**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**Commission File Number 333-117473**

 

----

 

**MUELLER GROUP, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                     | ** ** | **37-1387813**                       |
|------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or  organization) | ** ** | (I.R.S. Employer identification No.) |

 

**500 West Eldorado St.**

**Decatur, IL 62522-1808**

(Address of principal executive offices)

 

**(217) 423-4471**

(Registrant’s telephone number, includingarea code)

 

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

 

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

 

| **Common Stock**      | ** ** | **Shares Outstanding As of August 5, 2005** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|
| $ 0.01 Par Value |       | 100                                              |       |

 

 

----

** **

**MUELLER GROUP, INC.**

**REPORT ON FORM 10-Q**

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

 

**TABLE OF CONTENTS**

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

 

2

----

 

**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1. FINANCIAL STATEMENTS**

 

**MUELLER GROUP, INC.**

**UNAUDITED CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                          | ** ** | **September 30,  2004** | ** ** | **July 2,  2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                                                                          | ** ** | **(unaudited)**              | ** ** |
| ** **                                                                          |       | **(dollars in millions)**    |       |
| **Assets**                                                                          |       | ** **                   |       |
| Cash and cash equivalents                                                           |       | $                            | 55.6       |                   | $          | 65.8 |   |
| Receivables, net of allowance for doubtful  accounts of $5.1 and $5.3, respectively |       | 162.0                        |       | 160.9                  |       |
| Inventories                                                                         |       | 260.2                        |       | 309.7                  |       |
| Income taxes receivable                                                             |       | 4.1                          |       | 0.5                    |       |
| Deferred income taxes                                                               |       | 9.0                          |       | 10.1                   |       |
| Prepaid expenses and other current assets                                           |       | 28.9                         |       | 26.3                   |       |
| Total current assets                                                                |       | 519.8                        |       | 573.3                  |       |
| Property, plant and equipment, net                                                  |       | 186.8                        |       | 173.5                  |       |
| Goodwill, net                                                                       |       | 163.2                        |       | 163.2                  |       |
| Identifiable intangibles, net                                                       |       | 55.2                         |       | 53.1                   |       |
| Pension intangible                                                                  |       | 0.8                          |       | 0.8                    |       |
| Deferred financing fees, net                                                        |       | 33.8                         |       | 30.2                   |       |
| Deferred income taxes                                                               |       | 19.3                         |       | 23.2                   |       |
| Total assets                                                                        |       | $                            | 978.9      |                   | $          | 1,017.3 |   |
| **Liabilities**                                                                     |       |                         |       |                   |       |
| Accounts payable                                                                    |       | $                            | 52.7       |                   | $          | 50.2 |   |
| Current portion of long-term debt                                                   |       | 3.2                          |       | 3.9                    |       |
| Accrued expenses and other current  liabilities                                     |       | 85.5                         |       | 83.6                   |       |
| Total current liabilities                                                           |       | 141.4                        |       | 137.7                  |       |
| Long-term debt, net of current portion                                              |       | 929.4                        |       | 926.9                  |       |
| Accrued pension liability                                                           |       | 29.2                         |       | 33.7                   |       |
| Other long-term liabilities                                                         |       | 7.8                          |       | 3.6                    |       |
| Total liabilities                                                                   |       | 1,107.8                      |       | 1,101.9                |       |
| Commitments and contingencies (Note 8)                                              |       | —                       |       | —                 |       |
| **Shareholder’s equity**                                                       |       |                         |       |                   |       |
| Common stock—$0.01 par value (100 shares  authorized and issued)               |       | —                       |       | —                 |       |
| Additional paid-in capital                                                          |       | —                       |       | —                 |       |
| Accumulated deficit                                                                 |       | (112.9                       | )          | (70.8                  | )          |
| Accumulated other comprehensive loss                                                |       | (16.0                        | )          | (13.8                  | )          |
| Total shareholder’s equity                                                     |       | (128.9                       | )          | (84.6                  | )          |
| Total liabilities and shareholder’s equity                                     |       | $                            | 978.9      |                   | $          | 1,017.3 |   |

 

The accompanying notes are an integral partof the financial statements.

 

3

----

 

**MUELLER GROUP, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
| ** **                                                 | ** ** | **Three months ended**                 | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **June 26, 2004**                 | ** ** | **July 2, 2005** | ** ** |
| ** **                                                 | ** ** | **(restated)**                         | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| Net sales                                                  |       | $                                      | 289.1      |   | $ | 296.9 |   |
| Cost of sales                                              |       | 204.5                                  |       | 200.2 |   |
| Gross profit                                               |       | 84.6                                   |       | 96.7 |   |
| Selling, general and administrative expense                |       | 46.7                                   |       | 47.8 |   |
| Stock compensation expense                                 |       | 20.9                                   |       | — |   |
| Facility rationalization, restructuring and  related costs |       | —                                 |       | — |   |
| Operating income                                           |       | 17.0                                   |       | 48.9 |   |
| Interest expense and early repayment costs                 |       | (18.9                                  | )          | (18.5 | ) |
| Interest income                                            |       | 0.1                                    |       | 0.4 |   |
| Income before income taxes                                 |       | (1.8                                   | )          | 30.8 |   |
| Income tax expense                                         |       | (4.6                                   | )          | 11.0 |   |
| Net income                                                 |       | $                                      | 2.8        |   | $ | 19.8 |   |

 
| ** **                                                 | ** ** | **Nine months ended**                  | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **June 26, 2004**                 | ** ** | **July 2, 2005** | ** ** |
| ** **                                                 | ** ** | **(restated)**                         | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| Net sales                                                  |       | $                                      | 745.6      |   | $ | 838.2 |   |
| Cost of sales                                              |       | 535.7                                  |       | 577.7 |   |
| Gross profit                                               |       | 209.9                                  |       | 260.5 |   |
| Selling, general and administrative expense                |       | 125.3                                  |       | 139.1 |   |
| Stock compensation expense                                 |       | 21.2                                   |       | — |   |
| Facility rationalization, restructuring and  related costs |       | 0.9                                    |       | 1.6 |   |
| Operating income                                           |       | 62.5                                   |       | 119.8 |   |
| Interest expense and early repayment costs                 |       | (39.3                                  | )          | (53.6 | ) |
| Interest income                                            |       | 0.3                                    |       | 1.0 |   |
| Income before income taxes                                 |       | 23.5                                   |       | 67.2 |   |
| Income tax expense                                         |       | 5.5                                    |       | 25.1 |   |
| Net income                                                 |       | $                                      | 18.0       |   | $ | 42.1 |   |

 

The accompanying notes are an integral partof the financial statements.

 

4

----

 

**MUELLER GROUP, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine months ended**     | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                         | ** ** | **June 26,  2004**   | ** ** | **July 2,  2005** | ** ** |
| ** **                                                                         | ** ** | **(restated)**            | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**           | ** ** |
| ** **                                                                         | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating activities**                                           |       |                      |       |   |   |
| Net income                                                                         |       | $                         | 18.0       |   | $ | 42.1 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                      |       |   |   |
| Depreciation                                                                       |       | 34.3                      |       | 32.7 |   |
| Amortization of intangibles and tooling                                            |       | 15.2                      |       | 4.1 |   |
| Unrealized gain on interest rate swaps                                             |       | (10.4                     | )          | (4.2 | ) |
| Write off of deferred financing fees                                               |       | 7.0                       |       | — |   |
| All other adjustments                                                              |       | 7.2                       |       | (0.5 | ) |
| Changes in assets and liabilities, net of  the effects of acquisitions:            |       |                      |       |   |   |
| Receivables                                                                        |       | (16.7                     | )          | 1.1 |   |
| Inventories                                                                        |       | (9.1                      | )          | (49.5 | ) |
| Accounts payable and accrued expenses                                              |       | 4.8                       |       | (4.4 | ) |
| All other changes, net                                                             |       | 1.1                       |       | 9.8 |   |
| Net cash provided by operating activities                                          |       | 51.4                      |       | 31.2 |   |
| **Cash flows from investing activities**                                           |       |                      |       |   |   |
| Purchase of property, plant and equipment                                          |       | (17.4                     | )          | (20.8 | ) |
| Acquisition of businesses, net of cash  acquired                                   |       | (19.8                     | )          | — |   |
| Net cash used in investing activities                                              |       | (37.2                     | )          | (20.8 | ) |
| **Cash flows from financing activities**                                           |       |                      |       |   |   |
| Proceeds from short-term borrowings                                                |       | 9.2                       |       | — |   |
| Payment of short-term borrowings                                                   |       | (9.2                      | )          | — |   |
| Proceeds of long-term debt                                                         |       | 960.0                     |       | — |   |
| Payment of long-term debt, including  capital lease obligations                    |       | (604.4                    | )          | (2.4 | ) |
| Payment of deferred financing fees                                                 |       | (30.8                     | )          | — |   |
| Dividends paid (excluding amounts paid to  optionholders)                          |       | (387.3                    | )          | — |   |
| Net cash used in financing activities                                              |       | (62.5                     | )          | (2.4 | ) |
| Effect of exchange rate changes on cash                                            |       | 0.2                       |       | 2.2 |   |
| Increase (decrease) in cash and cash  equivalents                                  |       | (48.1                     | )          | 10.2 |   |
| **Cash and cash equivalents**                                                      |       |                      |       |   |   |
| Beginning of period                                                                |       | 71.4                      |       | 55.6 |   |
| End of period                                                                      |       | $                         | 23.3       |   | $ | 65.8 |   |

 

The accompanying notes are an integral partof the financial statements.

