacilityRationalization, Restructuring and Related Costs**

In the first quarter offiscal 2005, the Company announced that it will cease manufacturing and beginoutsourcing a product line it currently produces at its water infrastructureplant in Colorado. A restructuring charge of $0.1 million related toseverance was reflected in the first quarter of fiscal 2005. An additionalcharge of $1.5 million is related primarily to the termination ofoperating leases for the building and machinery and will be reflected in thesecond quarter of fiscal 2005.

**ConsolidatingGuarantor and Non-Guarantor Financial Information**

The following tables setforth the consolidating statements of operations and cash flows for each of thethree-month periods ended December 27, 2003 and January 1, 2005and the consolidating balance sheets as of September 30, 2004 and January 1,2005. Amounts have been restated to reflect the impact of items discussed inNote 2. The following information is included as a result of the guaranteeby certain of the Company’s wholly owned U.S. subsidiaries (“GuarantorCompanies”) of the second priority senior secured notes and senior subordinatednotes issued by the Company. None of the Company’s other subsidiaries guaranteethe debt. Each of the guarantees is joint and several and full andunconditional. “Mueller Group, Inc.” (“Issuer”) includes the consolidatedfinancial results of Mueller Group, Inc. with all of its wholly-ownedsubsidiaries accounted for under the equity method.

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**ConsolidatingStatement of OperationsFor Predecessor Mueller GroupFor the Three Months Ended January 1, 2005**

| ** **                                                 | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                  |       | $                                   | —     |                        |       | $                            | 202.7      |                           |       |             | $          | 53.4 |   |   |   | $ | — |   |   |   | $ | 256.1 |   |   |
| Cost of sales                                              |       | —                              |       |                        | 139.6      |                         |       |                           | 42.3       |             |       |   | — |   |   |   | 181.9 |   |   |
| Gross profit                                               |       | —                              |       |                        | 63.1       |                         |       |                           | 11.1       |             |       |   | — |   |   |   | 74.2 |   |   |
| Selling, general  and administrative                       |       | 2.9                                 |       |                        | 31.4       |                         |       |                           | 7.5        |             |       |   | — |   |   |   | 41.8 |   |   |
| Facility  rationalization, restructuring and related costs |       | —                              |       |                        | 0.1        |                         |       |                           | —     |             |       |   | — |   |   |   | 0.1 |   |   |
| Operating income  (loss)                                   |       | (2.9                                | )          |                        | 31.6       |                         |       |                           | 3.6        |             |       |   | — |   |   |   | 32.3 |   |   |
| Interest expense,  net of interest income                  |       | (16.2                               | )          |                        | —     |                         |       |                           | 0.1        |             |       |   | — |   |   |   | (16.1 | ) |   |
| Income (loss)  before income taxes                         |       | (19.1                               | )          |                        | 31.6       |                         |       |                           | 3.7        |             |       |   | — |   |   |   | 16.2 |   |   |
| Income tax  expense (benefit)                              |       | (7.4                                | )          |                        | 12.4       |                         |       |                           | 1.3        |             |       |   | — |   |   |   | 6.3 |   |   |
| Equity income  from subsidiaries                           |       | 21.6                                |       |                        | 2.4        |                         |       |                           | —     |             |       |   | (24.0 | ) |   |   | — |   |   |
| Net income                                                 |       | $                                   | 9.9        |                        |       | $                            | 21.6       |                           |       |             | $          | 2.4 |   |   |   | $ | (24.0 | ) |   |   | $ | 9.9 |   |   |

 

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**ConsolidatingBalance SheetFor Predecessor Mueller GroupSeptember 30, 2005**

| ** **                                                 | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                 |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                  |       | $                                   | 94.5       |                        |       | $                              | (11.4      | )                               |       |             | $          | 29.7 |   |   |   | $ | — |   |   |   | $ | 112.8 |   |   |
| Receivables, net                                           |       | —                              |       |                        | 143.6      |                           |       |                            | 33.8       |             |       |   | — |   |   |   | 177.4 |   |   |
| Inventories                                                |       | —                              |       |                        | 247.1      |                           |       |                            | 55.9       |             |       |   | — |   |   |   | 303.0 |   |   |
| Deferred income  taxes                                     |       | —                              |       |                        | 27.7       |                           |       |                            | —     |             |       |   | — |   |   |   | 27.7 |   |   |
| Prepaid expenses                                           |       | —                              |       |                        | 28.7       |                           |       |                            | 2.4        |             |       |   | — |   |   |   | 31.1 |   |   |
| Total current  assets                                      |       | 94.5                                |       |                        | 435.7      |                           |       |                            | 121.8      |             |       |   | — |   |   |   | 652.0 |   |   |
| Property, plant  and equipment, net                        |       | —                              |       |                        | 153.9      |                           |       |                            | 14.1       |             |       |   | — |   |   |   | 168.0 |   |   |
| Deferred  financing fees, net                              |       | 29.0                                |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 29.0 |   |   |
| Deferred income  taxes                                     |       | (4.1                                | )          |                        | 15.6       |                           |       |                            | (0.6       | )                |       |   | — |   |   |   | 10.9 |   |   |
| Other long-term  assets                                    |       | 0.5                                 |       |                        | 1.0        |                           |       |                            | —     |             |       |   | — |   |   |   | 1.5 |   |   |
| Identifiable  intangibles, net                             |       | —                              |       |                        | 52.4       |                           |       |                            | —     |             |       |   | — |   |   |   | 52.4 |   |   |
| Goodwill                                                   |       | —                              |       |                        | 163.2      |                           |       |                            | —     |             |       |   | — |   |   |   | 163.2 |   |   |
| Investment in  subsidiaires                                |       | 1,190.1                             |       |                        | 42.4       |                           |       |                            | —     |             |       |   | (1,232.5 | ) |   |   | — |   |   |
| Total assets                                               |       | $                                   | 1,310.0    |                        |       | $                              | 864.2      |                            |       |             | $          | 135.3 |   |   |   | $ | (1,232.5 | ) |   |   | $ | 1,077.0 |   |   |
| **Liabilities**                                            |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                           |       | $                                   | 10.0       |                        |       | $                              | 37.2       |                            |       |             | $          | 16.1 |   |   |   | $ | — |   |   |   | $ | 63.3 |   |   |
| Current portion  of long-term debt                         |       | 2.8                                 |       |                        | 1.0        |                           |       |                            | —     |             |       |   | — |   |   |   | 3.8 |   |   |
| Accrued expenses                                           |       | 18.3                                |       |                        | 74.6       |                           |       |                            | 10.1       |             |       |   | — |   |   |   | 103.0 |   |   |
| Total current  liabilities                                 |       | 31.1                                |       |                        | 112.8      |                           |       |                            | 26.2       |             |       |   | — |   |   |   | 170.1 |   |   |
| Intercompany  accounts                                     |       | 410.9                               |       |                        | (478.1     | )                              |       |                            | 67.2       |             |       |   | — |   |   |   | — |   |   |
| Long-term  debt                                            |       | 925.0                               |       |                        | 1.2        |                           |       |                            | —     |             |       |   | — |   |   |   | 926.2 |   |   |
| Accrued pension  liability                                 |       | —                              |       |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | 37.7 |   |   |
| Other long-term  liabilities                               |       | 1.5                                 |       |                        | 38.2       |                           |       |                            | (0.5       | )                |       |   | — |   |   |   | 1.5 |   |   |
| Total liabilities                                          |       | 1,368.5                             |       |                        | (325.9     | )                              |       |                            | 92.9       |             |       |   | — |   |   |   | 1,135.5 |   |   |
| **Shareholders’  equity**                             |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity (deficit)                 |       | (58.5                               | )          |                        | 1,190.1    |                           |       |                            | 42.4       |             |       |   | (1,232.5 | ) |   |   | (58.5 | ) |   |
| Total liabilities and  shareholders’ equity (deficit) |       | $                                   | 1,310.0    |                        |       | $                              | 864.2      |                            |       |             | $          | 135.3 |   |   |   | $ | (1,232.5 | ) |   |   | $ | 1,077.0 |   |   |

 

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**ConsolidatingStatement of Cash FlowsFor Predecessor Mueller GroupFor the Three Months Ended January 1, 2005**

| ** **                                              | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                              | ** ** | **(dollars in millions)** | ** ** |
| Net cash provided  by (used in) operating activities    |       | $                                   | (11.9      | )                           |       | $                              | 17.2       |                            |       |             | $          | (4.8 | ) |   |   | — |   |   |   | $ | 0.5 |   |   |
| **Cash  flows from investing activities**               |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                   |       | —                              |       |                        | (4.2       | )                              |       |                            | (0.5       | )                |       |   | — |   |   |   | (4.7 | ) |   |
| Net cash used in  investing activities                  |       | —                              |       |                        | (4.2       | )                              |       |                            | (0.5       | )                |       |   | — |   |   |   | (4.7 | ) |   |
| **Cash  flows from financing activities**               |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book overdrafts                                         |       | (0.7                                | )          |                        | —     |                           |       |                            | —     |             |       |   | — |   |   |   | (0.7 | ) |   |
| Intercompany  change                                    |       | 10.0                                |       |                        | (10.5      | )                              |       |                            | 0.5        |             |       |   | — |   |   |   | — |   |   |
| Retirement of  long-term debt, including capital leases |       | —                              |       |                        | (0.3       | )                              |       |                            | —     |             |       |   | — |   |   |   | (0.3 | ) |   |
| Net cash provided  by (used in) financing activities    |       | 9.3                                 |       |                        | (10.8      | )                              |       |                            | 0.5        |             |       |   | — |   |   |   | (1.0 | ) |   |
| Effect of  exchange rate changes on cash                |       | —                              |       |                        | —     |                           |       |                            | 0.9        |             |       |   | — |   |   |   | 0.9 |   |   |
| Increase  (decrease) in cash                            |       | (2.6                                | )          |                        | 2.2        |                           |       |                            | (3.9       | )                |       |   | — |   |   |   | (4.3 | ) |   |
| **Cash  and cash equivalents**                          |       |                                |       |                        |       |                           |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of  period                                    |       | 49.8                                |       |                        | (7.9       | )                              |       |                            | 18.6       |             |       |   | — |   |   |   | 60.5 |   |   |
| End of period                                           |       | $                                   | 47.2       |                        |       | $                              | (5.7       | )                               |       |             | $          | 14.7 |   |   |   | — |   |   |   | $ | 56.2 |   |   |

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(1)          Guarantorsinclude the accounts of the following direct and indirect subsidiaries ofMueller Group, LLC:

| **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   |                                 |       |

 

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this report, each of the terms “Group,” the “Company,”“we,” “us” or “our” refers to Mueller Group, LLC and its subsidiaries, exceptwhere the context makes clear that the reference is only to Mueller Group, LLCitself, and is not inclusive of its subsidiaries.

Except as otherwise noted,we present all financial and operating data on a fiscal year and fiscal quarterbasis. Our fiscal year ends on September 30, and our first fiscal quarterends on December 31.

**Overview**

*Organization*

Mueller Group, LLC, (the “Company”) is a wholly-ownedsubsidiary of Mueller Water Products, Inc. (“Mueller Water”), a Delawarecorporation. Mueller Water is the surviving corporation of the merger on February 2,2006 of Mueller Water Products, LLC (Commission File Number:  333-116590) and Mueller Water ProductsCo-Issuer, Inc. with and into Mueller Holding Company, Inc., aDelaware corporation.

On October 3, 2005, through a series of transactions(the “Acquisition”), Walter Industries, Inc. (“Walter”), through awholly-owned subsidiary, acquired all outstanding shares of capital stock ofour parent company, Mueller Water Products, Inc. (“Predecessor MuellerWater”), which immediately was converted into Mueller Water Products, LLC, aDelaware limited liability company and contributed United States Pipe andFoundry Company, LLC, (“U.S. Pipe”), owned by Walter since 1969, to theacquired company’s wholly-owned subsidiary, Mueller Group, LLC (“PredecessorMueller Group”). In accordance with generally accepted accounting principles,for accounting purposes U.S. Pipe is treated as the acquirer of PredecessorMueller Group. Accordingly, effective October 3, 2005, U.S. Pipe’s basisof accounting is used for the Company and all historical financial data of theCompany included in this report on Form 10-Q, is that of U.S. Pipe.The results of operations of Predecessor Mueller Group are included in theConsolidated Statements of Operations beginning October 3, 2005.

The Company was originally organized as United StatesPipe and Foundry Company, Inc. (“Inc.”) and was a wholly-owned subsidiaryof Walter Industries, Inc., a diversified New York Stock Exchange tradedcompany (NYSE: WLT). On September 23, 2005, Inc. was dissolved andUnited States Pipe and Foundry Company, LLC was organized in the state ofAlabama, and the operations of Inc. were conducted under the form of a limitedliability company.

In December 2005, U.S. Pipe changed its fiscalyear-end to September 30, which coincides with the fiscal year end ofPredecessor Mueller Group. Beginning with the quarter ended December 31,2005, the Company has three operating segments which are named after ourleading brands in each segment: Mueller, U.S. Pipe, and Anvil.

Consistentwith generally accepted accounting principles, the discussion of the Company’sresults of operations for the three months ended December 31, 2005 includes thefinancial results of Predecessor Mueller Group for all but the first two daysof the period.  The inclusion of theseresults, plus the continuing integration process, may render direct comparisonwith the results for prior periods less meaningful.  Accordingly, the discussion below addresses,where appropriate, trends that we believe are significant, separate and apartfrom the impact of the Acquisition. Supplemental information with comparisons of the three months endedDecember 31, 2005 Statement of Operations data to the pro forma three monthsended December 31, 2004 Statement of Operations data is provided below underthe subheading “Supplemental Information—Results of Operations for the ThreeMonths Ended December 31, 2005 Compared to Pro Forma Results of Operations forthe Three Months Ended December 31, 2004.”

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*Business*

We are a leading North American manufacturer of a broad range ofwater infrastructure and flow control products for use in water distributionnetworks, water and wastewater treatment facilities, gas distribution andpiping systems. We manage our business and report operations through threeoperating segments, based largely on the products they sell and the markets theyserve. Our segments are named after lead brands in each segment:

·       *Mueller*.   The Mueller segment produces and sells hydrants, valvesand related products primarily to the water and wastewater infrastructuremarkets. Sales of our Mueller segment products are driven principally byspending on water and wastewater infrastructure upgrade, repair and replacementand new water and wastewater infrastructure. Subsequent to the Acquisition,U.S. Pipe transferred its valve and hydrant business to our Mueller segment. Muellersegment sales are estimated to be approximately 50% for new infrastructure,with the remainder for upgrade, repair and replacement. A significant portionof Mueller’s sales are made through its broad distributor network. For most ofour Mueller segment products, which are sold through independent distributors,end-users choose the brand or establish product specifications. We believe ourreputation for quality, extensive distributor relationships, installed base andcoordinated marketing approach have helped our Mueller segment products to be “specified”as an approved product for use in most major metropolitan areas throughout theUnited States.

·       *U.S. Pipe*.   The U.S. Pipe segment produces and sells ductile ironpressure pipe, restraint joints and fittings and related products to the waterinfrastructure market. U.S. Pipe products are sold primarily to water worksdistributors, contractors, municipalities, private utilities and othergovernmental agencies. A substantial percentage of ductile iron pressure pipeorders result from contracts that are bid by contractors or directly issued bymunicipalities or private utilities. To support our customers’ inventory anddelivery requirements, U.S. Pipe utilizes numerous storage depots throughoutthe country.

·       *Anvil*.   The Anvil segment produces, sources and sells pipefittings, pipe hangers and pipe nipples and a variety of related productsprimarily to the commercial fire protection piping systems and HVACapplications market. Sales of our Anvil segment products are driven principallyby spending on non-residential construction projects.

*Developments andTrends*

The Acquisition of Predecessor Mueller Water on October 3,2005, as well as other developments, trends and factors may impact our futureresults including the following:

·       We have implemented price increasesfor Mueller segment products effective February 1, 2006, as planned.

·       As presented herein, the operatingresults from the Acquisition of Predecessor Mueller Group will be consolidatedwith those of U.S. Pipe’s results from October 3, 2005, the date ofAcquisition.

·       In the quarter ended December 31,2005, the Company, entered into the 2005 Mueller Credit Agreement. Proceeds ofthe 2005 Mueller Credit Agreement were approximately $1,053.4 million, net ofapproximately $21.6 million of underwriting fees and expenses which will beamortized over the life of the loans. The proceeds were used to refinancePredecessor Mueller Group’s 2004 Credit Facility (“2004 Mueller Credit Facility”),redeem Predecessor Mueller Group’s second priority senior secured floating ratenotes, and finance the acquisition of Predecessor Mueller Group by WalterIndustries. During the period subsequent to September 30, 2005, and priorto Walter Industries acquiring Predecessor Mueller Group on October 3,2005, Predecessor Mueller Group expensed $18.4 million of deferred financingfees related to the 2004 Mueller Credit Facility and 

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$2.4 million of deferred financing fees related to the secondpriority senior secured floating rate notes.

·       In the period subsequent to September 30,2005 and prior to Walter Industries acquiring Predecessor Mueller Group on October 3,2005, Predecessor Mueller Group expensed transaction fees of approximately$20.1 million and transaction bonuses of $10.0 million. These fees werecontingent upon completion of the sale of Predecessor Mueller Group to WalterIndustries. Non-contingent fees and expenses of approximately $3.1 million wereexpensed by Predecessor Mueller Group during the fiscal year ended September 30,2005.

·       We have initiated a synergy plandesigned to streamline our manufacturing operations, add incremental volumethrough combining sales efforts for complementary products and create savingsthrough a coordinated purchasing plan to reduce raw material and overallproduction costs. We expect that the full implementation of our synergy plan byearly fiscal 2008 will produce approximately $25-$35 million of ongoingincremental annual operating income. These benefits could be substantiallyhigher if additional production, purchasing and sales improvements arerealized.

·       As part of the synergy plan, in October 2005we announced and have initiated the closure of the U.S. Pipe Chattanooga,Tennessee plant and the transfer of the valve and hydrant production of thatplant to our Mueller segment’s Chattanooga, Tennessee and Albertville, Alabamaplants. The transfer of valve and hydrant production was completed in December 2005.The eventual closure of the U.S. Pipe Chattanooga, Tennessee plant will occursometime in fiscal 2006. Total costs related to this plant closure are expectedto be approximately $45.2 million, which will be expensed and included as acomponent of operating income in accordance with generally accepted accountingprinciples. Total costs recorded as components of operating income for the threemonths ended December 31, 2005 were $15.9 million charged to cost of salesrelated to inventory obsolescence and additional facility expenses and $24.1million of restructuring costs primarily related to fixed asset impairments,severance and environmental costs. Additional costs of $5.2 million areexpected to be expensed during the remainder of fiscal 2006 as a result ofclosing this facility.

·       Aspart of the synergy plan, on January 26, 2006, the Company announced theclosure of the Henry Pratt (“Pratt”) valve manufacturing facility in Dixon,Illinois by the end of fiscal 2006. The process of transferring the Dixon plant’soperations to other Pratt facilities has begun. Severance costs associated withthis plant closure of approximately $1.5 million will be allocated to goodwill.Costs associated with relocating equipment will be expensed as incurred. TheCompany has other plans that were formally identified prior to the Acquisitionto rationalize facilities and substantial cash expenditures in the form ofseverance and new equipment may be required to implement these plans. Althoughcertain expenditures related to future plant rationalizations are expected toqualify for purchase accounting treatment and are not expected to be charged tooperations, all costs of future facility rationalizations may not qualify forpurchase accounting treatment.

·       OnFebruary 3, 2006, Mueller Water filed a Registration Statement on Form S-1with respect to the initial public offering its Common Stock. The filing waspursuant to the October 21, 2005 announcement by Walter Industries toinitiate an initial public offering of equity securities and subsequentspin-off of Mueller Water.

·       In January 2005, the Company’sMueller segment completed two acquisitions. On January 4, 2006, theCompany acquired Hunt Industries, Inc. (“Hunt”) for $6.8 million in cash. Huntis a manufacturer of meter pits and meter yokes, based in Murfreesboro,Tennessee, which are sold by our Mueller segment. On January 27, 2006, theCompany acquired the operating assets of CCNE, L.L.C., a Connecticut-basedmanufacturer and seller of check valves to the water and wastewater 

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treatment markets, for$8.8 million in cash. The CCNE assets will be operated by our Milliken Valve Companyand Henry Pratt Company subsidiaries.

·       Mueller Water has announced itsintention to enter into a tax allocation agreement (“Tax AllocationAgreement”) with Walter Industries in connection with the initial publicoffering of its Common Stock. Pursuant to the Tax Allocation Agreement, we andWalter Industries will make payments to each other such that, with respect toany period during which we are or were a member of the consolidated federalincome tax group or any combined state or local income tax group with WalterIndustries or any Walter Industries subsidiaries, the amount of taxes to bepaid by us, or the amount of tax benefit to be refunded to us by WalterIndustries, subject to certain adjustments, will be determined as though we wereto file separate federal, state and local income tax returns as the commonparent of an affiliated group of corporations filing combined, consolidated orunitary (as applicable) federal, state and local returns rather than aconsolidated subsidiary of Walter Industries with respect to federal, state andlocal income taxes. With respect to our tax assets, our right to reimbursementfrom Walter Industries will be determined based on the usage of such tax assetsby the Walter Industries consolidated federal income tax group or the combined,consolidated or unitary state or local income tax group. Walter Industries willcontinue to have all the rights of a parent of a consolidated group (andsimilar rights provided for by applicable state and local law with respect to aparent of a combined, consolidated or unitary group), will be the sole andexclusive agent for us in any and all matters relating to the combined, consolidated or unitary federal,state and local income tax liabilities of us, will have sole and exclusiveresponsibility for the preparation and filing of consolidated federal incomeand consolidated or combined state and local tax returns (or amended returns),and will have the power, in its sole discretion, to contest or compromise anyasserted tax adjustment or deficiency and to file, litigate or compromise anyclaim for refund on behalf of us related to any such combined, consolidated orunitary (as applicable) federal, state or local tax return.

·       The Company has announced itsintention to adopt a new 2006 stock incentive plan designed to promoteour long-term growth and financial success by providing incentives to ouremployees, directors and consultants through grants of stock-based awards. Theimpact to net income for future grants has not yet been determined.

·       As of December 31, 2005, scrap metal costsfor our U.S. Pipe segment declined 16% from their peak in 2004. Recently scrapcosts have increased and are expected to remain elevated at least through March 2006.In addition, the price of brass ingot has increased by up to approximately 60%over the cost budgeted for brass ingot for fiscal year 2006.  If brass ingot pricing remains at currentlevels, production costs for our Mueller segment could increase, and there canbe no assurance that any of this increase can be passed along to our customers.

**Forward-Looking Statements**

This report contains certain statements that may bedeemed “forward-looking statements” within the meaning of Section 21E ofthe Securities Exchange Act of 1934. Allstatements other than statements of historical fact are statements that couldbe deemed forward looking statements. In this context, forward-lookingstatements often address our future business and financial performance, and maybe 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 and assessmentsmade by the Company’s management in light of its experience and its perceptionof historical trends, current conditions, expected future developments andother factors it believes to be appropriate. These forward looking statementsare subject to a number of risks and uncertainties, including but not limitedto: the Company’s ability to continue long-standing relationships with majorcustomers; increased competition; demand for and market acceptance of new andexisting products in the 

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marketswe serve; adverse changes in currency exchange rates or raw material prices, specificallysteel scrap, steel pipe and brass ingot; unanticipated developments that couldoccur with respect to contingencies such as litigation, product liabilityexposures and environmental matters; the Company’s ability to integrateacquired businesses into its operations; and other risks and uncertainties thataffect the manufacturing sector generally including, but not limited to,economic, political, governmental and technological factors affecting theCompany’s operations, markets, products, services and prices. Any such forwardlooking statements are not guarantees of future performances and actualresults, developments and business decisions may differ from those envisaged bysuch forward looking statements. These forward looking statements speak only asof the date of this Quarterly Report. The Company disclaims any duty to updateany forward looking statement, all of which are expressly qualified by theforegoing Forward-Looking Statements.

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**Results of Operations**

***Three Months Ended December 31,2005 As Compared to the Three Months Ended December 31, 2004***

| ** **                                                     | ** ** | **Three months ended**    | ** ** | ** **                            | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **December 31, 2005**     | ** ** | **December 31, 2004**       | ** ** | **FY06 Q1 vs. FY05 Q1** | ** ** |
| ** **                                                     | ** ** | ** **                          | ** ** | **Percentage  of net  sales(1)** | ** ** | ** ** | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                     | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                      |       |                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       | $                                   | 176.7      |                                  |       | 36.8 | % |   | $ | — |   |   | — | % |   |   | $ | 176.7 |   |   |   |   |   |   |
| U.S. Pipe                                                      |       | 171.1                               |       |                                  | 35.6       |   |   | 130.3 |   |   | 100.0 |   |   |   | 40.8 |   |   |   | 31.3 | % |   |
| Anvil                                                          |       | 132.6                               |       |                                  | 27.6       |   |   | — |   |   | — |   |   |   | 132.6 |   |   |   |   |   |   |
| Consolidated                                                   |       | $                                   | 480.4      |                                  |       | 100.0 |   |   | $ | 130.3 |   |   | 100.0 |   |   |   | $ | 350.1 |   |   |   |   |   |   |
| Gross profit                                                   |       |                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       | $                                   | 15.5       |                                  |       | 8.8 |   |   | $ | — |   |   | — |   |   |   | $ | 15.5 |   |   |   |   |   |   |
| U.S. Pipe                                                      |       | 9.1                                 |       |                                  | 5.3        |   |   | 12.7 |   |   | 9.7 |   |   |   | (3.6 | ) |   |   | (28.3 | ) |   |
| Anvil                                                          |       | 18.9                                |       |                                  | 14.3       |   |   | — |   |   | — |   |   |   | 18.9 |   |   |   |   |   |   |
| Consolidated                                                   |       | $                                   | 43.5       |                                  |       | 9.1 |   |   | $ | 12.7 |   |   | 9.7 |   |   |   | $ | 30.8 |   |   |   |   |   |   |
| Selling, general  and administrative                           |       |                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       | $                                   | 19.3       |                                  |       | 10.9 |   |   | $ | — |   |   | — |   |   |   | $ | 19.3 |   |   |   |   |   |   |
| U.S. Pipe                                                      |       | 11.0                                |       |                                  | 6.4        |   |   | 13.2 |   |   | 10.1 |   |   |   | (2.2 | ) |   |   | (16.7 | ) |   |
| Anvil                                                          |       | 20.4                                |       |                                  | 15.4       |   |   | — |   |   | — |   |   |   | 20.4 |   |   |   |   |   |   |
| Corporate                                                      |       | 6.4                                 |       |                                  | 1.3        |   |   | — |   |   | — |   |   |   | 6.4 |   |   |   |   |   |   |
| Consolidated                                                   |       | $                                   | 57.1       |                                  |       | 11.9 |   |   | $ | 13.2 |   |   | 10.1 |   |   |   | $ | 43.9 |   |   |   |   |   |   |
| Related party  corporate charges                               |       |                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       | $                                   | —     |                                  |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                      |       | 1.8                                 |       |                                  | 1.1        |   |   | 1.9 |   |   | 1.5 |   |   |   | (0.1 | ) |   |   | (5.3 | ) |   |
| Anvil                                                          |       | —                              |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                                   |       | $                                   | 1.8        |                                  |       | 0.4 |   |   | $ | 1.9 |   |   | 1.5 |   |   |   | $ | (0.1 | ) |   |   |   |   |   |
| Facility  rationalization, restructuring and related costs     |       |                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       | $                                   | —     |                                  |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                      |       | 24.1                                |       |                                  | 14.1       |   |   | — |   |   | — |   |   |   | 24.1 |   |   |   |   |   |   |
| Anvil                                                          |       | —                              |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                                   |       | $                                   | 24.1       |                                  |       | 5.0 |   |   | $ | — |   |   | — |   |   |   | $ | 24.1 |   |   |   |   |   |   |
| Loss from  operations                                          |       |                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                        |       | $                                   | (3.8       | )                                     |       | (2.2 | ) |   | $ | — |   |   | — |   |   |   | $ | (3.8 | ) |   |   |   |   |   |
| U.S. Pipe                                                      |       | (27.8                               | )          |                                  | (16.2      | ) |   | (2.4 | ) |   | (1.8 | ) |   |   | (25.4 | ) |   |   |   |   |   |
| Anvil                                                          |       | (1.5                                | )          |                                  | (1.1       | ) |   | — |   |   | — |   |   |   | (1.5 | ) |   |   |   |   |   |
| Corporate                                                      |       | (6.4                                | )          |                                  | (1.3       | ) |   | — |   |   | — |   |   |   | (6.4 | ) |   |   |   |   |   |
| Consolidated                                                   |       | $                                   | (39.5      | )                                     |       | (8.2 | ) |   | $ | (2.4 | ) |   | (1.8 | ) |   |   | $ | (37.1 | ) |   |   |   |   |   |
| Interest expense arising from related party payable  to Walter |       | $                                   | —     |                                  |       | — |   |   | $ | (5.9 | ) |   | (4.5 | ) |   |   | $ | 5.9 |   |   |   |   |   |   |
| Interest expense,  net of interest income                      |       | (28.1                               | )          |                                  | (5.8       | ) |   | (0.1 | ) |   | — |   |   |   | (28.0 | ) |   |   |   |   |   |
| Loss before income  taxes                                      |       | (67.6                               | )          |                                  | (14.1      | ) |   | (8.4 | ) |   | (6.4 | ) |   |   | (59.2 | ) |   |   |   |   |   |
| Income tax expense  (benefit)                                  |       | (26.7                               | )          |                                  | (5.6       | ) |   | 1.1 |   |   | 0.8 |   |   |   | (27.8 | ) |   |   |   |   |   |
| Net loss                                                       |       | $                                   | (40.9      | )                                     |       | (8.5 | ) |   | $ | (9.5 | ) |   | (7.3 | ) |   |   | $ | (31.4 | ) |   |   |   |   |   |

----

(1)           Percentages are by segment, if applicable.

51

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*NetSales.**  *Consolidatednet sales for the three months ended December 31, 2005 were $480.4 million,an increase of $350.1 million from $130.3 million in the prior yearperiod. The increase was primarily related to the October 3, 2005Acquisition of Predecessor Mueller Group, which accounted for $309.3 million orapproximately 88% of the overall increase.

Mueller segment net sales for the three months ended December 31,2005 were $176.7 million.

U.S. Pipe segment net sales for the three months endedDecember 31, 2005 were $171.1 million, an increase of $40.8 million,or 31.3% from $130.3 million in the prior year period. This increase wasdriven primarily by improved volumes and pricing of ductile iron pipe sales.

Anvil segment net sales for the three months ended December 31,2005 were $132.6 million.

*GrossProfit.**  *Consolidatedgross profit for the three months ended December 31, 2005 was $43.5 million,an increase of $30.8 million compared to $12.7 million in the prioryear period. The Acquisition of Predecessor Mueller Group contributed $34.4million of the increase. Included in cost of sales for the three months ended December 31,2005 was $59.0 million of purchase accounting adjustments related to valuinginventory acquired in the Acquisition at fair value and $1.4 million ofamortization expense related to intangible assets identified during theallocation of the Acquisition purchase price.

Mueller segment gross profit for the three monthsended December 31, 2005 was $15.5 million. Included in cost of sales forthe three months ended December 31, 2005 was $46.2 million of purchaseaccounting adjustments related to valuing inventory at fair value and $1.3million of amortization expense related to intangible assets.

U.S. Pipe segment gross profit for the three months endedDecember 31, 2005 was $9.1 million, a decrease of $3.6 million, or28.3%, compared to $12.7 million in the prior year period. Gross margindecreased to 5.3% in the current period compared to 9.7% in the prior yearperiod. On October 26, 2005 the Company announced that the U.S. PipeChattanooga plant would be closed during fiscal 2006 and that production of theU.S. Pipe valves and hydrants would be transferred to the Mueller manufacturingfacilities at Albertville, Alabama and Chattanooga, Tennessee. In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant product sales was transferred to the Muellersegment. In conjunction with this transfer, it was determined that certain U.S.Pipe inventory would not ultimately be sold. As a result, inventoryobsolescence write-offs of $10.7 million were recorded to cost of sales duringthe current period.

In addition, because of the plant closure process, currentperiod actual production capacity at the U.S. Pipe Chattanooga facility wassignificantly lower than normal capacity, resulting in facility expenses of$5.2 million charged directly to cost of sales.

Excluding the charges for inventory write-offs of$10.7 million and facility expenses of $5.2 million, U.S. Pipe gross marginswould have been $250.0 million, or 14.6% for the current period, comparedto 9.7 % in the prior year period. This increase is primarily due to higherductile iron pipe selling prices.

Anvil segment gross profit for the three months ended December 31,2005 was $18.9 million. Included in cost of sales for the three months ended December 31,2005 was $12.2 million of purchase accounting adjustments related to valuinginventory at fair value and $0.1 million of amortization expense related tointangible assets.

*Selling,General & Administrative.**  *Consolidated expenses for the threemonths ended December 31, 2005 were $57.1 million, an increase of$43.9 million, compared to $13.2 million in the prior year period.The acquisition of Predecessor Mueller Group accounted for $46.1 million of theincrease. Expenses as a percentage of net sales increased to 11.9% in thecurrent period compared to 10.1% in the prior year period. Included in currentperiod expenses were amortization expenses related to definite-livedintangibles of $5.2 million as a result of the Acquisition.

52

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Mueller segment expenses for the three months ended December 31,2005 were $19.3 million, including $4.6 million of amortization expense ofdefinite-lived intangibles.

U.S. Pipe segment expenses for the three months ended December 31,2005 were $11.0 million, compared to $13.2 million for the prior yearperiod. As a percentage of net sales, expenses improved to 6.4% in the currentperiod compared to 10.1% in the prior year period. Prior period costs includeda $4.0 million environmental charge related to the Anniston, Alabama site(shut down in 2003), which was partially offset by higher management incentiveaccruals and increased outside sales commissions recorded in the currentperiod.