 

5

----

 

**MUELLER GROUP, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

**(UNAUDITED)**

 

**1. Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementsof Mueller Group, Inc. (the “Company”) have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information. Accordingly, the unaudited condensedconsolidated financial statements and notes do not contain certain informationincluded in the Company’s annual financial statements. In the opinion ofmanagement, all normal and recurring adjustments that are considered necessaryfor a fair financial statement presentation have been made. Operating resultsfor the three and nine months ended July 2, 2005 are not necessarilyindicative of the results that may be expected for the fiscal year ended September 30,2005. The consolidated financial statements should be read in conjunction withthe audited consolidated financial statements for the year ended September 30,2004 as found in the Company’s Annual Report on Form 10-K.

 

**2. Restatements**

 

In November 2004, the Company’s Audit Committee was notified ofalleged potential accounting improprieties concerning the Company’s accountingfor inventory reserves and certain questions concerning revenue recognition.The Audit Committee appointed an independent law firm to investigate theallegations. The law firm delivered a report that identified several areasrequiring financial review by the Company principally concerning accounting forexcess and obsolete (E&O) inventory, the capitalization of costs relatingto a project that should have been expensed in prior periods, the accrual ofreserves for this project without identifying support for such accruals and thetiming of recognition of revenue with regard to full truckload shipments thatwere not immediately dispatched to customers by certain freight carriers usedby the Company. The Company also identified some additional annual and interimitems recorded in incorrect periods in the course of finalizing the 2004financial statements. In addition, the Company determined that the value itassigned to stock compensation in connection with its April 2004recapitalization should be revised. As a result of these findings, the Companyrestated its annual and interim financial statements. For more specificinformation about prior period restatements, see Notes 2 and 21 of theCompany’s Audited Consolidated Financial Statements for the year ended September 30,2004 as found in Form 10-K for such fiscal year (File No. 333-117473).

 

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

 

*Inventory valuation adjustments*

 

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

 

*Research and development costs*

 

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

 

*Revenue recognition adjustments*

 

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

 

6

----

 

*Inventory journal entries*

 

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

 

*Stock-based compensation*

 

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

 

*Intercompany profit elimination*

 

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

 

*Deferred financing fees*

 

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

 

*Income tax effect of adjustments*

 

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

 

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

 
| ** **                                  | ** ** | **Three Months Ended  6/26/04** | ** ** | **Nine Months Ended  6/26/04** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **(dollars  in millions)**                  | ** ** | **As previously  reported**     | ** ** | **As restated**                | ** ** | **As previously  reported** | ** ** | **As restated** | ** ** |
| Net sales                                   |       | $                               | 288.7      |                           | $          | 289.1 |   | $ | 743.6 |   | $ | 745.6 |   |
| Cost of sales                               |       | 205.7                           |       | 204.5                          |       | 533.7 |   | 535.7 |   |
| Gross profit                                |       | 83.0                            |       | 84.6                           |       | 209.9 |   | 209.9 |   |
| Selling, general and administrative expense |       | 47.5                            |       | 46.7                           |       | 126.5 |   | 125.3 |   |
| Stock compensation expense                  |       | 15.5                            |       | 20.9                           |       | 15.8 |   | 21.2 |   |
| Facility rationalization and related costs  |       | —                          |       | —                         |       | 0.9 |   | 0.9 |   |
| Operating income                            |       | 20.0                            |       | 17.0                           |       | 66.7 |   | 62.5 |   |
| Interest expense and early repayment costs  |       | (18.1                           | )          | (18.9                          | )          | (39.3 | ) | (39.3 | ) |
| Interest income                             |       | 0.1                             |       | 0.1                            |       | 0.3 |   | 0.3 |   |
| Income before income taxes                  |       | 2.0                             |       | (1.8                           | )          | 27.7 |   | 23.5 |   |
| Income tax expense                          |       | (3.2                            | )          | (4.6                           | )          | 7.1 |   | 5.5 |   |
| Net income                                  |       | $                               | 5.2        |                           | $          | 2.8 |   | $ | 20.6 |   | $ | 18.0 |   |

 
| **(dollars  in millions)**             | ** ** | **Three Months  Ended  6/26/04** | ** ** | **Nine Months  Ended  6/26/04** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Net income, as previously reported     |       | $                                | 5.2        |                            | $          | 20.6 |   |
| Increased (decreased) pretax earnings: |       |                             |       |                            |       |
| Inventory valuation adjustments        |       | (0.1                             | )          | (0.2                            | )          |
| Research & development costs  |       | 0.8                              |       | 1.2                             |       |
| Revenue recognition adjustments        |       | 0.1                              |       | 0.6                             |       |
| Inventory journal entries              |       | 1.1                              |       | 0.9                             |       |
| Stock-based compensation               |       | (5.4                             | )          | (5.4                            | )          |
| Intercompany profit elimination        |       | 0.5                              |       | (1.3                            | )          |
| Deferred financing fees                |       | (0.8                             | )          | —                          |       |
| Total pre-tax adjustments              |       | (3.8                             | )          | (4.2                            | )          |
| Income tax effect of adjustments       |       | 1.4                              |       | 1.6                             |       |
| Net income, as restated                |       | $                                | 2.8        |                            | $          | 18.0 |   |

 

7

----

 
| ** **                 | ** ** | **Three Months Ended  6/26/04** | ** ** | **Nine Months Ended  6/26/04** | ** ** |
|----------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **(dollars  in millions)** | ** ** | **As previously  reported**     | ** ** | **As restated**                | ** ** | **As previously  reported** | ** ** | **As restated** | ** ** |
| Net sales:                 |       |                            |       |                           |       |   |   |   |   |
| Water infrastructure       |       | $                               | 172.4      |                           | $          | 172.8 |   | $ | 432.7 |   | $ | 434.7 |   |
| Piping systems             |       | 116.3                           |       | 116.3                          |       | 310.9 |   | 310.9 |   |
| Consolidated               |       | 288.7                           |       | 289.1                          |       | 743.6 |   | 745.6 |   |
| Segment EBITDA:            |       |                            |       |                           |       |   |   |   |   |
| Water infrastructure       |       | 45.2                            |       | 46.0                           |       | 111.4 |   | 113.0 |   |
| Piping systems             |       | 10.8                            |       | 12.4                           |       | 28.8 |   | 28.4 |   |
| Total segment EBITDA       |       | 56.0                            |       | 58.4                           |       | 140.2 |   | 141.4 |   |
| Operating Income:          |       |                            |       |                           |       |   |   |   |   |
| Water infrastructure       |       | 39.5                            |       | 40.3                           |       | 93.5 |   | 95.1 |   |
| Piping systems             |       | 6.5                             |       | 8.1                            |       | 16.1 |   | 15.7 |   |
| Corporate                  |       | (26.0                           | )          | (31.4                          | )          | (42.9 | ) | (48.3 | ) |
| Consolidated               |       | 20.0                            |       | 17.0                           |       | 66.7 |   | 62.5 |   |
|                            |            |                                 |            |                                |            |  |  |  |  |  |  |  |  |

 

**3. Segment Information**

 

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

 

Intersegment sales and transfers are made at established intersegmentselling prices generally intended to cover costs. Our determination of segmentearnings does not reflect allocations of certain corporate expenses notattributable to segment operations and intersegment eliminations, which wedesignate as Corporate in the segment presentation, and is before interest expenseand early debt repayment costs, interest income 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 booked at the date of the Company’s inception in1999 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 were notpushed down to our water infrastructure products and piping systems productssegments and are maintained as Corporate items. Therefore, segment earnings arenot reflective of results on a stand-alone basis.