Anvil segment expenses for the current period were$20.4 million, including $0.6 million of amortization expense of definite-livedintangibles.

Corporate segment expenses for the current period were$6.4 million.

*RelatedParty Corporate Charges.*   Certain costs incurredby Walter such as insurance, executive salaries, professional service fees,human resources, transportation, and other centralized business functions areallocated to its subsidiaries. Costs incurred by Walter that cannot be directlyattributed to its subsidiaries are allocated to them based on estimated annualrevenues.

*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$24.1 million of restructuring costs for the three months ended December 31,2005 related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $19.0 million,severance for terminated hourly and salaried employees of $3.0 million, andenvironmental costs of $2.1 million, primarily related to landfill closureand required site clean-up costs. The Company expects to expense additionalclosure costs of $5.2 million in future periods, when allowable under generallyaccepted accounting principles.

*InterestExpense Arising from Related Party Payable to Walter.**  *Interest expense was allocated to the Company up tothe date of the Acquisition based upon the outstanding balance of theintercompany note. The intercompany note to Walter of $443.6 million was  forgiven. There was no intercompany interestexpense for the three months ended December 31, 2005 and $5.9 million forthe three months ended December 31, 2004.

*InterestExpense, Net of Interest Income.**  *Interest expense, net of interestincome, for the current period was $28.1 million and includes $25.2million of contractual interest expense on the $1,050.0 million senior securedterm loan entered into on October 3, 2005, and the 10% Senior SubordinatedNotes assumed by the Company as part of the October 3, 2005 Acquisition;$2.5 million in commitment fees for a bridge loan which were expensed at theexpiration of the bridge loan period during the current period and $1.1 millionof amortization of deferred financing fees, partially offset by $0.4 million ofgains on interest rate swaps and $0.3 million of interest income earned onunrestricted cash balances for the current period.

*Income Tax Expense(Benefit).**  *The provision for income taxes forthe current period was a benefit of $26.7 million as compared to anexpense of $1.1 million in the prior year period. The effective tax ratesfor the first quarter of 2006 was 39.5%. The effective tax rate  for the first quarter of 2005 was (13.1%). Thenegative tax rate was due to reducing a valuation allowance on state deferredtax assets.

53

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**SupplementalInformation—Results of Operations for the Three Months Ended December 31,2005 Compared to Pro Forma Results of Operations for the Three Months EndedDecember 31, 2004**

The unaudited pro forma results of operations for thethree months ended December 31, 2004 is presented as if the Acquisition ofPredecessor Mueller Group and borrowings under the 2005 Mueller CreditAgreement had taken place on October 1, 2004 and were carried forwardthrough December 31, 2004.

54

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**Pro Forma Results of Operations**

***Actual Three MonthsEnded December 31, 2005 As Compared to the Pro FormaThree Months Ended December 31,2004***

| ** **                                                 | ** ** | **Three months ended**        | ** ** | ** **                                      | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                 | ** ** | **Actual December 31,  2005** | ** ** | **Pro Forma December 31,  2004** | ** ** | **Actual FY06 Q1 vs. Pro  FormaFY05 Q1** | ** ** |
| ** **                                                 | ** ** | ** **                              | ** ** | **Percentage  of net  sales(1)**           | ** ** | ** ** | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                 | ** ** | **(dollars in millions)**     | ** ** |
| Net sales                                                  |       |                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | 176.7      |                                            |       | 36.8 | % |   | $ | 138.6 |   |   | 35.9 | % |   |   | $ | 38.1 |   |   |   | 27.5 | % |   |
| U.S. Pipe                                                  |       | 171.1                                   |       |                                            | 35.6       |   |   | 130.3 |   |   | 33.7 |   |   |   | 40.8 |   |   |   | 31.3 |   |   |
| Anvil                                                      |       | 132.6                                   |       |                                            | 27.6       |   |   | 117.5 |   |   | 30.4 |   |   |   | 15.1 |   |   |   | 12.9 |   |   |
| Consolidated                                               |       | $                                       | 480.4      |                                            |       | 100.0 |   |   | $ | 386.4 |   |   | 100.0 |   |   |   | $ | 94.0 |   |   |   | 24.3 |   |   |
| Gross profit                                               |       |                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | 15.5       |                                            |       | 8.8 |   |   | $ | 43.1 |   |   | 31.1 |   |   |   | $ | (27.6 | ) |   |   | (64.0 | ) |   |
| U.S. Pipe                                                  |       | 9.1                                     |       |                                            | 5.3        |   |   | 12.7 |   |   | 9.7 |   |   |   | (3.6 | ) |   |   | (28.3 | ) |   |
| Anvil                                                      |       | 18.9                                    |       |                                            | 14.3       |   |   | 30.3 |   |   | 25.8 |   |   |   | (11.4 | ) |   |   | (37.6 | ) |   |
| Consolidated                                               |       | $                                       | 43.5       |                                            |       | 9.1 |   |   | $ | 86.1 |   |   | 22.3 |   |   |   | $ | (42.6 | ) |   |   | (49.5 | ) |   |
| Selling, general  and administrative                       |       |                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | 19.3       |                                            |       | 10.9 |   |   | $ | 21.0 |   |   | 15.2 |   |   |   | $ | (1.7 | ) |   |   | (8.1 | ) |   |
| U.S. Pipe                                                  |       | 11.0                                    |       |                                            | 6.4        |   |   | 13.2 |   |   | 10.1 |   |   |   | (2.2 | ) |   |   | (16.7 | ) |   |
| Anvil                                                      |       | 20.4                                    |       |                                            | 15.4       |   |   | 20.0 |   |   | 17.0 |   |   |   | 0.4 |   |   |   | 2.0 |   |   |
| Corporate                                                  |       | 6.4                                     |       |                                            | 1.3        |   |   | 5.8 |   |   | 1.5 |   |   |   | 0.6 |   |   |   | 10.3 |   |   |
| Consolidated                                               |       | $                                       | 57.1       |                                            |       | 11.9 |   |   | $ | 60.0 |   |   | 15.5 |   |   |   | $ | (2.9 | ) |   |   | (4.8 | ) |   |
| Related party  corporate charges                           |       |                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | —     |                                            |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                  |       | 1.8                                     |       |                                            | 1.1        |   |   | 1.9 |   |   | 1.5 |   |   |   | (0.1 | ) |   |   | (5.3 | ) |   |
| Anvil                                                      |       | —                                  |       |                                            | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                               |       | $                                       | 1.8        |                                            |       | 0.4 |   |   | $ | 1.9 |   |   | 0.5 |   |   |   | $ | (0.1 | ) |   |   | (5.3 | ) |   |
| Facility  rationalization, restructuring and related costs |       |                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | —     |                                            |       | — |   |   | $ | 0.1 |   |   | — |   |   |   | $ | (0.1 | ) |   |   |   |   |   |
| U.S. Pipe                                                  |       | 24.1                                    |       |                                            | 14.1       |   |   | — |   |   | — |   |   |   | 24.1 |   |   |   |   |   |   |
| Anvil                                                      |       | —                                  |       |                                            | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                               |       | $                                       | 24.1       |                                            |       | 5.0 |   |   | $ | 0.1 |   |   | — |   |   |   | $ | 24.0 |   |   |   |   |   |   |
| Income (loss) from  operations                             |       |                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                       | (3.8       | )                                               |       | (2.2 | ) |   | $ | 22.0 |   |   | 15.9 |   |   |   | $ | (25.8 | ) |   |   |   |   |   |
| U.S. Pipe                                                  |       | (27.8                                   | )          |                                            | (16.2      | ) |   | (2.4 | ) |   | (1.8 | ) |   |   | (25.4 | ) |   |   |   |   |   |
| Anvil                                                      |       | (1.5                                    | )          |                                            | (1.1       | ) |   | 10.3 |   |   | 8.8 |   |   |   | (11.8 | ) |   |   |   |   |   |
| Corporate                                                  |       | (6.4                                    | )          |                                            | (1.3       | ) |   | (5.8 | ) |   | (1.5 | ) |   |   | (0.6 | ) |   |   | (10.3 | ) |   |
| Consolidated                                               |       | $                                       | (39.5      | )                                               |       | (8.2 | ) |   | $ | 24.1 |   |   | 6.2 |   |   |   | $ | (63.6 | ) |   |   |   |   |   |
| Interest expense, net of interest income                   |       | (28.1                                   | )          |                                            | (5.8       | ) |   | (31.1 | ) |   | (8.1 | ) |   |   | 3.0 |   |   |   |   |   |   |
| Loss before income  taxes                                  |       | (67.6                                   | )          |                                            | (14.1      | ) |   | (7.0 | ) |   | (1.8 | ) |   |   | (60.6 | ) |   |   |   |   |   |
| Income tax benefit                                         |       | (26.7                                   | )          |                                            | (5.6       | ) |   | (1.4 | ) |   | (0.4 | ) |   |   | (25.3 | ) |   |   |   |   |   |
| Net loss                                                   |       | $                                       | (40.9      | )                                               |       | (8.5 | ) |   | $ | (8.4 | ) |   | (2.2 | ) |   |   | $ | (32.5 | ) |   |   |   |   |   |

----

(1)           Percentages are by segment, if applicable.

55

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Management’s discussion below reflects its analysis ofthe pro forma data presented above. Management believes that the pro formacomparisons will assist in understanding trends in the Company’s business inthe factors that management considers critical to assessing the Company’soperating and financial performance.

*NetSales.**  *Consolidatednet sales for the three months ended December 31, 2005 were $480.4million, an increase of $94.0 million from $386.4 million in theprior year period.

Mueller segment net sales for the three months ended December 31,2005 were $176.7 million, an increase of $38.1 million, or 27.5% from $138.6million in the prior year period. This increase was primarily driven by higherpricing and volumes in hydrants and water valves.

U.S. Pipe segment net sales for the three months endedDecember 31, 2005 were $171.1 million, an increase of $40.8 million,or 31.3% from $130.3 million in the prior year period. This increase wasdriven primarily by improved volumes and pricing of ductile iron pipe sales.

Anvil segment net sales for the three months ended December 31,2005 were $132.6 million, an increase of $15.1 million, or 12.9% from $117.5million in the prior year period. This increase was primarily the result ofcontinued strength in the oilfield and mechanical markets for grooved andhanger products and growth in the sales of foreign-sourced products. Priceincreases implemented in late fiscal 2005 also had a positive impact, and thestrength of the Canadian dollar, relative to the U.S. dollar, assisted inincreasing sales in Canada.

*GrossProfit.*   Consolidatedgross profit for the three months ended December 31, 2005 was $43.5 million,a decrease of $42.6 million compared to $86.1 million in the prioryear period. Included in cost of sales for the three months ended December 31,2005 was $58.4 million of purchase accounting adjustments related to valuinginventory acquired in the Acquisition at fair value.

Mueller segment gross profit for the three monthsended December 31, 2005 was $15.5 million, a decrease of $27.6 million, or64.0% from $43.1 million in the prior year period. Gross margin decreased to8.8% in the current period compared to 31.1% in the prior year period. Thecurrent period includes $46.2 million related to the amortization expenseresulting from the purchase accounting adjustment to increase acquiredinventories to fair value on the date of acquisition. Excluding the effects ofthis inventory amortization, gross profit would have been $58.7 million andgross margin would have been 33.2% compared to 31.1% in the prior year period. Thisincrease was primarily due to higher pricing and volumes, particularly inhydrants and water valves.

U.S. Pipe segment gross profit for the three monthsended December 31, 2005 was $9.1 million, a decrease of $3.6 million,or 28.3%, compared to $12.7 million in the prior year period. Gross margindecreased to 5.3% in the current period compared to 9.7% in the prior yearperiod. On October 26, 2005 the Company announced that the U.S. PipeChattanooga plant would be closed during fiscal 2006 and that production of theU.S. Pipe valves and hydrants would be transferred to the Mueller manufacturingfacilities at Albertville, Alabama and Chattanooga, Tennessee. In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant product sales was transferred to the Muellersegment. In conjunction with this transfer, it was determined that certain U.S.Pipe inventory would not ultimately be sold. As a result, inventoryobsolescence write-offs of $10.7 million were recorded to cost of sales duringthe current period.

In addition, because of the plant closure process, currentperiod actual production capacity at the U.S. Pipe Chattanooga facility wassignificantly lower than normal capacity, resulting in facility expenses of$5.2 million charged directly to cost of sales.

Excluding the charges for inventory write-offs of$10.7 million and facility expenses of $5.2 million, U.S. Pipe gross marginswould have been $25.0 million, or 14.6% for the current period, comparedto 9.7 % in the prior year period. This increase is primarily due to higherductile iron pipe selling prices.

56

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Anvil segment gross profit for the three months ended December 31,2005 was $18.9 million, a decrease of $11.4 million, or 37.6%, compared to$30.3 million in the prior year period. The current period includes $12.2million related to the amortization expense resulting from the purchaseaccounting adjustment to increase acquired inventories to fair value on thedate of acquisition. Excluding the effects of this inventory amortization,gross profit would have been $31.1 million and gross margin would have been23.5% compared to 25.8% in the prior year period.

*Selling,General & Administrative.**  *Consolidated expenses for the threemonths ended December 31, 2005 were $57.1 million, a decrease of$2.9 million, compared to $60.0 million in the prior year period.Expenses as a percentage of net sales improved to 11.9% in the current periodcompared to 15.5% in the prior year period.

Mueller segment expenses for the three months ended December 31,2005 were $19.3 million, a decrease of $1.7 million, or 8.1%, compared to $21.0million in the prior year period. Expenses as a percentage of net sales improvedto 10.9% in the current period compared to 15.2% in the prior year period.

U.S. Pipe segment expenses for the three months ended December 31,2005 were $11.0 million, compared to $13.2 million for the prior yearperiod. As a percentage of net sales, expenses improved to 6.4% in the currentperiod compared to 10.1% in the prior year period. Prior period costs includeda $4.0 million environmental charge related to the Anniston, Alabama site(shut down in 2003), which were partially offset by higher management incentiveaccruals and increased outside sales commissions recorded in the currentperiod.

Anvil segment expenses for the current period were$20.4 million, an increase of $0.4 million, or 2.0%, compared to $20.0 millionin the prior year period. Expenses as a percentage of net sales improved to15.4% in the current period compared to 17.0% in the prior year period.

Corporate segment expenses for the current period were$6.4 million, an increase of $0.6 million compared to $5.8 million in the prioryear period.

*Related PartyCorporate Charges.*   Certain costs incurred by Walter such as insurance,executive salaries, professional service fees, human resources, transportation,and other centralized business functions are allocated to itssubsidiaries.  Costs incurred by Walterthat cannot be directly attributed to its subsidiaries are allocated to thembased on estimated annual revenues.

*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$24.1 million of restructuring costs for the three months ended December 31,2005, related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $19.0 million,severance for terminated hourly and salaried employees of $3.0 million, andenvironmental costs of $2.1 million, primarily related to landfill closureand required site clean-up costs. The Company expects to expense additionalclosure costs of $5.2 million in future periods, when allowable under generallyaccepted accounting principles. The Company expensed $0.1 million for the threemonths ended December 31, 2004, for severance related to the closure of aMueller segment manufacturing facility in Colorado.

*InterestExpense, Net of Interest Income.**  *Interest expense, net of interestincome, for the current period was $28.1 million and includes $25.2million of contractual interest expense on the $1,050.0 million senior securedterm loan entered into on October 3, 2005, and the 10% Senior SubordinatedNotes assumed by the Company as part of the October 3, 2005 Acquisition; $2.5million in commitment fees for a bridge loan which were expensed at theexpiration of the bridge loan period during the current period and $1.1 millionof amortization of deferred financing fees, partially offset by $0.4 million ofgains on interest rate swaps and $0.3 million of interest income earned onunrestricted cash balances for the period. Interest expense, net of interestincome, for the prior year period was $31.1 million. The decrease isprimarily due to the inclusion in the prior year period of $5.9 million ofinterest expense arising from a related party payable to Walter.

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**Financial Condition**

Cash and cash equivalents increased from zero atSeptember 30, 2005 to $63.5 million at December 31, 2005, reflecting $74.9million in cash flows provided by operations and $24.6 million in cash flowsprovided by financing activities, offset by $36.0 million of cash flows used ininvesting activities. At September 30, 2005, U.S. Pipe was a wholly-ownedsubsidiary of Walter and all of its net cash activity was transferred intoWalter’s concentrated cash management system on a daily basis.

Net receivables, consisting principally of tradereceivables, were $267.0 million at December 31, 2005, an increase of$148.5 million from September 30, 2005. The Acquisition accounted for anincrease of $161.9 million, partially offset by a $13.4 million decrease forthe U.S. Pipe segment, primarily due to lower U.S. Pipe sales levels in  the quarter ended December 31, 2005compared to the quarter ended September 30, 2005.

Inventories were $429.1 million at December 31,2005, an increase of $281.9 million from September 30, 2005. TheAcquisition accounted for an increase of $373.2 million, partially offset by reducingacquired inventory during the period by $62.2 million and a $29.1 milliondecrease for the U.S. Pipe segment, primarily due to reductions in pipe, valve,and hydrant inventories and a $10.7 million inventory obsolescence write-downidentified with the closure of the U.S. Pipe Chattanooga plant.

Current deferred income taxes, net, were $58.8 millionat December 31, 2005, an increase of $47.7 million fromSeptember 30, 2005. The Acquisition accounted for $29.4 million of theincrease. The remainder of the increase was primarily due to $15.8 millionof accrued expenses not currently deductible.

Prepaid expenses, consisting principally ofmaintenance supplies and tooling parts and prepaid insurance premiums, were$32.1 million at December 31, 2005, an increase of $30.6 million fromSeptember 30, 2005. The Acquisition accounted for $31.1 million of theincrease.

Property, plant and equipment was $344.8 million atDecember 31, 2005, an increase of $195.6 million from September 30,2005, primarily due to the Acquisition ($212.9 million) and capitalexpenditures ($16.0 million), partially offset by fixed assets impairmentsresulting from the U.S. Pipe Chattanooga plant closure ($17.8 million) anddepreciation expense ($17.1 million).

Deferred financing fees, net, were $28.8 million atDecember 31, 2005. There were no deferred financing fees atSeptember 30, 2005. All fees are related to the 2005 Mueller CreditAgreement entered into in conjunction with the October 3, 2005 Acquisitionand the existing 10% Senior Subordinated Notes at Predecessor Mueller Groupthat were assumed as part of the Acquisition.

Due from Walter affiliate was $20.0 million atDecember 31, 2005, representing a $20.0 million note receivable for cashcontributed to Walter by the Company subsequent to the Acquisition.  There was no such amount at September 30,2005.

Identifiable intangibles, net, were $849.3 millionat December 31, 2005. There were no such intangibles at September 30,2005. Certain intangibles were identified during the allocation of the purchaseof the Acquisition: (a) indefinite-lived intangible assets consisting oftrade names and trademarks of $403.0 million; and (b) definite-livedintangible assets consisting of customer relationships of $396.6 millionand technology of $56.3 million. Amortization expense resultingfrom definite-lived assets for the three months ended December 31, 2005was $6.6 million.

Goodwill was $718.5 millionat December 31, 2005, an increase of $660.1 million from September 30,2005. This increase represents goodwill identified during the allocation of thepurchase price of the Acquisition.

Accounts payable were $105.9 millionat December 31, 2005, an increase of $53.4 million from September 30,2005. The Acquisition accounted for $47.3 million of theincrease.

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Accrued expenses were $105.1 millionat December 31, 2005, an increase of $70.4 million compared to September 30,2005. The Acquisition accounted for $67.3 million of theincrease. The remainder of the increase was primarily due to the addition ofaccrued restructuring of $3.8 million related tothe U.S. Pipe Chattanooga plant closure.

Long-term debt, including the current portion, was$1,382.9 million at December 31, 2005. Therewas no debt payable to non-affiliates at September 30, 2005. All debtamounts are related to the 2005 Mueller Credit Agreement entered into inconjunction with the October 3, 2005 Acquisition and existing notes andcapital leases at Predecessor Mueller Group that were assumed as part of theAcquisition.

Payable to parent, Walter, was $2.6 millionat December 31, 2005 compared to $443.6 million at September 30,2005. In conjunction with the contribution of U.S. Pipe to the Company at October 3,2005, the intercompany balance was forgiven. The remaining payable representscertain costs incurred by Walter which benefited the Company and are requiredto be settled in cash.

Accrued pension liability, net increased $43.6 millionto $97.2 millionat December 31, 2005. The Acquisition accounted for an increase of $41.4 million.

Non-current deferredincome taxes, net, were $312.0 million at December 31,2005, an increase of $321.5 million compared to September 30,2005. The Acquisition accounted for $301.3 million of theincrease. The remainder of the increase was primarily due to $20.0 millionof accrued expense not currently deductible.

***Statement of Cash Flows***

Historically, our financing requirements have beenfunded primarily through cash generated by operating activities and borrowingsunder our revolving credit facility. From time to time, we have also raisedadditional funds through term debt offerings.

*Cashflows from operating activities.**  *Net cash provided by operations was$74.9 millionfor the first three months of 2006, compared to net cash provided of $21.5 millionfor the first three months of 2005. The difference was due primarily to theAcquisition.

*Cashflows used in investing activities.**  *In the first three months of 2006we had net cash used in investing activities of $36.0 millioncompared to net cash used in the first three months of 2005 of $20.4 million.

*Cash flows from financingactivities.**  *Netcash provided by financing activities was $24.6 million for the firstthree months of 2006, compared to net cash used in the first three months of2005 of $1.2 million.

**Liquidity and Capital Resources**

Our principal sources ofliquidity have been, and are expected to be, cash flow from operations andborrowings under the 2005 Mueller Credit Agreement. Our principal uses of cashwill be debt service requirements as described below, capital expenditures,working capital requirements, dividends to our parent, Mueller Water, tofinance our cash needs and possible acquisitions.

*Debt Service*

As of December 31, 2005, we had: (a) totalconsolidated indebtedness of approximately $1,382.9 million;and (b) approximately $113.9 million of borrowingsavailable under the revolver portion of the 2005 Mueller Credit Agreement,subject to customary conditions. As of December 31, 2005, the Company had$31.1 millionin letters of credit outstanding under the 2005 Mueller Credit Agreement, whichreduces availability for borrowings thereunder. The significant debt serviceobligations under the credit facility and indentures could have materialconsequences to our security holders. Our key financial 

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covenants are dependent onattaining certain levels of EBITDA, as defined in the respective debtarrangements. The most restrictive covenant in effect at December 31, 2005related to a leverage ratio, as defined in the 2005 Mueller Credit Agreement,which required approximately $237.0 million of EBITDAover the trailing twelve months, based on net debt outstanding at December 31,2005. We were in compliance with this covenant at December 31, 2005.

*2005Mueller Credit Agreement:**  *OnOctober 3, 2005, the Company entered into a credit agreement (the “2005Mueller Credit Agreement”) consisting of a $145 million seniorsecured revolving credit facility maturing in October 2010 (the “2005Mueller Revolving Credit Facility”) and a $1,050 million seniorsecured term loan maturing in October 2012 (the “2005 Mueller Term Loan”).The 2005 Mueller Credit Agreement is a secured obligation of the Company andsubstantially all of its wholly-owned domestic subsidiaries, including U.S.Pipe. The 2005 Mueller Term Loan requires quarterly principal payments of $2.6 millionthrough October 3, 2012, at which point in time the remaining principaloutstanding is due. The commitment fee on the unused portion of the 2005Mueller Revolving Credit Facility is 0.50% and the interest rate is a floatinginterest rate of 2.5% over LIBOR. The 2005 Mueller Term Loan carries a floatinginterest rate of 2.25% over LIBOR.

Proceeds from the 2005 Mueller Credit Agreement were$1,053.4 million, net of $21.6 millionof underwriting fees and expenses which will be amortized over the life of theloans. The proceeds were used to finance the acquisition of our parent,Predecessor Mueller Water by Walter and to refinance existing indebtedness.

The 2005 Mueller Credit Agreement contains customaryevents of default and covenants, including covenants that restrict the abilityof the Company and certain of its subsidiaries to incur certain additional indebtedness,pay dividends, create or permit liens on assets, engage in mergers orconsolidations, and certain restrictive financial covenants.

On January 24, 2006, the Company entered into anAmendment No. 1 (the “First Amendment”) to the 2005 Credit Agreement. TheFirst Amendment removes the requirement that the Company and its subsidiarieschange their fiscal year end to December 31 and, in the event of aninitial public offering of the Company, provides the ability for the Company topay up to $8.5 million in cashdividends to Mueller Water for further distribution to Mueller Water’sshareholders. Mueller Water is a wholly-owned subsidiary of Walter.

The debt instruments described below were liabilitiesof Predecessor Mueller prior to the Acquisition on October 3, 2005 andcontinue as liabilities of the Company subsequent to the Acquisition.

*10%Senior Subordinated Notes:*   On April 23, 2004, the Company issued $315 million principal face amount of 10% senior subordinated notes due2012. The senior subordinated notes are guaranteed by each of theCompany’s existing domestic restricted subsidiaries. The subordinated notescontain customary covenants and events of default, including covenants thatlimit the Company’s ability to incur debt, pay dividends and make investments.

On October 4, 2005,the Company notified the holders of the subordinated notes that the Acquisitionwas a change in control and that, as a result, the holders had a right to causethe Company to repurchase their senior subordinated notes on or before 5:00 p.m.eastern standard time, on November 4, 2005 at a price of 101% of theprincipal face amount of such notes. The change of control offer expired at5:00 p.m. eastern standard time, on November 6, 2005, with nosubordinated notes being validly tendered and not withdrawn and, accordingly,no subordinated notes were purchased pursuant to the change of control offer.

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*CapitalExpenditures*

The 2005 Mueller CreditAgreement contains restrictions on our ability to make capital expenditures.Based on current estimates, management believes that the amount of capitalexpenditures permitted to be made under the senior credit facility will beadequate to maintain the properties and business of our continuing operations.

*Sources of Funds*

We anticipate that our operating cash flow, togetherwith permitted borrowings under the senior credit facility, will be sufficientto meet our anticipated future operating expenses, capital expenditures anddebt service obligations as they become due for at least the next twelvemonths. However, our ability to make scheduled payments of principal of, to payinterest on or to refinance our indebtedness and to satisfy our other debtobligations will depend upon our future operating performance, which will beaffected by general economic, financial, competitive, legislative, regulatory,business and other factors beyond our control.

From time to time we may explore additional financingmethods and other means to lower our cost of capital, which could include stockissuance or debt financing and the application of the proceeds therefrom to therepayment of bank debt or other indebtedness. In addition, in connection withany future acquisitions, we may require additional funding which may beprovided in the form of additional debt or equity financing or a combinationthereof. There can be no assurance that any additional financing will beavailable to us on acceptable terms.

As disclosed in MuellerWater’s Registration Statement on Form S-1 filed on February 3,2006 with the Securities and Exchange Commission, we anticipate using the netproceeds from the public offering of Mueller Water’s Common Stock, as well asany proceeds received from any exercise of the underwriters’ option to purchaseadditional shares of Common Stock, to repay certain of our indebtedness,including a portion of the Company’s term loan under the 2005 Mueller CreditAgreement and a portion of the Company’s 10% senior subordinated notes due 2012and for general corporate purposes.

**Off-Balance Sheet Arrangements**

We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. In addition, we do not have anyundisclosed borrowings or debt, and we have not entered into any derivativecontracts (other than those described in “—Qualitative and QuantitativeDisclosure About Market Risk—Interest Rate Risk”) or synthetic leases. We are,therefore, not materially exposed to any financing, liquidity, market or creditrisk that could arise if we had engaged in such relationships.

We utilize letters of creditand surety bonds in the ordinary course of business to ensure our performanceof contractual obligations. As of December 31, 2005, we had $31.1 millionof letters of credit and $23.3 million of suretybonds outstanding.

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**Contractual Obligations**

Our contractualobligations as of December 31, 2005:

**Payments Due byPeriod**

| **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            |       |                                | $          | 10.5                            |       |               |       | $                  | 21.0       |                        |       |      | $          | 21.0 |   |   |   | $ | 1,309.9 |   |   | $ | 1,362.4 |   |
| Interest on long-term debt(1)          |       |                                | 103.4      |                            |       |               | 204.6      |               |       |                        | 201.6      |      |       |   | 161.4 |   |   | 671.0 |   |
| Capital lease  obligations             |       |                                | 1.0        |                            |       |               | 1.2        |               |       |                        | 0.1        |      |       |   | — |   |   | 2.3 |   |
| Operating leases                       |       |                                | 9.0        |                            |       |               | 9.5        |               |       |                        | 3.2        |      |       |   | 3.1 |   |   | 24.8 |   |
| Unconditional purchase  obligations(2) |       |                                | 21.3       |                            |       |               | 0.7        |               |       |                        | —     |      |       |   | — |   |   | 22.0 |   |
| Other long-term  obligations(3)        |       |                                | —     |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | — |   |
| Total contractual  cash obligations    |       |                                | $          | 145.2                           |       |               |       | $                  | 237.0      |                        |       |      | $          | 225.9 |   |   |   | $ | 1,474.4 |   |   | $ | 2,082.5 |   |

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(1)          Interest on the seniorcredit facility is calculated using LIBOR of 4.54%, the rate in effect on December 31,2005. Each increase or decrease in LIBOR of 0.125% would result in an increaseor decrease in annual interest on the senior credit facility and secured notesof $1.3 million.Because the interest rate under the senior credit facility will be variable,actual payments may differ. Interest does not include payments that could berequired under our interest-rate swap agreements, which payments will dependupon movements in interest rates and could vary significantly. The payments dueon the existing interest rate swaps are estimated to be approximately $4.9 million,net of LIBOR interest calculated at 4.54% received from counterparties.

(2)          Includes contractualobligations for purchases of raw materials and capital expenditures.

(3)          Excludesthe deferred payment portion of the purchase price for Star Pipe, Inc. (“Star”),purchased by Predecessor Mueller Group on January 15, 2004. The Starpurchase price is subject to adjustment to reflect, among other things, adeferred payment to be made by us to the extent that the gross profit of thebusiness exceeds the target gross profit from February 1, 2004 to January 31,2007. Although the maximum amount payable is $23.0 million, we estimatethat the total deferred payment will be approximately $3.0 millionto $6.0 million.This calculation of the potential Star purchase price adjustment is based onmanagement’s best estimate; however, the actual adjustment may be materiallydifferent.

**Effect of Inflation; Seasonality**

We do not believe that general inflation (except forscrap steel, brass ingot and steel pipe) has had a material impact on ourfinancial position or results of operations.

Our business is dependentupon the construction industry, which is very seasonal due to the impact ofwinter or wet weather conditions. Our net sales and operating income havehistorically been lowest, and our working capital needs have been highest, inthe three month periods ending around December 31 and March 31, whenthe northern United States and all of Canada generally face weather thatrestricts significant construction activity and we build working capital inanticipation of the peak construction season, during which time our workingcapital needs tend to be reduced.

**Critical Accounting Policies**

Our significant accounting policies include those of U.S. Pipe andPredecessor Mueller Group. While all significant accounting policies areimportant to our consolidated financial statements, some of these 

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policies may be viewed as being critical.Such policies 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. We believe our most critical accountingpolicies are as follows:

***Pensions***

We sponsor a number of defined benefit retirement plans. We recordannual amounts relating to these plans based on calculations specified byaccounting principles generally accepted in the United States of America, whichinclude various actuarial assumptions including the following:

*U.S. Pipe*

| ** **                                                                     | ** ** | **Pension Benefits**    | ** ** | **Other Benefits**     | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Weighted-average assumptions used to determine benefit  obligations:           |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                  |       |                         | 5.0        | %                           |       |   | 6.0 | % |   |   | 5.0 | % |   |   | 6.0 | % |   |
| Rate of compensation increase                                                  |       |                         | 3.5        | %                           |       |   | 3.5 | % |   |   | — |   |   |   | — |   |   |
| Weighted-average assumptions used to determine net  periodic costs:            |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate:                                                                 |       |                         | 6.0        | %                           |       |   | 6.4 | % |   |   | 6.0 | % |   |   | 6.4 | % |   |
| Expected return on plan assets                                                 |       |                         | 8.9        | %                           |       |   | 8.9 | % |   |   | — |   |   |   | — |   |   |
| Rate of compensation increase                                                  |       |                         | 3.5        | %                           |       |   | 3.5 | % |   |   | — |   |   |   | — |   |   |
| Assumed health care cost trend rates:                                          |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Health care cost trend rate assumed for next year                         |       |                         | —     |                        |       |   | — |   |   |   | 10.0 | % |   |   | 10.0 | % |   |
| Rate to which cost trend rate is assumed to decline (the  ultimate trend rate) |       |                         | —     |                        |       |   | — |   |   |   | 5.0 | % |   |   | 5.0 | % |   |
| Year that the rate reaches the ultimate trend rate                        |       |                         | —     |                        |       |   | — |   |   |   | 2010 |   |   |   | 2009 |   |   |

 

The discount rate used to determine pension expensewas decreased to 6.0% for 2005 from 6.4% used in 2004. The discount rate isbased on a proprietary bond defeasance model designed by the plans’ investmentconsultant to create a portfolio of high quality corporate bonds which, ifinvested on the measurement date, would provide the necessary future cash flowsto pay accumulated benefits when due. The premise of the model is that annualbenefit obligations are funded from the cash flows generated from periodic bondcoupon payments, principal maturities and the interest on excess cash flows,i.e. carry forward balances.

The model uses a statistical program to determine theoptimal mix of securities to offset benefit obligations. The model is populatedwith an array of Moody’s Aa-rated corporate fixed income securities that are activelytraded in the bond market on the measurement date. None of the securities usedin the model had embedded call, put or convertible features, and none werestructured with par paydowns or deferred income streams. All of the securitiesin the model are considered appropriate for the analysis as they arediversified by maturity date and issuer and offer predictable cash flowstreams. For diversification purposes, the model was constrained to purchasingno more than 20% of any outstanding issuance. Carry 

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forward interest iscredited at a rate determined by adding the appropriate implied forwardTreasury yield to the Aa-rated credit spread as of the measurement date.