 

The Company evaluates segment performance based on segment EBITDA.Segment EBITDA is defined as net income plus income tax expense, interestexpense (not net of interest income), depreciation and amortization expense.Segment assets consist primarily of accounts receivable, inventories, property,plant and equipment—net, goodwill, and identifiable intangibles. Summarizedfinancial information for our segments follows:

 

8

----

 
| ** **                         | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June 26, 2004** | ** **  | **Nine months  ended  July 2, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|-------------|-------------------------------------------|------------|
| ** **                         | ** ** | **(restated)**                              | ** ** | ** **                                 | ** ** | **(restated)**                             | ** **  | ** **                                | ** ** |
| **Net Sales:**                     |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       | $                                           | 172.8      |                                       | $          | 172.1                                      |        | $                                         | 434.7      |   | $ | 480.8 |   |
| Piping systems                     |       | 116.3                                       |       | 124.8                                      |       | 310.9                                      |        | 357.4                                     |       |
| Consolidated                       |       | 289.1                                       |       | 296.9                                      |       | 745.6                                      |        | 838.2                                     |       |
| **Intersegment sales:**            |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       | 4.1                                         |       | 3.8                                        |       | 10.1                                       |        | 10.6                                      |       |
| Piping systems                     |       | 0.2                                         |       | 0.3                                        |       | 0.5                                        |        | 0.6                                       |       |
| Consolidated                       |       | 4.3                                         |       | 4.1                                        |       | 10.6                                       |        | 11.2                                      |       |
| **Segment EBITDA:**                |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       | 46.0                                        |       | 52.7                                       |       | 113.0                                      |        | 131.9                                     |       |
| Piping systems                     |       | 12.4                                        |       | 17.2                                       |       | 28.4                                       |        | 47.5                                      |       |
| Total segment EBITDA               |       | 58.4                                        |       | 69.9                                       |       | 141.4                                      |        | 179.4                                     |       |
| **Depreciation and amortization:** |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       | 5.7                                         |       | 4.9                                        |       | 17.9                                       |        | 16.9                                      |       |
| Piping systems                     |       | 4.3                                         |       | 4.3                                        |       | 12.7                                       |        | 12.9                                      |       |
| Corporate                          |       | 6.3                                         |       | 2.2                                        |       | 18.9                                       |        | 7.0                                       |       |
| Consolidated                       |       | 16.3                                        |       | 11.4                                       |       | 49.5                                       |        | 36.8                                      |       |
| **Impairment charges:**            |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       | —                                      |       | —                                     |       | —                                     |        | —                                    |       |
| Piping systems                     |       | —                                      |       | —                                     |       | 0.1                                        |        | —                                    |       |
| Corporate                          |       | —                                      |       | —                                     |       | —                                     |        | —                                    |       |
| Consolidated                       |       | —                                      |       | —                                     |       | 0.1                                        |        | —                                    |       |
| **Capital expenditures:**          |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       | 3.1                                         |       | 4.0                                        |       | 9.3                                        |        | 13.0                                      |       |
| Piping systems                     |       | 3.3                                         |       | 2.9                                        |       | 8.1                                        |        | 6.8                                       |       |
| Corporate                          |       | —                                      |       | 0.3                                        |       | —                                     |        | 1.0                                       |       |
| Consolidated                       |       | 6.4                                         |       | 7.2                                        |       | 17.4                                       |        | 20.8                                      |       |
|                               |       |                                        |       |                                       |       |                                       |        |                                      |       |
|                               |       | ** **                                  | ** ** | ** **                                 |       | **At September 30, 2004**             | ** **  | **At July 2, 2005**                  |       |
| **Total assets:**                  |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       |                                        |       |                                       |       | $                                          |  500.0 |                                      | $          |  507.4 |   |
| Piping systems                     |       |                                        |       |                                       |       | 307.9                                      |        | 336.2                                     |       |
| Corporate                          |       |                                        |       |                                       |       | 171.0                                      |        | 173.7                                     |       |
| Consolidated                       |       |                                        |       |                                       |       | 978.9                                      |        | 1,017.3                                   |       |
| **Goodwill:**                      |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       |                                        |       |                                       |       | 149.1                                      |        | 149.1                                     |       |
| Piping systems                     |       |                                        |       |                                       |       | 14.1                                       |        | 14.1                                      |       |
| Consolidated                       |       |                                        |       |                                       |       | 163.2                                      |        | 163.2                                     |       |
| **Identifiable intangibles:**      |       |                                        |       |                                       |       |                                       |        |                                      |       |
| Water infrastructure               |       |                                        |       |                                       |       | 5.3                                        |        | 4.7                                       |       |
| Piping systems                     |       |                                        |       |                                       |       | 7.2                                        |        | 5.7                                       |       |
| Corporate                          |       |                                        |       |                                       |       | 42.7                                       |        | 42.7                                      |       |
| Consolidated                       |       |                                        |       |                                       |       | 55.2                                       |        | 53.1                                      |       |
|                                    |            |                                             |            |                                            |            |                                            |             |                                           |            |  |  |  |  |  |  |

 

The Company evaluates segment performance based on segment EBITDA. Areconciliation of segment EBITDA to consolidated income before income taxesfollows:

 

9

----

 
| ** **                                 | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June 26, 2004** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **(restated)**                              | ** ** | ** **                                 | ** ** | **(restated)**                             | ** ** | ** **                                | ** ** |
| Total segment EBITDA                       |       | $                                           | 58.4       |                                       | $          | 69.9                                       |       | $                                         | 141.4      |   | $ | 179.4 |   |
| Unallocated corporate costs                |       | (25.0                                       | )          | (9.2                                       | )          | (29.1                                      | )          | (21.8                                     | )          |
| Interest expense and early repayment costs |       | (18.9                                       | )          | (18.5                                      | )          | (39.3                                      | )          | (53.6                                     | )          |
| Depreciation and amortization              |       | (16.3                                       | )          | (11.4                                      | )          | (49.5                                      | )          | (36.8                                     | )          |
| Income before income taxes                 |       | $                                           | (1.8       | )                                          | $          | 30.8                                       |       | $                                         | 23.5       |   | $ | 67.2 |   |

 

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

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

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

 

**4. Summary of Significant Accounting Policies**

 

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

 

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

 

Warranty Costs—The Company accrues for the estimated cost of product warrantiesat the time of product sale based on historical experience. Adjustments toobligations for warranties are made as changes in the obligations becomereasonably estimable. The following table summarizes information concerning theCompany’s product warranty obligations:

 

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

 

Comprehensive Income—The Company’s comprehensive income for the threemonths ended June 26, 2004, and July 2, 2005 includes foreigncurrency translation losses of $(1.1) million and $(1.2) million,respectively and minimum pension liability adjustment of $(0.4) million for thethree months ended June 26, 2004. The Company’s comprehensive income forthe nine

 

10

----

 

months ended June 26, 2004and July 2, 2005 includes foreign currency translation gains of $0.2 millionand $2.2 million, respectively, and minimum pension liability adjustmentof $(0.4) million for the nine months ended June 26, 2004.

 

Related Party Transactions—Substantially all of the outstanding sharesof the common stock of our parent company, Mueller Water Products, Inc. (“MuellerWater”), are held by DLJ Merchant Banking Partners II, L.P. and its affiliates(the “DLJ Funds”). On July 23, 1999, the Company and Mueller Water enteredinto a financial advisory agreement with Donaldson, Lufkin & Jenrette(“DLJ”) whereby the Company committed to pay DLJ for financial advisoryservices provided by DLJ.  On April 27,2004, Credit Suisse, as successor to DLJ, assigned its rights under thefinancial advisory agreement to DLJ Merchant Banking II, Inc. (“DLJMerchant Banking”), other than the right to provide services to the Company andreceive customary compensation for such services in connection with a “Transaction”,generally defined in the financial advisory agreement to be a sale ordisposition of the Company, a significant acquisition by the Company or arefinancing or restructuring of the Company’s debt or equity.  Credit Suisse and DLJ Merchant Banking areaffiliates of the DLJ Funds.

 

The aggregate amount of all fees incurred by the Company with DLJMerchant Banking and Credit Suisse under the financial advisory agreement wasapproximately $21.4 million and $0.2 million, respectively, for each ofthe three-month periods ended June 26, 2004 and July 2, 2005 and $21.9 millionand $0.4 million for the nine-month periods ended June 26, 2004 and July 2,2005, respectively.  Included in feespaid during the three- and nine-month periods ended June 26, 2004 was $21.2million related to the Company’s April 2004 recapitalization.  Under the financial advisory agreement,Credit Suisse will be entitled to receive fees in connection with the closingof the pending merger of our parent company, Mueller Water, and WalterIndustries.  See Note 5 – MergerAnnouncement and Acquisitions.

 

**5.****              Merger Announcementand Acquisitions**

 

*Merger Announcement*

 

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

 

Also, as previously disclosed, Mueller Water will cause the Company tocommence a tender offer and consent solicitation for the Company’s secondpriority senior secured floating rate notes due 2011, and the closing of thetender offer and consent solicitation would be simultaneous with the mergerclosing but is not a condition to the merger closing.  The Company’s senior credit facility will berefinanced at merger closing.  Inaddition, the holders of Mueller Water’s 14 3⁄4% senior discount notes due 2014and the Company’s 10% senior subordinated notes due 2012 will have the right toput these notes to their respective issuers following the change of controlresulting from the consummation of the merger transaction in accordance withthe respective indentures.  See Note 7 –Long Term Debt.

 

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

 

*Acquisitions*

 

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

 

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

 

11

----

 

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

 

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

 

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

 

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

 

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

 

12

----

 

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

 

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

 

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

 

| ** ** | ** ** | **Three months ended  June 26, 2004** | ** ** | **Nine months ended  June 26, 2004** | ** ** |
|------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| Net Sales  |       | $                                          | 289.1      |                                      | $          | 753.0 |   |
| Net income |       | 2.8                                        |       | 18.2                                      |       |
|            |            |                                            |            |                                           |            |  |  |

 

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

 

**6.  NewAccounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Board issuedSFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFASNo. 123, “Accounting for Stock-Based Compensation,” and supersedes APBOpinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R)requires compensation costs related to share-based payment transactions to berecognized in the financial statements over the period that an employeeprovides service in exchange for the award. Public companies are required toadopt the new standard using a modified prospective method and may elect torestate prior periods using the modified retrospective method. Under themodified prospective method, companies are required to record compensation costfor new and modified awards over the related vesting period of such awardsprospectively and record compensation cost prospectively for the unvestedportion, at the date of adoption, of previously issued and outstanding awardsover the remaining vesting period of such awards. No change to prior periodspresented is permitted under the modified prospective method. Under themodified retrospective method, companies record compensation costs for priorperiods retroactively through restatement of such periods using the exact proforma amounts disclosed in the companies’ footnotes. Also, in the period ofadoption and after, companies record compensation based on the modifiedprospective method. SFAS No. 123(R), as amended in April 2005 forcompliance dates, allows companies to implement the standard at the beginningof their next fiscal year. The Company plans to adopt SFAS No. 123(R) asof October 1, 2005, the beginning of its next fiscal year and to use themodified prospective method. The adoption of SFAS 123(R) is not expectedto have a material impact on the Company’s financial statements, as all optionspreviously outstanding have been cancelled as part of the April 2004recapitalization.

 

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

 

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

 

13

----

 

provision on its plan forrepatriation of foreign earnings and does not expect to be able to completethis evaluation until after the Treasury Department has issued all of itsguidance, including the expected passage of a Technical Corrections Bill byCongress.

 

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

 

**7. Long-Term Debt**

 
| ** **                           | ** ** | **September 30, 2004** | ** ** | **July 2, 2005** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **(dollars in millions)**   | ** ** |
| Senior credit facility term loans    |       | $                           | 515.0      |                  | $          | 513.5 |   |
| Second Priority Senior Secured Notes |       | 100.0                       |       | 100.0                 |       |
| 10% Senior Subordinated Notes        |       | 315.0                       |       | 315.0                 |       |
| Capital lease obligations            |       | 2.6                         |       | 2.3                   |       |
|                                 |       | 932.6                       |       | 930.8                 |       |
| Less current portion                 |       | (3.2                        | )          | (3.9                  | )          |
|                                 |       | $                           | 929.4      |                  | $          | 926.9 |   |

 

Treatment ofLong-Term Debt in Connection with Walter Industries Merger - Under the WalterIndustries merger agreement with our parent company, Mueller Water, and priorto merger closing, the Company will commence a tender offer and consentsolicitation for the Company’s second priority senior secured floating ratenotes due 2011.  The consummation of thetender offer and consent solicitation is expected to occur simultaneously withthe consummation of the merger, but it is not a condition to mergerclosing.  The Company’s senior creditfacility will be refinanced at merger closing. The Company’s 10% senior subordinated notes due 2012 will remain outstandingafter the merger is completed.  However,holders of these notes will have the right to put them to the issuer followingthe change of control resulting from the consummation of the merger transactionin accordance with the indentures.  TheCompany anticipates that, in connection with the merger, the Company will incuradditional debt.  As a result, theCompany’s leverage will increase, thereby increasing its debt serviceobligations.  The increased leveragecould adversely affect the outstanding notes of the Company going forward.

 

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

 

Interest RateSwaps — The Company has entered into interest rate swap agreements in order toreduce interest rate risks and manage interest expense. As of July 2,2005, a notional principal amount of $100.0 million in swap agreements wasoutstanding and scheduled to mature in July 2005 and May 2007. Theswap agreements effectively convert floating-rate debt into fixed-rate debt andcarried an average fixed interest rate of 5.77% at July 2, 2005. Interestdifferentials to be paid or received because of swap agreements are reflectedas an adjustment to interest expense over the related debt period. At July 2,2005 and September 30, 2004, the fair value of interest rate swaps was aliability of $0.5 million and $4.7 million, respectively, and hasbeen recorded in Other Long-Term Liabilities on the Consolidated BalanceSheets.

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

 

**8. Commitments and Contingencies**

 

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

 

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

 

14

----

 

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

 

Over the next two to three years, the Company expects to incur between$2.0 million and $6.0 million of capital costs at its U.S. iron foundries tocomply with the United States Environmental Protection Agency’s NationalEmissions Standards for Hazardous Air Pollutants (“NESHAP”) for Iron and SteelFoundries and the NESHAP for Miscellaneous Metal Parts Coating Operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

For a detailed disclosure on the Company’s pension and employeebenefits plans, please refer to Note 13 of the Company’s AuditedConsolidated Financial Statements for the year ended September 30, 2004,as found on Form 10-K (File No. 333-117473).

 

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

 

15

----

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

 

The Company previously disclosed in its financial statements for theyear ended September 30, 2004, that it was required to contribute$0.1 million to its pension plans in 2005. As of July 2, 2005, nocontributions have been made. The Company presently anticipates contributing$0.1 million to fund its pension plans in 2005 and may make furtherdiscretionary payments.

 

**10. Supplementary Balance Sheet Information**

 

Selected supplementary balance sheet information is presented below:

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

 

**11. Supplementary Income Statement Information**

 

The components of interest expense are presented below:

 
| ** **                                         | ** ** | **Three months ended**    | ** ** | **Nine months ended**  | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **June 26,  2004**   | ** ** | **July 2,  2005** | ** ** | **June 26,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                                         | ** ** | **(dollars in millions)** | ** ** |
| **Interest expense and early repayment costs:**    | ** ** | ** **                | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contractual interest expense                       |       | $                         | 15.6       |                   | $          | 18.6 |   | $ | 33.6 |   | $ | 54.2 |   |
| Deferred financing fee amortization                |       | 0.8                       |       | 1.2                    |       | 2.1 |   | 3.6 |   |
| Senior subordinated debt early redemption  penalty |       | —                    |       | —                 |       | 7.0 |   | — |   |
| Write off of deferred financing fees               |       | 6.6                       |       | —                 |       | 7.0 |   | — |   |
| Interest rate swap gains                           |       | (4.1                      | )          | (1.3                   | )          | (10.4 | ) | (4.2 | ) |
| Total interest expense and early repayment  costs  |       | $                         | 18.9       |                   | $          | 18.5 |   | $ | 39.3 |   | $ | 53.6 |   |

 

A reconciliation of net income available to the common shareholder isas follows:

 
| ** **                                                                                       | ** ** | **Three months ended**    | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **June 26, 2004**    | ** ** | **July 2, 2005** | ** ** | **June 26, 2004** | ** ** | **July 2, 2005** | ** ** |
| ** **                                                                                       | ** ** | **(restated)**            | ** ** | ** **            | ** ** | **(restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **(dollars in millions)** | ** ** |
| Net income                                                                                       |       | $                         | 2.8        |                  | $          | 19.8 |   | $ | 18.0 |   | $ | 42.1 |   |
| Less preferred share accretion related to  redeemable preferred stock retired in April 2004 |       | (1.3                      | )          | —                |       | (9.3 | ) | — |   |
| Net income available to the common  shareholder                                                  |       | $                         | 1.5        |                  | $          | 19.8 |   | $ | 8.7 |   | $ | 42.1 |   |

 

16

----

 

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

 

In the first quarter of fiscal 2005, the Company announced that itwould cease manufacturing and begin outsourcing a product line it produced atits water infrastructure plant in Colorado. A restructuring charge of$0.1 million in the first quarter of fiscal 2005 related to severancepayments. An additional charge of $1.5 million, related primarily to thetermination of operating leases for the plant building and machinery, wasreflected in the second quarter of fiscal 2005.