The expected return on plan assets was based on U.S.Pipe’s expectation of the long-term average rate of return on assets in thepension funds, which was modeled based on the current and projected asset mixof the funds and considering the historical returns earned on the type ofassets in the funds. We will review our actuarial assumptions on an annualbasis and make modifications to the assumptions based on current rates andtrends when appropriate. As required by U.S. GAAP, the effects of themodifications are amortized over future periods.

Assumed health care cost trends, discountrates, expected return on plan assets and salary increases have a significanteffect on the amounts reported for the pension plans and health care plans. Aone-percentage-point change in the rate for each of these assumptions wouldhave the following effects: 

| ** **                                                    | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **(dollars in** millions)   | ** ** |
| Discount rate:                                                |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  pension service and interest cost components  |       |                                  | $          | (0.2                                  | )          |   |   | $ | 0.2 |   |   |
| Effect on  pension benefit obligation                         |       |                                  | (24.5      | )                                     |       |   | 29.8 |   |   |
| Effect on  current year pension expense                       |       |                                  | (1.5       | )                                     |       |   | 1.8 |   |   |
| Expected return on plan assets:                               |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  current year pension expense                       |       |                                  | (1.2       | )                                     |       |   | 1.2 |   |   |
| Rate of compensation increase:                                |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  pension service and interest cost components  |       |                                  | 0.3        |                                  |       |   | (0.3 | ) |   |
| Effect on  pension benefit obligation                         |       |                                  | 2.8        |                                  |       |   | (2.4 | ) |   |
| Effect on current year pension expense                        |       |                                  | 0.6        |                                  |       |   | (0.5 | ) |   |
|                                                               |            |                                       |            |                                       |            |  |  |  |  |  |  |

 

Among the items affectingU.S. Pipe’s net accrued retirement pension benefits were additional minimumpension liabilities recognized in 2005, which primarily resulted from a furtherdecline in the average discount rate from 6.0% to 5.0%. As a result, the netaccrued benefit was increased by $24.1 million andaccumulated other comprehensive loss (a component of equity) was increased by asimilar amount, net of a tax benefit of $8.2 million. Depending onfuture plan asset performances and interest rates, additional adjustments toour net accrued benefit and equity may be required.

*Predecessor Mueller Group*

| ** **                                                           | ** ** | **Pension**                    | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **At September 30,** | ** ** |
| ** **                                                           | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Weighted-Average  Assumptions used to determine benefit obligations: |       |                           |       |   |   |   |   |   |   |
| Discount rate                                                        |       |                           | 5.2        | % |   |   | 5.8 | % |   |
| Rate of compensation  increase                                       |       |                           | 3.5        | % |   |   | 3.5 | % |   |
| Weighted-Average Assumptions used to determine  net periodic costs:  |       |                           |       |   |   |   |   |   |   |
| Discount rate:                                                       |       |                           | 5.8        | % |   |   | 6.0 | % |   |
| Expected return  on plan assets                                      |       |                           | 7.9        | % |   |   | 7.9 | % |   |
| Rate of compensation  increase                                       |       |                           | 3.5        | % |   |   | 3.5 | % |   |

 

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The discount rateused to determine pension expense was decreased to 5.8% for 2005 from 6.0% usedin 2004. The rate of return on plan assets used to determine pension expense is7.9% for both 2005 and 2004. The discount rate is based on a model portfolio ofAa-rated bonds with a maturity matched to the estimated payouts of futurepension benefits. The expected return on plan assets is based on PredecessorMueller Group’s expectation of the long-term average rate of return on assetsin the pension funds, which was modeled based on the current and projectedasset mix of the funds and considering the historical returns earned on thetype of assets in the funds. We will review the actuarial assumptions on anannual basis and make modifications to the assumptions based on current ratesand trends when appropriate. As required by U.S. GAAP, the effects of themodifications are amortized over future periods.

Assumed discount rates, expected return onplan assets and salary increases have a significant effect on the amountsreported for the pension plans. A one-percentage-point change in the rate foreach of these assumptions would have the following effects: 

| ** **                                              | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **(dollars in** millions)   | ** ** |
| Discount rate:                                          |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components |       |                                  | $          | (0.1                                  | )          |   |   | $ | — |   |   |
| Effect on pension benefit obligation                    |       |                                  | $          | (12.4                                 | )          |   |   | $ | 14.0 |   |   |
| Effect on current year pension expense                  |       |                                  | $          | (1.2                                  | )          |   |   | $ | 1.2 |   |   |
| Expected return  on plan assets:                        |       |                                  |       |                                  |       |   |   |   |   |
| Effect on current year pension expense                  |       |                                  | $          | (0.8                                  | )          |   |   | $ | 0.8 |   |   |
| Rate of  compensation increase:                         |       |                                  |       |                                  |       |   |   |   |   |
| Effect on pension service and interest cost  components |       |                                  | —     |                                  |       |   | — |   |   |
| Effect on pension benefit obligation                    |       |                                  | $          | 0.3                                   |       |   |   | $ | (0.3 | ) |   |
| Effect on current  year pension expense                 |       |                                  | $          | 0.1                                   |       |   |   | $ | — |   |   |

 

Among the items affectingour net accrued retirement pension benefits were additional minimum pensionliabilities recognized in 2005, which primarily resulted from a further declinein the average discount rate from 5.8% to 5.2%. As a result, the net accruedbenefit was increased by $2.8 million andaccumulated other comprehensive earnings (a component of equity) was reduced bya similar amount, net of a tax benefit of $1.1 million. Depending onfuture plan asset performance and interest rates, additional adjustments to ournet accrued benefit and equity may be required.

***Workers’Compensation***

We are self-insured for workers’compensation benefits for work-related injuries. Liabilities, including thoserelated to claims incurred but not reported, are recorded principally usingannual valuations based on discounted future expected payments and usinghistorical data or combined insurance industry data when historical data islimited. Pursuant to the terms of the Tyco Purchase Agreement, PredecessorMueller Group is indemnified by Tyco for all liabilities that occurred prior toAugust 16, 1999. Workers’ compensation liabilities were as follows:

| ** **                                                          | ** ** | **December 31,  2005**         | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **(dollars in** millions) | ** ** |
| Undiscounted aggregated estimated claims to be paid                 |       |                                | $          | 27.0                         |       |   |   | $ | 14.4 |   |   |
| Workers’ compensation liability recorded on a discounted basis |       |                                | $          | 22.8                         |       |   |   | $ | 11.9 |   |   |

 

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A one-percentage-point increase in the discount rate on thediscounted claims liability would decrease the liability by $0.1 million,while a one-percentage-point decrease in the discount rate would increase theliability by $0.1 million.

***Litigation,Investigations and Claims***

We are involved in litigation, investigations, and claims arisingout of the normal conduct of our business, including those relating tocommercial transactions, as well as environmental, health and safety matters.We estimate and accrue liabilities resulting from such matters based on avariety of factors, including outstanding legal claims and proposedsettlements; assessments by internal counsel of pending or threatenedlitigation; and assessments of potential environmental liabilities andremediation costs. We believe we have adequately accrued for these potentialliabilities; however, facts and circumstances may change and could cause theactual liability to exceed the estimates, or that may require adjustments tothe recorded liability balances in the future.

***RevenueRecognition***

We recognize revenue based on the recognition criteria set forthin the Securities and Exchange Commission’s Staff Accounting Bulletin 104“Revenue Recognition in Financial Statements,” which is when delivery of aproduct has occurred and there is persuasive evidence of a sales arrangement,sales prices are fixed and determinable, and collectibility from the customersis reasonably assured. Revenue from the sale of products is recognized whentitle passes upon delivery to the customer. Sales are recorded net of cashdiscounts and rebates.

***Receivables***

Receivables relateprimarily to customers located in North America. To reduce credit risk, weperform credit investigations prior to accepting an order and, when necessary,require letters of credit to insure payment.

Our estimate for uncollectible accounts receivable is based, inlarge part, upon judgments and estimates of expected losses and specificidentification of problem trade accounts. Significantly weaker than anticipatedindustry or economic conditions could impact customers’ ability to pay suchthat actual losses are greater than the amounts provided for in theseallowances. Our periodic evaluation of the adequacy of our allowance is basedon our analysis of our prior collection experience, specific customercreditworthiness and current economic trends within the industries we serve. Incircumstances where we are aware of a specific customer’s inability to meet itsfinancial obligation to us (e.g., bankruptcy filings or substantial downgradingof credit ratings), we record a specific reserve to reduce the receivable tothe amount we reasonably believe will be collected.

***Inventories***

Inventories are recorded at the lower of cost (first-in,first-out) or market value. Additionally, we evaluate our inventory in terms ofexcess and obsolete exposures. This evaluation includes such factors asanticipated usage, inventory turnover, inventory levels and ultimate productsales value. Inventory cost includes an overhead component that can be affectedby levels of production and actual costs incurred. Management periodicallyevaluates the effects of production levels and actual costs incurred on thecosts capitalized as part of inventory cost.

***Income Taxes***

Deferred taxliabilities and assets are recognized for the expected future tax consequencesof events that have been included in the financial statements or tax returns.Deferred tax liabilities and assets are 

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determined based on the differences between the financialstatements and the tax basis of assets and liabilities, using tax rates ineffect for the years in which the differences are expected to reverse. Avaluation allowance is provided to offset any net deferred tax assets if, basedupon the available evidence, it is more likely than not that some or all of thedeferred tax assets will not be realized. If we were to reduce our estimates offuture taxable income, we could be required to record a valuation allowanceagainst our deferred tax assets.

We have recorded provisions associated with income tax exposures.Such provisions require significant judgment and are adjusted when events orcircumstances occur that would require a change in the estimated accrual.

***Accounting for theImpairment of Long-Lived Assets Including Goodwill and Other Intangibles***

Long-lived assets, including goodwill and intangible assets thathave an indefinite life are tested for impairment annually (or more frequentlyif events or circumstances indicate possible impairments). Definite-livedintangible assets are amortized over their respective estimated useful livesand reviewed for impairment annually or more frequently if events orcircumstances indicate possible 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. We use an estimate of futureundiscounted net cash flows of the related asset or asset grouping over theremaining life in measuring whether long-lived assets other than goodwill andintangibles are impaired. If impaired, we may need to record impairment chargesto reduce the carrying value of our long-lived assets.

***Stock-BasedCompensation***

The Company participates in the stock-basedcompensation plans of its parent company, Walter Industries. Historically,Walter Industries did not allocate any costs of this plan to U.S. Pipe.Beginning October 1, 2005, we adopted SFAS No. 123(R), “Share-BasedPayment,” which requires that compensation costs related to share-based paymenttransactions be recognized in the financial statements over the period that anemployee provides service in exchange for the award. We will use a modifiedprospective method, under which we will record compensation cost for new andmodified awards over the related vesting period of such awards. The Company hadno stock options outstanding at December 31, 2005.

***DerivativeInstruments and Hedging Activities***

We currently useinterest rate swaps as required in the 2005 Mueller Credit Agreement to reducethe risk of interest rate volatility. The amount to be paid or received frominterest rate swaps is charged or credited to interest expense over the livesof the interest rate swap agreements. Changes in the fair value of derivativesare recorded each period in earnings or Accumulated Other Comprehensive Income(Loss), depending on whether a derivative is designated and effective as partof a hedge transaction and meets the applicable requirements associated withStatement of Financial Accounting Standards (SFAS) No. 133.

For a derivativeto qualify as a hedge at inception and throughout the hedge period, we mustformally document the nature and relationships between the hedging instrumentsand hedged items, as well as its risk-management objectives, strategies forundertaking the various hedge transactions and method of assessing hedgeeffectiveness. Any financial instruments qualifying for hedge accounting mustmaintain a specified level of effectiveness between the hedging instrument andthe item being hedged, both at inception and throughout the hedged period.

Additionally, we utilize forward contracts to mitigate itsexposure to changes in foreign currency exchange rates from third party andintercompany forecasted transactions. The primary currency to which we areexposed and to which we hedge the exposure is the Canadian dollar. Theeffective portion of 

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unrealized gains and losses associatedwith forward contracts are deferred as a component of Accumulated OtherComprehensive Income (Loss) until the underlying hedged transactions arereported in our consolidated statement of earnings. The balance was notmaterial at December 31, 2005.

**RecentlyIssued Accounting Standards**

In November 2004, the Financial AccountingStandards Board issued SFAS No. 151, “Inventory Costs,” which clarifiesthe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material. This Statement requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. The Company adopted SFAS No. 151on October 1, 2005, the beginning of its 2006 fiscal year. The impact ofthe adoption of SFAS No. 151 on the Company’s financial statements mayhave a material impact on our operating income in the event actual productionoutput is significantly higher or lower than normal capacity. In the eventactual production capacity is significantly different than normal capacity, theCompany may be required to recognize certain amounts of facility expense,freight, handling costs or wasted materials as a current period expense**.**

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”), which is an interpretation of FASB No. 143, “Accountingfor Asset Retirement Obligations” (“SFAS 143”). This interpretationclarifies terminology within SFAS 143 and requires companies to recognizea liability for the fair value of a conditional asset retirement obligationwhen incurred if the liability’s fair value can be reasonably estimated. FIN 47is effective for fiscal years beginning after December 15, 2005. Thisstandard is not expected to have a material impact on the Company’s financialcondition or results of operations.

In June 2005, theFASB issued FASB No. 154, “Accounting Changes and Error Corrections”,which changes the requirements for accounting for and reporting of a change inaccounting principle. SFAS 154 requires retrospective application to priorperiods’ financial statements of a voluntary change in accounting principleunless it is impracticable. SFAS 154 also requires that a change in methodof depreciation, amortization or depletion for long-lived, nonfinancial assetsbe accounted for as a change in accounting estimate that is affected by achange in accounting principle. SFAS 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005. Theadoption of SFAS 154 is not expected to have a material impact on theCompany’s financial condition or results of operations.

**ITEM 3.**                QUALITATIVEAND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed tovarious market risks, which are potential losses arising from adverse changesin market rates and prices, such as interest rates and foreign exchangefluctuations. We do not enter into derivatives or other financial instrumentsfor trading or speculative purposes.

Our primary financial instruments are cash and cash equivalents.This includes cash in banks and highly rated, liquid money market investmentsand U.S. government securities. We believe that those instruments are notsubject to material potential near-term losses in future earnings fromreasonably possible near-term changes in market rates or prices.

***Interest Rate Risk***

At December 31,2005, the Company had fixed rate debt of $335.5 million and variable rate debt of $1,047.4 million. The pre-tax earnings andcash flows impact resulting from a 100 basis point increase in interest rateson variable rate debt, holding other variables constant and excluding theimpact of the hedging agreements described below, would be approximately $10.4 millionper year.

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On October 27, 2005, the Company entered into sixinterest rate hedge transactions with a cumulative notional amount of $350 million.The swap terms are between one and seven years with five separatecounter-parties. The objective of the hedges is to protect the Company againstrising LIBOR interest rates that would have a negative effect on the Company’scash flows due to changes in interest payments on its 2005 Mueller Term Loan.The structure of the hedges are a one-year 4.617% LIBOR swap of $25 million,a three-year 4.740% LIBOR swap of $50 million, a four-year 4.800% LIBORswap of $50 million, a five-year 4.814% LIBOR swap of $100 million,a six-year 4.915% LIBOR swap of $50 million, and a seven year 4.960% LIBORswap of $75 million. These swap agreements call for the Company to makefixed rate payments over the term at each swap’s stated fixed rate and toreceive payments based on three month LIBOR from the counter-parties. Theseswaps will be settled quarterly over their lives and will be accounted for ascash flow hedges. As such, changes in the fair value of these swaps that takeplace through the date of maturity will be recorded in Accumulated OtherComprehensive Income (Loss). These hedges comply with covenants contained inthe 2005 Mueller Credit Agreement.

The Company has two interest rate hedge agreements witha cumulative notional value amount of $100 million that existed as of October 3,2005: a $50 million two-year 3.928% LIBOR swap that matures in May 2007and a $50 million two-year 4.249% LIBOR swap that matures in April 2007.The changes in fair value of these two swaps were recorded immediately asinterest expense in the Statements of Operations until achieving hedgeeffectiveness in October 2005 and November 2005, respectively, atwhich times such changes in fair value were recorded in Accumulated OtherComprehensive Income (Loss).

The Company recorded an unrealized loss from itscontracts, net of tax, of $1.1 million at December 31,2005 in Accumulated Other Comprehensive Income (Loss).

We will consider entering into additional interestrate swaps or other interest rate hedging instruments to protect againstinterest rate fluctuations on our floating rate debt.

The 2005 Mueller CreditAgreement requires that at least 50% of the funded debt of the Company and itsrestricted subsidiaries on a consolidated basis be fixed for a period beginningno later than January 1, 2006 and ending October 3, 2008. Thisrequirement can be met with any combination of fixed rate debt and rateprotection agreements. The Company is currently in compliance with thisrequirement.