 

For the three months ended June 26, 2004, the Company recorded nocharge.  For the nine months ended June 26,2004, the Company recorded a charge of $0.1 million related to assetimpairment for write-offs at piping systems facilities that were closed inNorcross, Georgia and Kearny, New Jersey, $0.3 million related toenvironmental issues at the piping systems closed facility in Statesboro,Georgia (see Note 8), and $0.5 million related to future leaseobligations at the closed and vacated Kearny, New Jersey facility.

 

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

 

The following tables set forth the consolidating statements ofoperations and cash flows of the Company’s guarantor and non-guarantorsubsidiaries for the periods ended June 26, 2004 and July 2, 2005 andthe consolidating balance sheets as of September 30, 2004 and July 2,2005. 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. The information presented below under the title “Issuer”includes the consolidated financial results of Mueller Group, Inc. withall of its wholly-owned subsidiaries accounted for under the equity method.

 

**Consolidating Statement of OperationsFor the Three Months Ended June 26, 2004**

** **
| ** **                                  | ** ** | **Issuer**     | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|----------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **(restated)** | ** ** | **(restated)**              | ** ** | ** **                   | ** ** | **(restated)**                 | ** ** | **(restated)**   | ** ** |
| Net sales                                   |       | $              | —     |                        | $          | 246.9                        |       | $                              | 42.2       |             | $          | — |   | $ | 289.1 |   |
| Cost of sales                               |       | —         |       | 173.7                       |       | 30.8                         |       | —                         |       | 204.5            |       |
| Royalty expense                             |       | —         |       | (0.6                        | )          | 0.6                          |       | —                         |       | —           |       |
| Gross profit                                |       | —         |       | 73.8                        |       | 10.8                         |       | —                         |       | 84.6             |       |
| Selling, general and administrative expense |       | 4.0            |       | 37.4                        |       | 5.3                          |       | —                         |       | 46.7             |       |
| Stock compensation expense                  |       | —         |       | 20.9                        |       | —                       |       | —                         |       | 20.9             |       |
| Facility rationalization and related costs  |       | —         |       | —                      |       | —                       |       | —                         |       | —           |       |
| Operating income (loss)                     |       | (4.0           | )          | 15.5                        |       | 5.5                          |       | —                         |       | 17.0             |       |
| Interest expense                            |       | (18.8          | )          | 0.7                         |       | (0.8                         | )          | —                         |       | (18.9            | )          |
| Interest income                             |       | —         |       | —                      |       | 0.1                          |       | —                         |       | 0.1              |       |
| Income (loss) before income taxes           |       | (22.8          | )          | 16.2                        |       | 4.8                          |       | —                         |       | (1.8             | )          |
| Income tax expense (benefit)                |       | (8.1           | )          | 1.6                         |       | 1.9                          |       | —                         |       | (4.6             | )          |
| Equity income from subsidiaries             |       | 17.5           |       | 2.9                         |       | —                       |       | (20.4                          | )          | —           |       |
| Net income                                  |       | $              | 2.8        |                        | $          | 17.5                         |       | $                              | 2.9        |             | $          | (20.4 | ) | $ | 2.8 |   |

 

**Consolidating Statement of Operations**

**For the Three Months Ended July 2, 2005**

 
| ** **                                  | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                   |       | $          | —     |                        | $          | 233.2                        |       | $                              | 63.7       |             | $          | — |   | $ | 296.9 |   |
| Cost of sales                               |       | —     |       | 150.5                       |       | 49.7                         |       | —                         |       | 200.2            |       |
| Royalty expense                             |       | —     |       | —                      |       | —                       |       | —                         |       | —           |       |
| Gross profit                                |       | —     |       | 82.7                        |       | 14.0                         |       | —                         |       | 96.7             |       |
| Selling, general and administrative expense |       | 1.8        |       | 38.1                        |       | 7.9                          |       | —                         |       | 47.8             |       |
| Facility rationalization and related costs  |       | —     |       | —                      |       | —                       |       | —                         |       | —           |       |
| Operating income (loss)                     |       | (1.8       | )          | 44.6                        |       | 6.1                          |       | —                         |       | 48.9             |       |
| Interest expense                            |       | (18.5      | )          | (0.1                        | )          | —                       |       | 0.1                            |       | (18.5            | )          |
| Interest income                             |       | 0.3        |       | 0.1                         |       | 0.1                          |       | (0.1                           | )          | 0.4              |       |
| Income (loss) before income taxes           |       | (20.0      | )          | 44.6                        |       | 6.2                          |       | —                         |       | 30.8             |       |
| Income tax expense (benefit)                |       | (7.7       | )          | 16.7                        |       | 2.0                          |       | —                         |       | 11.0             |       |
| Equity income from subsidiaries             |       | 32.1       |       | 4.2                         |       | —                       |       | (36.3                          | )          | —           |       |
| Net income                                  |       | $          | 19.8       |                        | $          | 32.1                         |       | $                              | 4.2        |             | $          | (36.3 | ) | $ | 19.8 |   |

 

17

----

 

**Consolidating Statement of Operations**

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

 
| ** **                                  | ** ** | **Issuer**     | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|----------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                  | ** ** | **(restated)** | ** ** | **(restated)**              | ** ** | ** **                   | ** ** | **(restated)**                 | ** ** | **(restated)**   | ** ** |
| Net sales                                   |       | $              | —     |                        | $          | 635.3                        |       | $                              | 110.3      |             | $          | — |   | $ | 745.6 |   |
| Cost of sales                               |       | —         |       | 453.0                       |       | 82.7                         |       | —                         |       | 535.7            |       |
| Royalty expense                             |       | —         |       | —                      |       | —                       |       | —                         |       | —           |       |
| Gross profit                                |       | —         |       | 182.3                       |       | 27.6                         |       | —                         |       | 209.9            |       |
| Selling, general and administrative expense |       | 7.9            |       | 102.9                       |       | 14.5                         |       | —                         |       | 125.3            |       |
| Stock compensation expense                  |       | —         |       | 21.2                        |       | —                       |       | —                         |       | 21.2             |       |
| Facility rationalization and related costs  |       | —         |       | 0.9                         |       | —                       |       | —                         |       | 0.9              |       |
| Operating income (loss)                     |       | (7.9           | )          | 57.3                        |       | 13.1                         |       | —                         |       | 62.5             |       |
| Interest expense                            |       | (39.2          | )          | 2.4                         |       | (2.5                         | )          | —                         |       | (39.3            | )          |
| Interest income                             |       | 0.1            |       | —                      |       | 0.2                          |       | —                         |       | 0.3              |       |
| Income (loss) before income taxes           |       | (47.0          | )          | 59.7                        |       | 10.8                         |       | —                         |       | 23.5             |       |
| Income tax expense (benefit)                |       | (17.8          | )          | 19.0                        |       | 4.3                          |       | —                         |       | 5.5              |       |
| Equity income from subsidiaries             |       | 47.2           |       | 6.5                         |       | —                       |       | (53.7                          | )          | —           |       |
| Net income                                  |       | $              | 18.0       |                        | $          | 47.2                         |       | $                              | 6.5        |             | $          | (53.7 | ) | $ | 18.0 |   |

 