***Currency Risk***

Outside of theUnited States, we maintain assets and operations in Canada and, to a muchlesser extent, China. The results of operations and financial position of ourforeign operations are principally measured in their respective currency andtranslated into United States dollars. As a result, exposure to foreigncurrency gains and losses exists. The reported income of these subsidiarieswill be higher or lower depending on a weakening or strengthening of the UnitedStates dollar against the respective foreign currency. Our subsidiaries andaffiliates also purchase and sell products and services in various currencies.As a result, we may be exposed to cost increases relative to the localcurrencies in the markets in which we sell. Because a different percentage ofour revenues is in foreign currency than our costs, a change in the relativevalue of the United States dollar could have a disproportionate impact on ourrevenues compared to our cost, which could impact our margins.

A portion of ourassets are based in our foreign locations and are translated into United Statesdollars at foreign currency exchange rates in effect as of the end of eachperiod, with the effect of such translation reflected in other comprehensiveincome (loss). Accordingly, our consolidated stockholders’ equity willfluctuate depending upon the weakening or strengthening of the United Statesdollar against the respective foreign currency.

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We have entered into forward exchange contractsprincipally to hedge currency fluctuations in transactions (primarilyanticipated inventory purchases) denominated in foreign currencies, therebylimiting the risk that would otherwise result from changes in exchange rates.The majority of the Company’s exposure to currency movements is in Canada. Allof the foreign exchange contracts have maturity dates in 2006. Gains and losseson the forward contracts are expected to be offset by losses / gains in recognizednet underlying foreign currency transactions. As of December 31, 2005, theCompany had entered into one forward contract in a notional amount of less than$0.1 million,selling U.S. dollars and purchasing Euros at an exchange rate of $1.3635.

Subsequent toDecember 31, 2005, the Company entered into forward contracts in anotional amount of $9.1 million primarily toprotect anticipated inventory purchases by its Canadian operations. With thesehedges, the Company purchases U.S. dollars and sells Canadian dollars at anaverage exchange rate of $0.867.

***Raw Materials Risk***

Our products are made from several basic raw materials, includingsteel pipe, scrap steel, iron, brass ingot, sand, resin and natural gas, whoseprices fluctuate as market supply and demand change. Accordingly, productmargins and the level of profitability can fluctuate if we are not able to passraw material costs on to our customers. Management estimates for our Muellerand Anvil segments that raw material accounted for approximately 18% of ourcost of goods sold due to increasing raw material prices in 2005. Managementestimates U.S. Pipe’s scrap metal and ferrous alloys used in the manufacturingprocess accounted for 40% of the cost to manufacture ductile iron pipe as of September 30,2005. Historically, we have been able to obtain an adequate supply of rawmaterials and do not anticipate any shortage of these materials. We generallypurchase raw materials at spot prices but may, from time to time, enter intocommodity derivatives to reduce our exposure to fluctuation in the price of rawmaterials. On January 12, 2006, the Company entered into a swapcontract to hedge anticipated purchases of natural gas from February 2006through March 2006 totaling 0.4 million mmbtu, orapproximately 80% of expected natural gas consumption, at a price of $9.41 permmbtu. This swap contract effectively converts a portion of forecastedpurchases at market prices to a fixed price basis.

**ITEM 4.**   CONTROLS ANDPROCEDURES

***Evaluation of Predecessor Mueller Group’s DisclosureControls and Procedures.***

As of the end of the period covered by this report,the Company’s management evaluated the effectiveness of the design andoperation of disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) under the Exchange Act). This evaluation was done under thesupervision and with the participation of management, including Dale B. Smith,President and Chief Executive Officer, and Jeffery W. Sprick, Chief FinancialOfficer.

Based on this evaluationand because of the material weakness described below, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were not effective, at the reasonableassurance level, to enable it to record, process, summarize, and reportinformation required to be included in their periodic SEC filings within therequired time period. Notwithstanding this material weakness, their managementconcluded that the financial statements included in this Form 10-Qfor the period ended December 31, 2005 fairly present in all materialrespects their financial position, results of operations and cash flows for theperiods presented in conformity with generally accepted accounting principles (“GAAP”).

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***Material Weakness in Internal Control over PredecessorMueller Group’s Financial Reporting***

A material weakness is a control deficiency or acombination of control deficiencies that results in more than a remotelikelihood that a material misstatement of the annual or interim consolidatedfinancial statements will not be prevented or detected.

As of September 30,2005, Predecessor Mueller Group did not maintain effective controls over thepreparation, review and presentation and disclosure of its consolidatedfinancial statements. Specifically, their controls failed to prevent or detectthe incorrect presentation of the following: (i) cash flows from theeffect of exchange rate changes on cash balances; (ii) cash flows from theloss on disposal of property, plant and equipment; (iii) cash flows andbalance sheet presentation of book overdrafts; (iv) the presentation ofcurrent and non-current deferred income tax assets in Predecessor Mueller Group’sconsolidated balance sheet; and (v) classification of certain depreciationexpense as selling, general and administrative expense instead of cost of salesin their consolidated statement of operations. This control deficiency resultedin the restatement of Predecessor Mueller Group’s annual consolidated financialstatements for fiscal 2004 and 2003 and interim consolidated financialstatements for the first three quarters of fiscal 2005, all interim periods offiscal 2004 and audit adjustments to our 2005 annual consolidated financialstatements. Additionally, this control deficiency could result in amisstatement of the presentation and disclosure of their consolidated financialstatements that would result in a material misstatement in the annual orinterim financial statements that would not be prevented or detected.Accordingly, Predecessor Mueller Group’s management has determined that thiscontrol deficiency constitutes a material weakness. This is the only materialweakness determined by management to exist as of September 30, 2005.

***Prior Year Material Weakness in Internal Control overPredecessor Mueller Group’s Financial Reporting***

As of September 30, 2004, and all interim periodsthrough June 30, 2005, Predecessor Mueller Group reported the followingcontrol deficiencies that, in the aggregate, constituted a material weakness ininternal control over preparation, review and presentation and disclosure oftheir consolidated financial statements. Specifically Predecessor Mueller Group’scontrol deficiencies included: (i) a lack of personnel with experience infinancial reporting and control procedures necessary for SEC registrants; (ii) alack of sufficient controls to prevent or detect, on a timely basis,unauthorized journal entries; (iii) a lack of sufficient controls overinformation technology data conversion and program changes; (iv) a lack ofsufficient controls over the development and communication of income taxprovisions; (v) a lack of effective controls surrounding “whistleblower”hotline complaints and internal certifications to ensure that issues werecommunicated on a more timely basis by management to the audit committee andthe independent registered public accounting firm; (vi) a lack ofeffective controls over revenue recognition associated with full truckloadshipments not immediately dispatched by freight carriers; and (vii) a lackof formal controls and procedures regarding assessment of financial exposuresand transactions, including consideration of accounting implications underGAAP. These control deficiencies resulted in audit adjustments to theconsolidated financial statements for the year ended September 30, 2004.Additionally, these control deficiencies, in the aggregate, could result in amisstatement to accounts and disclosures that would result in a materialmisstatement to the annual or interim financial statements that would not beprevented or detected.

In order to remediate thismaterial weakness, Predecessor Mueller Group: (i) reassigned its ChiefFinancial Officer, appointed an Interim Chief Financial Officer and hiredadditional accounting and finance staff; (ii) introduced increasedtraining for their existing financial and accounting and other staff; (iii) retainedthird-party consultants with significant SEC financial reporting experience toprovide assistance in complying with SEC reporting requirements; (iv) formeda disclosure committee to supervise the preparation of their Exchange ActReports and other public communications; (v) improved their controls over,and began developing written policies and procedures that cover all significantaccounting 

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processes,including journal entries, the development and communication of income taxprovisions, information data conversion issues and program changes, revenuerecognition and assessing financial exposures; (vi) improved andcentralized controls over information technology; and (vii) implementedglobal compliance initiatives under the direction of their Chief ComplianceOfficer. These improvement efforts continued to progress during the quarterended September 30, 2005. While significant improvements have beenimplemented throughout the year, management believed that additionalremediation was needed and would require changes in personnel, processes andprocedures to ensure timely and accurate financial reporting on a sustainablebasis.

There also existsignificant deficiencies in our internal controls over financial reportingwhich, if unremediated, may result in more than a remote likelihood that amaterial misstatement of our annual or interim financial statements will not beprevented or detected.

The material weaknessesand significant deficiencies will need to be addressed as a part of theevaluation of our internal controls over financial reporting pursuant to theSarbanes-Oxley Act of 2002 and may impair our ability to comply with Section 404of the Act.

***Changes in Internal Control Over Predecessor MuellerGroup’s Financial Reporting Subsequent to September 30, 2005***

Subsequent to September 30,2005, we have taken steps to remediate the material weakness described above.These steps include a thorough review, on a quarterly basis, of foreigncurrency translation cash flow statement effects, book overdrafts andtransactions related to property, plant and equipment and an additional review,on a quarterly basis, of the classification requirements of each component lineitem and the individual elements that comprise each line item of the statementof cash flows, in accordance with Statement of Financial Accounting Standards, No. 95,“Statement of Cash Flows.” Additionally, the classification of deferred incometax items in the balance sheet and cash flow statement, as well as depreciationin the statement of operations, will be evaluated quarterly. We believe theadditional control procedures designed, when implemented, will fully remediatethis material weakness.

Inaddition, subsequent to September 30, 2005, we made the following changesin internal controls to improve financial reporting accuracy:

·       hireda full time Chief Financial Officer, Jeffery W. Sprick, and a CorporateController with SEC financial reporting experience;

·       hiredadditional finance and accounting personnel for our Pratt and Chattanoogafacilities;

·       designatedthe Walter Industries Audit Committee, which is fully independent under NewYork Stock Exchange listing rules and the rules of the SEC, as ouraudit committee; and

·       beganto implement an internal quarterly review plan to review higher risk areas infinancial reporting, such as revenue recognition and inventory valuation.

Another significantremedial action underway or planned to commence in fiscal year 2006, notspecifically related to the previously identified material weakness, includesthe issuance of a code of conduct to all employees. In fiscal 2006, the Companywill be subject to the Sarbanes-Oxley internal control reporting requirementsand in 2006 the Company will be testing key internal controls for allsignificant business units and business processes.

We continue to upgrade theknowledge of our finance staff by implementing on-going United States GAAPtraining programs, consisting of providing appropriate technical resources toour finance team and training on the use of such resources, conducting a seriesof training sessions for plant controllers, periodic distribution of changes inaccounting and reporting standards, and issuing and updating our accountingpolicies. Additionally, the Company terminated the former Chief ComplianceOfficer of Predecessor Mueller Group and reassigned those duties to theDirector of Internal Audit.

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**PART II**   OTHERINFORMATION

**Item 1.**   Legal Proceedings

We are involved in various legal proceedings which have arisen inthe normal course of our operations, including the proceedings summarizedbelow. The effect of the outcome of these matters on the Company’s futureresults of operations cannot be predicted with certainty as any such effectdepends on future results of operations and the amount and timing of theresolution of such matters. Other than the litigation described below, we donot believe that any of our outstanding litigation would have a materialadverse effect on our business, operations or prospects.

U.S. Pipe has implemented an Administrative ConsentOrder (“ACO”) for its Burlington, New Jersey plant that was required under theNew Jersey Environmental Cleanup Responsibility Act (now known as theIndustrial Site Recovery Act). The ACO required soil and ground water cleanup.U.S. Pipe has completed, and has received final approval for the soil cleanuprequired by the ACO. U. S. Pipe is continuing to address ground water issues atthis site. Further remediation could be required. These remediation costs areexpected to be minimal. Long term ground water monitoring will be required toverify natural attenuation. It is not known how long ground water monitoringwill be required. Management does not believe monitoring or further cleanupcosts, if any, will have a material adverse effect on the financial conditionor results of operations of the Company and its subsidiaries.

The FederalComprehensive Environmental Response, Compensation and Liability Act (“CERCLA”),generally imposes liability, which may be joint and several and is withoutregard to fault or the legality of waste generation or disposal, on certainclasses of persons, including owners and operators of sites at which hazardoussubstances are released into the environment (or pose a threat of suchrelease), persons that disposed or arranged for the disposal of hazardoussubstances at such sites, and persons who owned or operated such sites at thetime of such disposal. CERCLA authorizes the EPA, the States and, in somecircumstances, private entities to take actions in response to public health orenvironmental threats and to seek to recover the costs they incur from the sameclasses of persons. Certain governmental authorities can also seek recovery fordamages to natural resources.

Currently, U.S.Pipe has been identified as a potentially responsible party (“PRP”) by the EPAunder CERCLA with respect to cleanup of hazardous substances at U.S. Pipe’sformer Anniston, Alabama facility, to which its wastes allegedly weretransported or deposited. U.S. Pipe is among many PRP’s at the site and asignificant number of the PRP’s are substantial companies. With respect to theAnniston, Alabama site, a Consent Order has been negotiated and signed betweenthe PRP’s and the EPA. Management estimates the Company’s and U.S. Pipe’saggregate share of liability for cleanup under the Consent Order, afterallocation among the several PRP’s, will be approximately $4.0 million. U.S. Pipe accrued for this liability in 2004, and the accrualwas recorded in our financial statements as of October 3, 2005. Civillitigation in respect of the site is also ongoing, including a putative classaction lawsuit alleging property damage and personal injury. Management doesnot believe that U.S. Pipe’s share of any additional liability will have amaterial adverse effect on the financial condition of the Company, but could bematerial to results of operations in future reporting periods.

In the purchaseagreement relating to the August 1999 sale by Tyco of the PredecessorMueller Group business to our prior owners, Tyco agreed to indemnifyPredecessor Mueller Group and their affiliates for all “Excluded Liabilities.”Excluded Liabilities include, among other things, substantially all liabilitiesrelating to the time prior to the August 1999 Tyco sale. The indemnitysurvives indefinitely and is not subject to any deductibles or caps. However,we may be responsible for these liabilities in the event that Tyco (or anysuccessor entity) ever becomes financially unable or fails to comply with, theterms of the indemnity. In addition, Tyco’s indemnity does not coverenvironmental liabilities to the extent caused by us or Predecessor Mueller orthe operation of the Predecessor Mueller Group business after the August 1999

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Tyco sale, nor does it cover environmental liabilities arisingwith respect to businesses or sites acquired after the August 1999 Tycosale, which would include the U.S. Pipe business and facilities.

Our subsidiary,James Jones Company, and its former parent company are defendants in a falseclaims 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. Our subsidiary, Mueller Co., which had also been named asa defendant, brought a summary judgment motion and was dismissed from thislitigation in January 2004. On September 15, 2004, the trial courtruled against the intervention of approximately 30 municipalities that hadfailed to intervene within the time deadlines previously specified by theCourt. The trial court also ruled that the majority of municipalities that hadpurchased James Jones products from contractors or distributors, were not inprivity with the James Jones Company and were not entitled to punitive damages.Following the Court’s ruling, the water districts and municipalities filed anew action against the James Jones Company, Mueller Co. and Watts (formerparent company of James Jones Company), alleging fraud and intentionalmisrepresentation. This lawsuit is based on the same underlying facts as thefalse claims lawsuit. Any liability associated with these lawsuits is coveredby the Tyco indemnity, and the defense is being paid for and conducted by Tyco.

Some of oursubsidiaries have been named as defendants in a small number of asbestos-relatedlawsuits. We do not believe these lawsuits, either individually or in theaggregate, are material to our financial position or results of operations.

As discussed in Note 14 “Commitments and Contingencies” to theConsolidated Financial Statements, the Company is subject to other legalmatters in the normal course of business.

**Item 1A.**   Risk Factors

**Ourbusiness would be adversely affected by a downturn in government spending relatedto infrastructure upgrades, repairs and replacements, or in the cyclicalresidential or non-residential building markets.**

Our business is primarilydependent upon spending on water and wastewater infrastructure upgrades,repairs and replacement, new water and wastewater infrastructure spending(which is dependent upon residential construction) and spending onnon-residential construction. We are also subject to general economicconditions, the need for construction projects, interest rates and governmentincentives provided for public work projects. In addition, a significantpercentage of our products are ultimately used by municipalities or othergovernmental agencies in public water transmission and collection systems. As aresult, our sales could be impacted adversely by declines in the number ofprojects planned by public water agencies, government spending cuts, generalbudgetary constraints, difficulty in obtaining necessary permits or theinability of government entities to issue debt. It is not unusual for waterprojects to be delayed and rescheduled for a number of reasons, includingchanges in project priorities and difficulties in complying with environmentaland other government regulations. Spending growth in the infrastructureupgrades, repairs and replacement sector has slowed in recent years as stateand local governments’ budgets were negatively impacted by the downturn in theeconomy. We cannot assure you that economic conditions will continue to improveor that if they do, that state and local governments will address deferredinfrastructure needs. Although the residential building market has experiencedgrowth in recent years, we cannot assure that this growth will continue in thefuture. The residential and non-residential building markets are cyclical, and,historically, down cycles have typically lasted approximately four to sixyears. Any significant decline in the residential or non-residential buildingmarkets or governmental spending on infrastructure could have a material adverseeffect on our financial condition and results of operations.

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**Ourindustry is very competitive and some of our products are commodities.**

The domestic andinternational markets for flow control products are competitive. While thereare only a few competitors for most of our product offerings, many of them arewell-established companies with strong brand recognition. In particular, ourmalleable iron and cast iron pipe fitting products, which together comprised 5%of our pro forma sales for the 2005 fiscal year, face competition from lessexpensive imports and our pipe nipple and hanger products and our pipe fittingsand couplings products, which together comprised 16% of our pro forma sales in2005, compete on the basis of price and are sold in fragmented markets with lowbarriers to entry, allowing less expensive domestic and foreign producers togain market share and reduce our margins. Also, competition for ductile ironpressure pipe sold by our U.S. Pipe segment comes not only from ductile pipeproduced by a concentrated number of domestic manufacturers, but also from pipecomposed of other materials, such as polyvinylchloride (PVC), high densitypolyethylene (HDPE), concrete, fiberglass, reinforced plastic and steel.

**Foreigncompetition is intense and could have a material adverse effect on ourfinancial condition and results of operations.**

In addition to domestic competition, we face intenseforeign competition. The intensity of foreign competition is affectedsignificantly by fluctuations in the value of the U.S. dollar against foreigncurrencies and by the level of import duties imposed by the U.S. Department ofCommerce on certain products. Foreign competition is likely to further increaseand certain product prices will continue to face downward pressure as ourdomestic competitors shift their operations or outsource manufacturingrequirements overseas or source supplies from foreign vendors in an effort toreduce expenses.

In 2003, the U.S.Department of Commerce imposed anti-dumping duties on imported malleable andnon-malleable iron fittings from China. We cannot assure you that thesegovernment agencies will continue the current duties on imported malleable andnon-malleable iron fittings. If the duties for respondent companies, whichrange from 7.4% to 14.3% (111.4% for other producers/exporters) for malleableiron fittings and 6.3% to 7.1% (75.5% for other producers/exporters) fornon-malleable iron fittings, are reduced or completely eliminated, we may beforced to reduce the prices of some of our products. An increase in foreigncompetition, a decrease in these duties or a strengthening in the U.S. dollarcould have a material adverse effect on our financial condition and results ofoperations.

**Wedepend on a group of major distributors for a significant portion of our sales;any loss of these distributors could reduce our sales and continuingconsolidation could cause price pressure.**

In the fiscal year ended 2005, on a pro forma basis,approximately 37% of our pro forma sales were to our ten largest distributors,and approximately 30% of our pro forma sales were to our three largestdistributors: Hughes Supply, Ferguson Enterprises and National Waterworks. Ourbusiness relationships with most of our major distributor branches may beterminated at the option of either party upon zero to 60 days’ notice.

Our reliance onthese major distributors exposes us to:

·       therisk of changes in the business condition of our major distributors; and

·       therisk that the loss of a major distributor could adversely affect our results ofoperations.

While our relationshipswith our ten largest distributors have been long-lasting, distributors in ourindustry have experienced significant consolidation in recent years, and wecannot assure you that our distributors will not be acquired by otherdistributors who buy products from our competitors. Our ability to retain thesecustomers in the face of other competitors generally depends on a variety offactors, including the quality and price of our products and our ability tomarket these products effectively. We cannot assure you that, as consolidationamong distributors continues, distributors will not be able to force 

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us tolower our prices, which would have an adverse impact on our financial conditionor results of operations. For example, Home Depot acquired National Waterworksin 2005 and announced in January 2006 that it intends to acquire HughesSupply. As a result, two of our three largest distributors could be combinedunder common control. Moreover, the loss of any of National Waterworks, HughesSupply or Ferguson Enterprises as a distributor could have a material adverseeffect on our financial condition or results of operations.

**Ourbrass valve products contain lead, which may be replaced in the future.**

Our brass valve products,which constituted approximately 6% of our pro forma sales in the twelve monthsended September 30, 2005, contain approximately 5.0% lead. Environmentaladvocacy groups, relying on standards established by California’s Proposition65, are seeking to eliminate or reduce the content of lead in some of theseproducts, including water meters and valves, and to limit their sale inCalifornia. Some of our business units have entered into settlement agreementswith these environmental advocacy groups that have required them to eithermodify some of these products or offer substitutes for them with respect toproducts sold in California. Modifications of or substitutions for our productsto meet or conform with regulatory requirements will require incrementalcapital spending of up to $8.0 million in the nexttwo years and will require us to purchase more expensive raw materials, and wemay not be able to pass these costs on to our customers. Legislation tosubstantially restrict lead content in water products has been introduced inthe United States Congress. If Congress adopts such legislation or if similarissues are raised in Congress in the future or in other jurisdictions or ifthese or other advocacy groups file suit against us under Proposition 65, ourresults of operations and financial condition could be adversely affected.

**Ourresults have been, and may continue to be, adversely impacted by increases inraw material prices.**

Our business is subject to the risk of price increasesand fluctuations and periodic delays in the delivery of raw materials andpurchased components that are beyond our control. Our operations requiresubstantial amounts of raw materials or purchased components, such as steelpipe and scrap steel and iron, brass ingot, sand, resin, and natural gas.Management estimates that scrap metal and ferrous alloys used in the U.S. Pipemanufacturing process account for up to 40% of the U.S. Pipe cost tomanufacture ductile iron pipe and raw materials and purchased components usedin our manufacturing processes currently account for approximately 18% of theMueller and Anvil cost of goods sold. Fluctuations in the price and delivery ofthese materials may be driven by the supply/demand relationship for a material,factors particular to that material or governmental regulation for rawmaterials such as natural gas. In addition, if any of our suppliers seeksbankruptcy relief or otherwise cannot continue its business as anticipated orwe cannot renew our supply contracts on favorable terms, the availability orprice of raw materials could be adversely affected.

The availability and priceof certain raw materials or purchased components, such as steel scrap, brassingot and natural gas are subject to market forces largely beyond our control,including North American and international demand freight costs, speculationand foreign exchange rates. We generally purchase raw materials at spot pricesand generally do not have the ability to hedge our exposure to price changes.We are not always able, and may not be able in the future, to pass on increasesin the price of these raw materials to our customers. In particular, when rawmaterial prices increase rapidly or to significantly higher than normal levels,we may not be able to pass price increases through to our customers on a timelybasis, if at all, which could adversely affect our operating margins and cashflow. Any fluctuations in the price or availability of raw materials orpurchased components may have a material adverse effect on our business,results of operations or financial condition.

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**Weare dependent upon the successful operation of our key manufacturingfacilities.**

Some of our keyproducts, including hydrants, valves and ductile iron pipe, are manufactured atfive of our largest manufacturing facilities. The operation of such facilitiesinvolves various operating risks, including, but not limited to:

·       catastrophicevents such as fires, explosions, floods, earthquakes or other similaroccurrences;

·       interruptionsin raw materials and energy supply;

·       adversegovernment regulation;

·       breakdownsor equipment failures;

·       violationsof our permit requirements or revocation of permits;

·       releasesof pollutants and hazardous substances to air, soil, surface water orgroundwater;

·       shortagesof equipment or spare parts; and

·       labordisputes.

A decrease in, or theelimination of, the revenues generated by our key facilities or a substantialincrease in the costs of operating such facilities could materially impact ourcash flows and results of operations.

**Wemay be unsuccessful in identifying or integrating suitable acquisitions, whichcould adversely affect our growth.**

Our growth strategy isbuilt upon organic growth and on taking advantage of opportunities to acquirecomplementary businesses. This strategy depends on the availability ofacquisition candidates with businesses that can be successfully integrated intoour existing business and that will provide us with complementary manufacturingcapabilities, products or services. However, we may be unable to identifytargets that will be suitable for acquisition. In addition, if we identify a suitableacquisition candidate, our ability to successfully implement the acquisitionwill depend on a variety of factors, including our ability to finance theacquisition. Our ability to finance our acquisitions is subject to a number offactors, including the availability of adequate cash from operations or ofacceptable financing terms and the terms of our debt instruments. In addition,there are many challenges to integrating acquired companies and businesses inour company, including eliminating redundant operations, facilities andsystems, coordinating management and personnel, retaining key employees,managing different corporate cultures and achieving cost reductions andcross-selling opportunities. We cannot assure you that we will be able to meetthese challenges in the future.

**Businesseswe have acquired or will acquire may not perform as expected.**

We may be adverselyaffected if businesses we have recently acquired or acquire in the future donot perform as expected. Acquired businesses may perform below expectationsafter the acquisition for various reasons, including legislative or regulatorychanges that affect the areas in which a business specializes, the loss of keycustomers after the acquisition has closed, general economic factors thataffect a business in a direct way and the cultural incompatibility of anacquired management team with us. Any of these factors could adversely affectour results of operations.

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**Wehave recorded a significant amount of goodwill and other identifiableintangible assets, and we may never realize the full value of our intangibleassets.**

We have recorded asignificant amount of goodwill and other identifiable intangible assets. As of December 31,2005, goodwill and other net identifiable intangible assets were approximately$718.5 millionand $849.3 million(or, collectively, approximately 56% of our total assets). Goodwill and netidentifiable intangible assets of Mueller Water are recorded at fair value onthe date of acquisition and goodwill of U.S. Pipe remain at historical cost. Inaccordance with Financial Accounting Standards Board Statement of FinancialAccounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets,are reviewed at least annually for impairment. Impairment may result from,among other things, deterioration in our performance, adverse marketconditions, adverse changes in applicable laws or regulations, includingchanges that restrict the activities of or affect the products and servicessold by our business, and a variety of other factors. The amount of anyquantified impairment must be expensed immediately as a charge to results ofoperations. Depending on future circumstances, it is possible that we may neverrealize the full value of our intangible assets. Any future determination ofimpairment of a significant portion of goodwill or other identifiableintangible assets would result in a non-cash impairment charge and would havean adverse effect on our financial condition and results of operations.

**Wehave a significant amount of debt that could adversely affect our financialhealth.**

As of December 31,2005, our total debt was $1,382.9 million. We may incur significant additionalindebtedness from time to time. The level of our indebtedness could haveimportant consequences, including:

·       makingit more difficult for us to satisfy our obligations under our debt instruments;

·       limitingcash flow available for general corporate purposes, including capitalexpenditures and acquisitions, because a substantial portion of our cash flowfrom operations must be dedicated to servicing our debt;

·       limitingour ability to obtain additional debt financing in the future for workingcapital, capital expenditures or acquisitions;

·       limitingour flexibility to react to competitive and other changes in our industry andeconomic conditions generally; and

·       exposing us to risksinherent in interest rate fluctuations because a substantial portion of ourborrowings is at variable rates of interest, which could result in higherinterest expense in the event of increases in interest rates.

**Wewill require a significant amount of cash to service our debt and our abilityto generate cash depends on many factors beyond our control.**

Our ability to pay or torefinance our indebtedness will depend upon our future operating performance,which will be affected by general economic, financial, competitive,legislative, regulatory, business and other factors beyond our control. We cannotassure you that our business will generate sufficient cash flow fromoperations, that currently anticipated revenue growth and operatingimprovements will be realized or that future borrowings will be available to usin an amount sufficient to enable us to pay our indebtedness, or to fund ourother liquidity needs. If we are unable to meet our debt service obligations orfund our other liquidity needs, we could attempt to restructure or refinanceour indebtedness or seek additional equity capital. We cannot assure you thatwe will be able to accomplish those actions on satisfactory terms, if at all.

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**Restrictivecovenants in our debt instruments may adversely affect us.**

Our debt instrumentscontain various covenants that limit our ability to engage in certaintransactions. Our senior credit facilities also require the maintenance ofspecified financial ratios and the satisfaction of other financial conditiontests. In addition, our debt instruments require us to provide regularfinancial information to our lenders and bondholders. Such requirementsgenerally may be satisfied by our timely filing with the SEC of annual andquarterly reports under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Our ability to satisfy those financial ratios, tests or covenants can beaffected by events beyond our control, and we cannot assure you that we willmeet those tests. A breach of any of these covenants could result in a defaultunder our debt instruments. If an event of default is not remedied after thedelivery of notice of default and lapse of any relevant grace period, theholders of our debt would be able to declare it immediately due and payable.Upon the occurrence of an event of default under our senior credit facilities,the lenders could also terminate all commitments to extend further credit. Ifwe were unable to repay those amounts, the lenders could proceed against thecollateral granted to them to secure the indebtedness under our senior creditfacilities. We have pledged substantially all of our assets (including ourintellectual property), other than the assets of our foreign subsidiaries, assecurity under our senior credit facilities. If the lenders under our seniorcredit facilities or noteholders of the notes accelerate the repayment ofborrowings, we cannot assure you that we will have sufficient assets to repayour senior credit facilities and our other indebtedness.

**Certainof our brass valve products may not be in compliance with NSF standards, whichcould limit the ability of municipalities to buy our products.**

The National SanitaryFoundation (“NSF”) is a non-profit entity that was contracted by the U.S.Environmental Protection Agency (“EPA”) to promulgate standards for the waterindustry. NSF has issued NSF 61, which governs the leaching characteristics ofvalves and devices that are part of drinking water distribution networks,including certain of our products made from brass. In recent years, a growingmajority of states have adopted, by statute or regulation, a requirement thatwater distribution systems utilize products that comply with NSF 61 and/or arecertified as NSF 61 compliant. We, along with others in the industry, areengaged in the lengthy process of attempting to obtain certification of NSF 61compliance for all of our relevant products. In fiscal 2005, our sales of brassvalve products were approximately 6% of our total sales, on a pro forma basis.Approximately 35% of these products have not been certified and these representapproximately 20% of our brass valve product sales. In the event that some ofour brass valve products are found not to be in compliance with NSF 61, thoseproducts may not be accepted by various municipalities or we may be forced tomodify non-conforming products with substitute materials which may requireincreased cost, thereby adversely affecting profitability. In addition, if ourcompetitors develop a complete line of NSF 61 compliant brass valve productsbefore we do, we may be placed at a competitive disadvantage which may, in turn,adversely affect profitability.

**Ourbusiness may be adversely impacted by work stoppages and other laborrelations matters.**

We are subject to a riskof work stoppages and other labor relations matters because our hourlyworkforce is highly unionized. As of December 31, 2005, approximately 85%of our hourly workforce was represented by unions. These employees arerepresented by locals from approximately six different unions, including theGlass, Molders, Pottery, Plastics and Allied Workers International Union, whichis our largest union. Our labor agreements will be negotiated as they expire atvarious times through March 2010. Work stoppages for an extendedperiod of time could have a material adverse effect on our business. Laborcosts are a significant element of the total expenditures involved in ourmanufacturing process, and an increase in the costs of labor could thereforehave a material adverse effect on our business. In addition, the freightcompanies who deliver our products to our distributors generally use unionizedtruck drivers, and we could also be adversely affected if our contractors facework stoppages or increased labor costs.

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**Ourrevenues are influenced by weather conditions and the level of constructionactivity at different times of the year; we may not be able to generaterevenues that are sufficient to cover our expenses during certain periods ofthe year.**

Some of our products,including ductile iron pipe, are moderately seasonal, with lower productioncapacity and lower sales in the winter months. This seasonality in demand hasresulted in fluctuations in our revenues and operating results. Because much ofour overhead and expenses are fixed payments, seasonal trends can causereductions in our profit margin and financial condition, especially during ourslower periods.

**Wemay be subject to product liability or warranty claims that could require us tomake significant payments.**

We would be exposed toproduct liability claims in the event that the use of our products results, oris alleged to result, in bodily injury and/or property damage. We cannot assureyou that we will not experience any material product liability or warrantylosses in the future or that we will not incur significant costs to defend suchclaims. While we currently have product liability insurance, we cannot assureyou that our product liability insurance coverage will be adequate for anyliabilities that may ultimately be incurred or that it will continue to beavailable on terms acceptable to us. A successful claim brought against us inexcess of our available insurance coverage or a requirement to participate in aproduct recall may have a materially adverse effect on our business.

Under the terms of thepurchase agreement (the “Tyco Purchase Agreement”) relating to the August 1999sale by Tyco International Ltd. (“Tyco”) of the Predecessor Mueller Groupbusiness to our prior owners, we are indemnified by Tyco for all liabilitiesarising in connection with the Predecessor Mueller Group business with respectto products manufactured or sold prior to the closing of that transaction. Theindemnity survives forever and is not subject to any dollar limits. In thepast, Tyco has made substantial payments and/or assumed defense of claimspursuant to this indemnification provision. However, we may be responsible forthese liabilities in the event that Tyco ever becomes financially unable orfails to comply with, the terms of the indemnity. In addition, Tyco’s indemnitydoes not cover product liabilities to the extent caused by our productsmanufactured after that transaction. On January 14, 2006, Tyco’s board ofdirectors announced that it approved a plan to separate Tyco into threeseparate, publicly traded companies. At this time, we do not know which of thenew entities will assume the indemnity provided under the terms of the TycoPurchase Agreement if this plan is implemented. Should the entity or entitiesthat assume Tyco’s obligations under the Tyco Purchase Agreement ever becomefinancially unable or fail to comply with the terms of the indemnity, we may beresponsible for such obligations or liabilities.