**Consolidating Statement of Operations**

**For the Nine Months Ended July 2, 2005**

 
| ** **                                  | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                   |       | $          | —     |                        | $          | 666.5                        |       | $                              | 171.7      |             | $          | — |   | $ | 838.2 |   |
| Cost of sales                               |       | —     |       | 441.4                       |       | 136.3                        |       | —                         |       | 577.7            |       |
| Royalty expense                             |       | —     |       | —                      |       | —                       |       | —                         |       | —           |       |
| Gross profit                                |       | —     |       | 225.1                       |       | 35.4                         |       | —                         |       | 260.5            |       |
| Selling, general and administrative expense |       | 6.0        |       | 110.6                       |       | 22.5                         |       | —                         |       | 139.1            |       |
| Facility rationalization and related costs  |       | —     |       | 1.6                         |       | —                       |       | —                         |       | 1.6              |       |
| Operating income (loss)                     |       | (6.0       | )          | 112.9                       |       | 12.9                         |       | —                         |       | 119.8            |       |
| Interest expense                            |       | (53.5      | )          | (0.4                        | )          | —                       |       | 0.3                            |       | (53.6            | )          |
| Interest income                             |       | 0.7        |       | 0.3                         |       | 0.3                          |       | (0.3                           | )          | 1.0              |       |
| Income (loss) before income taxes           |       | (58.8      | )          | 112.8                       |       | 13.2                         |       | —                         |       | 67.2             |       |
| Income tax expense (benefit)                |       | (22.7      | )          | 43.3                        |       | 4.5                          |       | —                         |       | 25.1             |       |
| Equity income from subsidiaries             |       | 78.2       |       | 8.7                         |       | —                       |       | (86.9                          | )          | —           |       |
| Net income                                  |       | $          | 42.1       |                        | $          | 78.2                         |       | $                              | 8.7        |             | $          | (86.9 | ) | $ | 42.1 |   |

 

18

----

 

**Consolidating Balance Sheet**

**September 30, 2004**

 
| ** **                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| **Assets**                                      |       |       |       |                        |       |                           |       |                            |       |             |       |
| Cash and cash equivalents                       |       | $          | 44.9       |                        | $          | (7.9                           | )          | $                               | 18.6       |             | $          | — |   | $ | 55.6 |   |
| Receivables, net                                |       | —     |       | 134.5                       |       | 27.5                           |       | —                          |       | 162.0            |       |
| Inventories                                     |       | —     |       | 211.9                       |       | 48.3                           |       | —                          |       | 260.2            |       |
| Income taxes receivable                         |       | 6.5        |       | 0.1                         |       | (2.5                           | )          | —                          |       | 4.1              |       |
| Deferred income taxes                           |       | —     |       | 9.0                         |       | —                         |       | —                          |       | 9.0              |       |
| Prepaid expenses and other current assets       |       | —     |       | 26.8                        |       | 2.1                            |       | —                          |       | 28.9             |       |
| Total current assets                            |       | 51.4       |       | 374.4                       |       | 94.0                           |       | —                          |       | 519.8            |       |
| Property, plant and equipment, net              |       | 0.7        |       | 173.3                       |       | 12.8                           |       | —                          |       | 186.8            |       |
| Goodwill, net                                   |       | —     |       | 163.1                       |       | 0.1                            |       | —                          |       | 163.2            |       |
| Identifiable intangibles, net                   |       | —     |       | 55.2                        |       | —                         |       | —                          |       | 55.2             |       |
| Pension intangible                              |       | —     |       | 0.8                         |       | —                         |       | —                          |       | 0.8              |       |
| Investment in subsidiaries                      |       | 981.3      |       | 26.1                        |       | —                         |       | (1,007.4                        | )          | —           |       |
| Deferred financing fees, net                    |       | 33.8       |       | —                      |       | —                         |       | —                          |       | 33.8             |       |
| Deferred income taxes                           |       | (3.0       | )          | 22.8                        |       | (0.5                           | )          | —                          |       | 19.3             |       |
| Total assets                                    |       | $          | 1,064.2    |                        | $          | 815.7                          |       | $                               | 106.4      |             | $          | (1,007.4 | ) | $ | 978.9 |   |
| **Liabilities**                                 | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Accounts payable                                |       | $          | 2.3        |                        | $          | 38.4                           |       | $                               | 12.0       |             | $          | — |   | $ | 52.7 |   |
| Current portion of long-term debt               |       | 2.2        |       | 1.0                         |       | —                         |       | —                          |       | 3.2              |       |
| Accrued expenses and other current  liabilities |       | 17.6       |       | 61.9                        |       | 6.0                            |       | —                          |       | 85.5             |       |
| Total current liabilities                       |       | 22.1       |       | 101.3                       |       | 18.0                           |       | —                          |       | 141.4            |       |
| Intercompany accounts                           |       | 236.9      |       | (297.8                      | )          | 60.9                           |       | —                          |       | —           |       |
| Long-term debt, net of current portion          |       | 927.9      |       | 1.5                         |       | —                         |       | —                          |       | 929.4            |       |
| Accrued pension liability                       |       | 0.0        |       | 29.4                        |       | (0.2                           | )          | —                          |       | 29.2             |       |
| Other long-term liabilities                     |       | 6.2        |       | —                      |       | 1.6                            |       | —                          |       | 7.8              |       |
| Total liabilities                               |       | 1,193.1    |       | (165.6                      | )          | 80.3                           |       | —                          |       | 1,107.8          |       |
| **Shareholder’s equity**                   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Total shareholder’s equity                 |       | (128.9     | )          | 981.3                       |       | 26.1                           |       | (1,007.4                        | )          | (128.9           | )          |
| Total liabilities and shareholder’s equity |       | $          | 1,064.2    |                        | $          | 815.7                          |       | $                               | 106.4      |             | $          | (1,007.4 | ) | $ | 978.9 |   |

 

19

----

 

**Consolidating Balance Sheet**

**July 2, 2005**

 
| ** **                                      | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| **Assets**                                      |       |       |       |                        |       |                           |       |                            |       |             |       |
| Cash and cash equivalents                       |       | $          | 58.2       |                        | $          | (12.6                          | )          | $                               | 20.2       |             | $          | — |   | $ | 65.8 |   |
| Receivables, net                                |       | —     |       | 131.6                       |       | 29.3                           |       | —                          |       | 160.9            |       |
| Inventories                                     |       | —     |       | 255.0                       |       | 54.7                           |       | —                          |       | 309.7            |       |
| Income taxes receivable                         |       | 1.1        |       | —                      |       | (0.6                           | )          | —                          |       | 0.5              |       |
| Deferred income taxes                           |       | —     |       | 10.1                        |       | —                         |       | —                          |       | 10.1             |       |
| Prepaid expenses and other current assets       |       | —     |       | 24.1                        |       | 2.2                            |       | —                          |       | 26.3             |       |
| Total current assets                            |       | 59.3       |       | 408.2                       |       | 105.8                          |       | —                          |       | 573.3            |       |
| Property, plant and equipment, net              |       | —     |       | 160.6                       |       | 12.9                           |       | —                          |       | 173.5            |       |
| Goodwill, net                                   |       | —     |       | 163.2                       |       | —                         |       | —                          |       | 163.2            |       |
| Identifiable intangibles, net                   |       | —     |       | 53.0                        |       | 0.1                            |       | —                          |       | 53.1             |       |
| Pension intangible                              |       | —     |       | 0.8                         |       | —                         |       | —                          |       | 0.8              |       |
| Investment in subsidiaries                      |       | 1,116.0    |       | 36.1                        |       | —                         |       | (1,152.1                        | )          | —           |       |
| Deferred financing fees, net                    |       | 30.2       |       | —                      |       | —                         |       | —                          |       | 30.2             |       |
| Deferred income taxes                           |       | (3.3       | )          | 27.1                        |       | (0.6                           | )          | —                          |       | 23.2             |       |
| Total assets                                    |       | $          | 1,202.2    |                        | $          | 849.0                          |       | $                               | 118.2      |             | $          | (1,152.1 | ) | $ | 1,017.3 |   |
| **Liabilities**                                 | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Accounts payable                                |       | $          | (0.2       | )                           | $          | 37.5                           |       | $                               | 12.9       |             | $          | — |   | $ | 50.2 |   |
| Current portion of long-term debt               |       | 2.9        |       | 1.0                         |       | —                         |       | —                          |       | 3.9              |       |
| Accrued expenses and other current  liabilities |       | 11.2       |       | 66.0                        |       | 6.4                            |       | —                          |       | 83.6             |       |
| Total current liabilities                       |       | 13.9       |       | 104.5                       |       | 19.3                           |       | —                          |       | 137.7            |       |
| Intercompany accounts                           |       | 346.8      |       | (408.4                      | )          | 61.6                           |       | —                          |       | —           |       |
| Long-term debt, net of current portion          |       | 925.6      |       | 1.3                         |       | —                         |       | —                          |       | 926.9            |       |
| Accrued pension liability                       |       | —     |       | 34.1                        |       | (0.4                           | )          | —                          |       | 33.7             |       |
| Other long-term liabilities                     |       | 0.5        |       | 1.5                         |       | 1.6                            |       | —                          |       | 3.6              |       |
| Total liabilities                               |       | 1,286.8    |       | (267.0                      | )          | 82.1                           |       | —                          |       | 1,101.9          |       |
| **Shareholder’s equity**                   | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Total shareholder’s equity                 |       | (84.6      | )          | 1,116.0                     |       | 36.1                           |       | (1,152.1                        | )          | (84.6            | )          |
| Total liabilities and shareholder’s equity |       | $          | 1,202.2    |                        | $          | 849.0                          |       | $                               | 118.2      |             | $          | (1,152.1 | ) | $ | 1,017.3 |   |

 

20

----

 

**Consolidating Statement of Cash Flows**

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

 
| ** **                                                      | ** ** | **Issuer**     | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|----------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **(Restated)** | ** ** | **(Restated)**              | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net cash provided by (used in) operating  activities            |       | $              | (52.2      | )                           | $          | 103.4                          |       | $                               | 0.1        |             | —     |   | $ | 51.3 |   |
| **Cash flows from investing activities**                        | ** ** | ** **     | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Capital expenditures                                            |       | —         |       | (16.4                       | )          | (1.0                           | )          | —                          |       | (17.4            | )          |
| Acquisition of businesses                                       |       | —         |       | (19.8                       | )          | —                         |       | —                          |       | (19.8            | )          |
| Net cash used in investing activities                           |       | —         |       | (36.2                       | )          | (1.0                           | )          | —                          |       | (37.2            | )          |
| **Cash flows from financing activities**                        | ** ** | ** **     | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Proceeds from short-term borrowings                             |       | 9.2            |       | —                      |       | —                         |       | —                          |       | 9.2              |       |
| Payment of short-term borrowings                                |       | (9.2           | )          | —                      |       | —                         |       | —                          |       | (9.2             | )          |
| Intercompany change                                             |       | 73.5           |       | (72.3                       | )          | (1.2                           | )          | —                          |       | —           |       |
| Proceeds from long-term debt                                    |       | 960.0          |       | —                      |       | —                         |       | —                          |       | 960.0            |       |
| Payment of long-term debt, including  capital lease obligations |       | (603.4         | )          | (1.0                        | )          | —                         |       | —                          |       | (604.4           | )          |
| Payment of deferred financing fees                              |       | (30.7          | )          | —                      |       | —                         |       | —                          |       | (30.7            | )          |
| Dividends paid                                                  |       | (387.3         | )          | —                      |       | —                         |       | —                          |       | (387.3           | )          |
| Net cash provided by (used in) financing  activities            |       | 12.1           |       | (73.3                       | )          | (1.2                           | )          | —                          |       | (62.4            | )          |
| Effect of exchange rate changes on cash                         |       | —         |       | —                      |       | 0.2                            |       | —                          |       | 0.2              |       |
| Decrease in cash                                                |       | (40.1          | )          | (6.1                        | )          | (1.9                           | )          | —                          |       | (48.1            | )          |
| **Cash and cash equivalents**                                   | ** ** | ** **     | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Beginning of period                                             |       | 53.3           |       | 1.6                         |       | 16.5                           |       | —                          |       | 71.4             |       |
| End of period                                                   |       | $              | 13.2       |                        | $          | (4.5                           | )          | $                               | 14.6       |             | —     |   | $ | 23.3 |   |

 

**Consolidating Statement of Cash Flows**

**For the Nine Months Ended July 2, 2005**

 
| ** **                                                           | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| Net cash provided by operating activities                            |       | $          | (39.9      | )                           | $          | 69.9                           |       | $                               | 1.2        |             | —     |   | $ | 31.2 |   |
| **Cash flows from investing activities**                             | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Capital expenditures                                                 |       | —     |       | (18.8                       | )          | (2.0                           | )          | —                          |       | (20.8            | )          |
| Net cash provided by (used in) investing  activities                 |       | —     |       | (18.8                       | )          | (2.0                           | )          | —                          |       | (20.8            | )          |
| **Cash flows from financing activities**                             | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Intercompany change                                                  |       | 54.7       |       | (54.9                       | )          | 0.2                            |       | —                          |       | —           |       |
| Payment of long–term debt, including  capital lease obligations |       | (1.5       | )          | (0.9                        | )          | —                         |       | —                          |       | (2.4             | )          |
| Net cash used in financing activities                                |       | 53.2       |       | (55.8                       | )          | 0.2                            |       | —                          |       | (2.4             | )          |
| Effect of exchange rate changes on cash                              |       | —     |       | —                      |       | 2.2                            |       | —                          |       | 2.2              |       |
| Increase (decrease) in cash                                          |       | 13.3       |       | (4.7                        | )          | 1.6                            |       | —                          |       | 10.2             |       |
| **Cash and cash equivalents**                                        | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Beginning of period                                                  |       | 44.9       |       | (7.9                        | )          | 18.6                           |       | —                          |       | 55.6             |       |
| End of period                                                        |       | $          | 58.2       |                        | $          | (12.6                          | )          | $                               | 20.2       |             | —     |   | $ | 65.8 |   |

 

----

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

 

21

----

 
| **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                   |       |

 

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

 

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

 

Except as otherwise noted, we present all financial and operating dataon a fiscal quarter basis. Our fiscal year ends on September 30, and ourthird fiscal quarter ends on the Saturday closest to June 30.

 

Certain information included or incorporated by reference in thisdocument may be deemed to be “forward looking statements” within the meaning ofthe federal securities laws. All statements other than statements of historicalfact are statements that could be deemed forward looking statements. In thiscontext, forward looking statements often address our future business andfinancial performance, and may be characterized by terminology such as “believe”,“anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”,“positioned”, “strategy”, and similar expressions. These statements are basedon assumptions and assessments made by the Company’s management in light of itsexperience and its perception of historical trends, current conditions,expected future developments and other factors it believes to be appropriate.

 

These forward looking statements are subject to a number of risks anduncertainties, including but not limited to: the possibility that the Company’sparent, Mueller Water, and Walter Industries may not be able to obtainregulatory approvals required for the proposed acquisition of Mueller Water byWalter Industries; the Company’s businesses may suffer as a result of theuncertainty surrounding the Walter Industries acquisition; upon consummation ofthe acquisition, the combined company will have significant debt; integratingthe businesses after the acquisition may not be successfully accomplished asanticipated; the acquisition may involve unexpected costs; the Company’sability to continue long-standing relationships with major customers; increasedcompetition; demand for and market acceptance of new and existing products inthe markets we serve; adverse changes in currency exchange rates or rawmaterial prices, specifically steel scrap, steel pipe and brass ingot;unanticipated developments that could occur with respect to contingencies suchas litigation, product liability exposures and environmental matters; theCompany’s ability to integrate acquired businesses into its operations; andother risks and uncertainties that affect the manufacturing sector generallyincluding, but not limited to, economic, political, governmental and technologicalfactors affecting the Company’s operations, markets, products, services andprices.

 

Any such forward looking statements are not guarantees of futureperformances and actual results, developments and business decisions may differfrom those contemplated by such forward looking statements. These forwardlooking statements speak only as of the date of this Quarterly Report. TheCompany disclaims any duty to update any forward looking statement, all ofwhich are expressly qualified by the foregoing.

 

**Overview**

 

We are a leading North American manufacturer of a broad range of flowcontrol products for use in water distribution, water and wastewater treatmentfacilities, gas distribution systems and piping systems and maintain a largeinstalled base of products. We are comprised of two segments: waterinfrastructure, a leading manufacturer of hydrants, valves and other productsfor use in water and gas distribution systems; and piping systems, a leadingmanufacturer of fittings, pipe hangers and other

 

22

----

 

productsfor use in piping system applications. Our business strategy continues to be focused on sustaining our marketleadership and competitive differentiation, while growing revenues andenhancing profitability.