We warrant our products tobe free of certain defects. Because of the long useful life of our products, itis possible that latent defects might not appear for several years. Any lossesthat result or are alleged to result from defects in our products, couldsubject us to claims for damages, including consequential damages. In addition,we could elect to replace our defective products and/or compensate ourcustomers for damages caused by our defective products even in the absence of aformal claim for damages. The insurance that we maintain may not be availableon terms acceptable to us in the future and such coverage may not be adequatefor liabilities actually incurred. Any claims or expenses relating to defectiveproducts that result in liability exceeding our insurance coverage could raisecosts and expenses or require us to accrue expenses or record accountingcharges and reduce our net income. Further, claims of defects could result inadverse publicity against us, which could lower our sales and harm ourbusiness.

**Wemay be adversely affected by environmental, health and safety laws andregulations or liabilities.**

We are subject to variouslaws and regulations relating to the protection of the environment and humanhealth and safety and must incur capital and other expenditures to comply withthese requirements. 

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Failureto comply with any environmental, health or safety requirements could result inthe assessment of damages, or imposition of penalties, suspension ofproduction, a required upgrade or change to equipment or processes or acessation of operations at one or more of our facilities. Because these lawsare complex, constantly changing and may be applied retroactively, we cannotassure you that these requirements, in particular as they change in the future,will not have a material adverse effect on our business, profitability andresults of operations.

In addition, we will berequired to incur costs to comply with the EPA’s National Emissions Standardsfor Hazardous Air Pollutants (“NESHAP”) for iron and steel foundries and forour foundries’ painting operations. These costs may be substantial. We may berequired to conduct investigations and perform remedial activities that couldrequire us to incur material costs in the future. Our operations involve theuse of hazardous substances and the disposal of hazardous wastes. We may incurcosts to manage these substances and wastes and may be subject to claims for damagefor personal injury, property damages or damage to natural resources.

Under the terms of theTyco Purchase Agreement, we are indemnified by Tyco for all environmentalliabilities arising in connection with the Predecessor Mueller Group businessand relating to actions occurring or conditions existing prior to the closingof that transaction. The indemnity survives forever and is not subject to anydollar limits. In the past, Tyco has made substantial payments and/or assumeddefense of claims pursuant to this indemnification provision. Should Tyco (orany successor entity) ever become financially unable or fail to comply with theterms of the indemnity, we may be responsible for such obligations orliabilities. In addition, Tyco’s indemnity does not cover environmentalliabilities to the extent caused by us or Predecessor Mueller Group or theoperation of our business after that transaction, nor does it coverenvironmental liabilities arising with respect to businesses, such as the U.S.Pipe operations, or sites, including U.S. Pipe facilities, acquired after August 1999.

Our U.S. Pipe segment hasbeen identified as a potentially responsible party liable under federalenvironmental laws for a portion of the clean-up costs with regard to twosites, one in Alabama and one in California, and is currently subject to anadministrative consent order requiring certain monitoring and clean-up withregard to its Burlington, New Jersey facility. Such clean-up costs could have amaterial adverse impact to our result of operations in any given reportingperiod.

**Ourloss of the services of, or inability to obtain, key personnel could have amaterial adverse effect on our future success.**

Our success depends to asignificant degree upon the contributions of Dale Smith, as well as othermembers of our senior management. Although Mr. Smith has entered intoemployment agreements with us or Walter Industries, these agreements may beterminated and such persons may not remain affiliated with us. If any of ourkey personnel were to cease their affiliation with us, we may be unable to findsuitable replacement personnel, and our results of operations could suffer. Wedo not intend to maintain key person life insurance on any person.

**Weneed to improve our internal controls to comply with SEC reportingrequirements; public reporting obligations have put significant demands on ourfinancial, operational and management resources.**

Predecessor Mueller Groupreported a material weakness in both fiscal 2004 and fiscal 2005 related tomaintaining effective controls over the preparation, review and presentationand disclosure of its consolidated financial statements. There also existsignificant deficiencies in our internal controls over financial reportingwhich, if unremediated, may result in more than a remote likelihood that amaterial misstatement of our annual or interim financial statements will not beprevented or detected.

The Public CompanyAccounting Oversight Board (“PCAOB”) defines a significant deficiency as acontrol deficiency, or a combination of control deficiencies, that adverselyaffects the company’s ability to initiate, authorize, record, process, orreport external financial data reliably in accordance with generally 

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acceptedaccounting principles such that there is more than a remote likelihood that amisstatement of the company’s annual or interim financial statements that ismore than inconsequential will not be prevented or detected. The PCAOB definesa material weakness as a single deficiency, or a combination of deficiencies,that results in more than a remote likelihood that a material misstatement ofthe annual or interim financial statements will not be prevented or detected.

The material weaknessesand significant deficiencies will need to be addressed as a part of theevaluation of our internal controls over financial reporting pursuant to theSarbanes-Oxley Act of 2002 and may impair our ability to comply with Section 404of the Act. We are currently taking additional steps to implement an internalcontrol structure and procedures for financial reporting that would allow us toproduce financial statements and related disclosure within the time periods andin the form required under the Exchange Act. Failure to implement remediationplans in future periods could have an adverse effect on us.

**Compliancewith internal control reporting requirements and securities laws andregulations is likely to increase our costs.**

The Sarbanes-Oxley Act of2002, as well as rules subsequently implemented by the SEC and the PublicCompany Accounting Oversight Board, have required changes in the corporategovernance and securities disclosure or compliance practices of publiccompanies over the last few years. We expect these new rules andregulations to continue to increase our legal and financial compliance costs,as well as our ongoing audit costs, and to make legal, accounting andadministrative activities more time-consuming and costly. In 2006, we will needto comply with the internal control reporting requirements of the Sarbanes-OxleyAct, which will have a significant impact on our compliance cost in 2006.

We also expect these rules andregulations to make it more difficult and expensive for us to obtain directorand officer liability insurance, and we may be required to accept reducedcoverage or incur substantially higher costs to obtain coverage. These new rules andregulations could also make it more difficult for us to attract and retainqualified members of our board of directors, particularly to serve on our auditcommittee, and executive officers.

**Wemay not be able to achieve the anticipated synergies in connection with ourintegration and rationalization plans.**

We are pursuing severalinitiatives designed to rationalize our manufacturing facilities and to use ourmanufacturing expertise to reduce our costs. In fiscal 2006, we expect toachieve integration synergies between our Mueller and U.S. Pipe segments byclosing the U.S. Pipe Chattanooga, Tennessee production facility andintegrating it into the Mueller Chattanooga and Albertville, Alabama productionfacilities. We have initiated the implementation of plant and distributioncombination and production efficiency strategies within our Mueller and Anvilsegments, which efforts will continue through fiscal years 2006, 2007 and thebeginning of 2008. Our Mueller segment sales force has begun to integrate U.S.Pipe products as complementary product offerings as part of their salesefforts. We also have begun to use our combined purchasing leverage to reduceraw material and overall product costs. If we fail to implement our integrationand rationalization plans, at the economic levels or within the time periodsexpected, we may not be able to achieve the projected levels of synergies andcost savings. In addition, we expect to incur substantial severance,environmental and impairment costs in connection with our integration andrationalization plans.

**If wefail to protect our intellectual property, our business and ability to competecould suffer.**

Our business depends uponour technology and know-how, which is largely developed internally. While webelieve that none of our operating units is substantially dependent on anysingle patent, trademark, copyright, or other form of intellectual property, werely on a combination of patent protection, 

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copyrightand trademark laws, trade secrets protection, employee and third partyconfidentiality and nondisclosure agreements and technical measures to protectour intellectual property rights. There can be no assurance that the measuresthat we take to protect our intellectual property rights will be adequate todeter infringement or misappropriation or independent third-party developmentof our technology or to prevent an unauthorized third party from obtaining orusing information or intellectual property that we regard as proprietary or tokeep others from using brand names similar to our own. The disclosure,misappropriation or infringement of our intellectual property could harm ourability to protect our rights and our competitive position. In addition, ouractions to enforce our rights may result in substantial costs and diversion ofmanagement and other resources. We may also be subject to intellectual propertyinfringement claims from time to time, which may result in our incurring additionalexpenses and diverting company resources to respond to these claims.

**Iftransportation for our ductile iron pipe products becomes unavailable oruneconomic for our customers, our ability to sell ductile iron pipe productswould suffer.**

Transportation costs are acritical factor in a customer’s purchasing decision. Increases intransportation costs could make our ductile iron pipe products less competitivewith the same or alternative products from competitors with lowertransportation costs.

We typically depend uponrail, barge and trucking systems to deliver our products to customers. Whileour customers typically arrange and pay for transportation from our factory tothe point of use, disruption of these transportation services because ofweather-related problems, strikes, lock-outs or other events could temporarilyimpair our ability to supply our products to our customers thereby resulting inlost sales and reduced profitability.

**RisksRelating to our Relationship with Walter Industries**

**WalterIndustries controls us and may have conflicts of interest.**

Walter Industries, Inc. isour ultimate parent and the sole stockholder of our parent, Mueller Water. Evenafter completion of the pending offering of Mueller Water’s Series A Commonstock, Walter will beneficially own all of Mueller Water’s outstanding Series Bcommon stock (which Series B common stock is entitled to eight votes per shareon any matter submitted to a vote of our stockholders), by means of whichWalter will own in excess of 50% of the voting power with respect to MuellerWater. For as long as Walter Industries continues to beneficially own shares ofcommon stock representing more than 50% of such voting power, Walter Industrieswill be able to direct the election of all of the members of the board ofdirectors of Mueller Water and exercise a controlling influence over thebusiness and affairs of Mueller Water and Mueller Water’s direct and indirectsubsidiaries including the Company. As a result, Walter Industries effectivelywill be able to control any determinations with respect to mergers or otherbusiness combinations, the acquisition or disposition of assets, the incurrenceof indebtedness, the issuance of any additional common stock or other equitysecurities, the repurchase or redemption of common stock or preferred stock,the payment of dividends and the level and timing of capital expendituresrelating to the operation of the Company’s business. Similarly, WalterIndustries will have the power to determine or significantly influence theoutcome of matters submitted to a vote of Mueller Water’s stockholders,including the power to prevent an acquisition or any other change in controland could take other actions that might be favorable to Walter Industries.

Walter Industries hasannounced its intention to spin off Mueller Water and its subsidiaries and maytake such actions with respect to Mueller Water and its subsidiaries, includingthe Company, as Walter deems appropriate to effect the announced spin-off.Beneficial ownership of at least 80% of the total voting power and 80% of eachclass of any nonvoting capital stock is required in order to effect a tax-freespin-off of us or certain other tax-free transactions. Walter Industries willhave an option available to it to purchase additional shares of Mueller WaterSeries B common stock and/or any nonvoting capital stock to 

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maintainits percentage of the total voting power and value of Mueller Water.Additionally, with respect to shares of any nonvoting Mueller Water capitalstock that may be issued in the future, Walter Industries will have an optionto purchase such additional shares so as to maintain ownership of 80% of eachoutstanding class of such stock.

Each member of aconsolidated group for federal income tax purposes is severally liable for thefederal income tax liability of each other member of the consolidated group forany year in which it is a member of the group at any time during such year.Each member of the Walter Industries controlled group, which currently includesWalter Industries, Mueller Water, the Company and Walter Industries’ othersubsidiaries, is also jointly and severally liable for pension and benefitfunding and termination liabilities of other group members, as well as certainbenefit plan taxes. Accordingly, we could be liable under such provisions inthe event any such liability is incurred, and not discharged, by any othermember of the Walter Industries consolidated or controlled group for any periodduring which we were included in the Walter Industries consolidated orcontrolled group. If Walter Industries retains less than 80% of the value ofMueller Water, we will no longer be included in the Walter Industries’consolidated federal income tax group, and there is no assurance that our taxposition will be as favorable as if we continued to be included in the WalterIndustries’ consolidated federal income tax group.

A controversy exists withregard to federal income taxes allegedly owed by the Walter consolidated group,which includes the Company, for fiscal years 1980 through 1994. It is estimatedthat the amount of tax presently claimed by the IRS is approximately $34.0million for issues currently in dispute in bankruptcy court for mattersunrelated to the Company. This amount is subject to interest and penalties.However, Walter Industries believes that their tax filing positions havesubstantial merit and intend to defend vigorously any claims asserted. WalterIndustries believes that it has an accrual sufficient to cover the estimatedprobable loss, including interest and penalties.

By virtue of itscontrolling beneficial ownership and the terms of a tax allocation agreementthat will be entered into between Mueller Water and Walter Industries, WalterIndustries effectively will control all of our tax decisions for periods duringwhich we are a member of the Walter Industries consolidated federal income taxgroup and certain combined, consolidated or unitary state and local income taxgroups. Under the terms of a tax allocation agreement between Walter Industriesand Mueller Water, Walter Industries will have sole authority to respond to andconduct all tax proceedings (including tax audits) relating to our federalincome and combined state returns, to file all such returns on behalf of us andto determine the amount of our liability to (or entitlement to payment from)Walter Industries for such periods. This arrangement may result in conflicts ofinterests between us and Walter Industries. In addition, the tax allocationagreement will provide that in the event that Walter Industries effectuates aspin-off of the Mueller Water common stock that it owns and such spin-off isnot tax-free pursuant to Section 355 of the Internal Revenue Code of 1986, asamended, or the “Code,” we will generally be responsible for any taxes incurredby Walter Industries or its stockholders if such taxes result from certain ofour actions or omissions. If the taxes incurred by Walter Industries or itsstockholders do not result from certain of our actions or omissions and do notresult from certain of Walter Industries’ actions or omissions, then wegenerally will be responsible for a percentage of such taxes based upon the  market value of Mueller Water’s stockrelative to Walter Industries’ market value.

**Becausewe have limited experience operating as a stand-alone entity, we may bematerially and adversely affected by the separation of our business from WalterIndustries.**

Our companyis a combination of the Predecessor Mueller Water business acquired by WalterIndustries on October 3, 2005 and the U.S. Pipe business. As of the dateof this report, Walter Industries owns all outstanding shares of Mueller Watercommon stock. Our operations as a stand-alone company may place significantdemands on our management, operational, and technical resources. Our futureperformance will depend on our ability to function as a stand-alone company andon our ability to finance and manage expanding operations and to adapt ourinformation systems to changes in its business. We rely 

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on contractual arrangements that require WalterIndustries and its affiliates to provide or procure certain criticaltransitional services and shared arrangements to us such as:

·       certaintax and accounting services;

·       certainhuman resources services, including benefit plan administration;

·       communicationssystems;

·       insurance;and

·       supplyarrangements.

After the termination ofthese arrangements, we may not be able to replace these services andarrangements in a timely manner or on terms and conditions, including servicelevels and cost, as favorable as those we have received from Walter Industriesand its affiliates. We cannot assure you that our separation from WalterIndustries will be successful, which could materially and adversely impact ourbusiness, our results and our financial reporting ability.

Furthermore, the financialinformation included in this prospectus may not necessarily reflect what theoperating results and financial condition would have been had we been aseparate, stand-alone entity during the periods presented or be indicative ofour future operating results and financial condition.

**Item 6.   Exhibits**

**(a) Exhibits**

| 3.1  |   | Certificate of Formation of Mueller Group, LLC  together with Certificate of Conversion to Limited Liability Company of  Mueller Group, Inc. (1)                                                                                                                                                                                  |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Limited Liability  Company Agreement of Mueller Group, LLC (1)                                                                                                                                                                                                                                                                    |
| 4.1  |   | First Supplemental  Indenture, dated as of October 3, 2005 by and among Mueller Group, LLC,  Mueller Group Co-Issuer, Inc. and Law Debenture Trust Company of New York *                                                                                                                                                          |
| 10.1 |   | Credit Agreement dated  as of October 3, 2005 among Mueller Group, LLC, Bank of America, N.A., as  administrative agent, Morgan Stanley Senior Funding, Inc., as syndication  agent, Calyon New York Branch, Fifth Third Bank and JPMorgan Chase Bank,  N.A., as co-documentation agents, and the other lenders named therein (2) |
| 31.1 |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes Oxley Act of 2002.*                                                                                                                                                                                                                             |
| 31.2 |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.*                                                                                                                                                                                                                             |
| 32.1 |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.*                                                                                                                                                                                                                             |
| 32.2 |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.*                                                                                                                                                                                                                             |

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(1)          Previously filed as anExhibit to the Company’s Annual Report on Form 10 K for the fiscal year endedSeptember 30, 2005 as filed with the Securities and Exchange Commission onDecember 20, 2005.

(2)          Previously filed as anExhibit to the Company’s Current Report on Form 8 K as filed with the SEC onOctober 6, 2005.

•                   Filed herewith.

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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, LLC |
|-------------------------------|--------|--------------------|
| Date:  February 22, 2006 |   | By:                | /s/ DALE B.  SMITH |
|                          |   |               | Dale B. Smith |
|                          |   |               | *President  and Chief Executive Officer* |
| Date:  February 22, 2006 |   | By:                | /s/  JEFFERY W. SPRICK |
|                          |   |               | Jeffery W. Sprick |
|                          |   |               | *Chief  Financial Officer* |

 

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