 

Results for the third quarter and first nine months of 2005 reflectedcontinued strong performance in the residential and non-residentialconstruction markets, as well as the full effect of the pricing increasesimplemented in the second half of 2004 and early 2005. Both our waterinfrastructure and piping systems segments reported improvements in grossprofit and operating income in the three months and the nine months ended July 2,2005 as compared to the three months and nine months ended June 26, 2004.

 

The Company incurred a significant amount of additional indebtedness inconnection with its recapitalization in April 2004. New debt associatedwith the recapitalization added $3.4 million and $22.1 million ofinterest expense in the three and nine month periods ended July 2, 2005 ascompared to the similar fiscal periods in 2004.

 

As previously announced, on June 17, 2005, Mueller Water enteredinto a definitive merger agreement with Walter Industries, Inc. (“WalterIndustries”) whereby Walter Industries will acquire Mueller Water for anaggregate purchase price of approximately $1.91 billion, consisting ofapproximately $860 million in cash and the assumption of approximately $1.05billion in Mueller Water and Company debt, based on Mueller Water’s balancesheet as of April 2, 2005, subject to the post-closing adjustmentsspecified in the merger agreement based on Mueller Water’s working capital uponthe closing of the transaction.  As aresult of the merger, Mueller Water’s shares of common stock will be convertedinto the right to receive the applicable merger consideration in cash at theclosing, subject to the post-closing adjustments.  Upon closing of the transaction, theoutstanding warrants of Mueller Water will become rights to receive cash uponexercise of the warrants based on the number of shares underlying the warrants.

 

Under the merger agreement and prior to merger closing the Company will  commence atender offer and consent solicitation for the its second priority seniorsecured floating rate notes due 2011. The consummation of the tender offer and consent solicitation isexpected to occur simultaneously with the consummation of the merger, but isnot a condition to the merger closing. The Company’s senior credit facility will be refinanced at mergerclosing.  The Company’s 10% seniorsubordinated notes due 2012 will remain outstanding after the merger iscompleted.  However, holders of thesenotes will have the right to put them to the issuer following the change ofcontrol resulting from the consummation of the merger transaction in accordancewith the indenture.  The Companyanticipates that, in connection with the merger, the Company will incuradditional debt.  As a result, theCompany’s leverage will increase, thereby increasing its debt serviceobligations.  The increased leveragecould adversely affect the outstanding notes of the Company going forward.

 

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

 

**Restatements**

 

In November 2004, our Audit Committee was notified of allegedpotential accounting improprieties concerning our accounting for inventoryreserves and certain questions concerning revenue recognition. The AuditCommittee appointed an independent law firm to investigate the allegations. In January 2005,the independent law firm issued an investigative report that identified severalareas requiring financial review by the Company. These areas principallyconcerned accounting for excess and obsolete (E&O) inventory, thecapitalization of costs relating to a project that should have been expensed inprior periods, the accrual of reserves for this project without identifyingsupport for such accruals and the timing of recognition of revenue with regardto full truckload shipments that were not immediately dispatched to customersby certain freight carriers used by the Company. The Company also identifiedsome additional annual and interim items recorded in incorrect periods in thecourse of finalizing the 2004 financial statements. In addition, the Companydetermined that the value it assigned to stock compensation in connection withits April 2004 recapitalization should be revised. As a result of thesefindings, the Company restated its annual financial statements for its 2002 and2003 fiscal years and its interim financial statements for its 2004 fiscalyear. For more specific information about prior period restatements, seeNotes 2 and 21 of the Company’s Audited Consolidated Financial Statementsfor the year ended September 30, 2004 as found in Form 10-K for suchfiscal year (File No. 333-117473).

 

23

----

 

**Results of Operations**

 

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

 
| ** **                                                     | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | **FY05 Q3 vs. FY04 Q3** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|-------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **Three months ended**    | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | **Change in** | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | **Percentage**   | ** ** | ** **        | ** ** | **Percentage**          | ** ** | ** ** | ** ** | **percentage** | ** ** |
| ** **                                                     | ** ** | **July 2,**          | ** ** | **of net sales** | ** ** | **June 26,** | ** ** | **of net sales**        | ** ** | **Increase/** | ** ** | **of** | ** ** |
| ** **                                                     | ** ** | **2005**                  | ** ** | **(2)**          | ** ** | **2004**          | ** ** | **(2)**                 | ** ** | **(decrease)** | ** ** | **net sales** | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | ** **       | ** ** | **(restated)**    | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **(dollars in millions)** | ** ** |
| **Net sales**                                                  | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | $                         | 172.1      |             | 58.0       | %                 | $          | 172.8                   |       | 59.8 | % | $ | (0.7 | ) | (1.8 | )% |
| Piping systems                                                 |       | 124.8                     |       | 42.0             |       | 116.3             |       | 40.2                    |       | 8.5 |   | 1.8 |   |
| Consolidated                                                   |       | 296.9                     |       | 100.0            |       | 289.1             |       | 100.0                   |       | 7.8 |   | — |   |
| **Gross profit**                                               | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 64.5                      |       | 37.5             |       | 56.6              |       | 32.8                    |       | 7.9 |   | 4.7 |   |
| Piping systems                                                 |       | 32.2                      |       | 25.8             |       | 28.0              |       | 24.1                    |       | 4.2 |   | 1.7 |   |
| Consolidated                                                   |       | 96.7                      |       | 32.6             |       | 84.6              |       | 29.3                    |       | 12.1 |   | 3.3 |   |
| **Selling, general and administrative  expenses**              | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 16.7                      |       | 9.7              |       | 16.3              |       | 9.4                     |       | 0.4 |   | 0.3 |   |
| Piping systems                                                 |       | 19.3                      |       | 15.5             |       | 19.9              |       | 17.1                    |       | (0.6 | ) | (1.6 | ) |
| Corporate                                                      |       | 11.8                      |       | 4.0              |       | 10.5              |       | 3.6                     |       | 1.3 |   | 0.4 |   |
| Consolidated                                                   |       | 47.8                      |       | 16.1             |       | 46.7              |       | 16.2                    |       | 1.1 |   | (0.1 | ) |
| **Stock compensation expense**                                 | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate                                                      |       | —                    |       | —           |       | 20.9              |       | 7.2                     |       | (20.9 | ) | (7.2 | ) |
| **Facility rationalization, restructuring and  related costs** | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | —                    |       | —           |       | —            |       | —                  |       | — |   | — |   |
| Piping systems                                                 |       | —                    |       | —           |       | —            |       | —                  |       | — |   | — |   |
| Consolidated                                                   |       | —                    |       | —           |       | —            |       | —                  |       | — |   | — |   |
| **Operating income**                                           | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 47.8                      |       | 27.8             |       | 40.3              |       | 23.3                    |       | 7.5 |   | 4.5 |   |
| Piping systems                                                 |       | 12.9                      |       | 10.3             |       | 8.1               |       | 7.0                     |       | 4.8 |   | 3.3 |   |
| Corporate                                                      |       | (11.8                     | )          | (4.0             | )          | (31.4             | )          | (10.9                   | )          | 19.6 |   | 6.9 |   |
| Consolidated                                                   |       | 48.9                      |       | 16.5             |       | 17.0              |       | 5.9                     |       | 31.9 |   | 10.6 |   |
| Interest expense                                               |       | (18.5                     | )          | (6.2             | )          | (18.9             | )          | (6.5                    | )          | 0.4 |   | 0.3 |   |
| Interest income                                                |       | 0.4                       |       | 0.1              |       | 0.1               |       | —                  |       | 0.3 |   | 0.1 |   |
| Income before income taxes                                     |       | 30.8                      |       | 10.4             |       | (1.8              | )          | (0.6                    | )          | 32.6 |   | 11.0 |   |
| Income tax expense                                             |       | 11.0                      |       | 3.7              |       | (4.6              | )          | (1.6                    | )          | 15.6 |   | 5.3 |   |
| Net income                                                     |       | $                         | 19.8       |             | 6.7        | %                 | $          | 2.8                     |       | 1.0 | % | $ | 17.0 |   | 5.7 | % |
| **Segment EBITDA(1)**                                          | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 52.7                      |       | 30.6             |       | 46.0              |       | 26.6                    |       | 6.7 |   | 4.0 |   |
| Piping systems                                                 |       | 17.2                      |       | 13.8             |       | 12.4              |       | 10.7                    |       | 4.8 |   | 3.1 |   |
| Total segment EBITDA                                           |       | $                         | 69.9       |             | 23.5       |              | $          | 58.4                    |       | 20.2 |   | $ | 11.5 |   | 3.3 |   |

 

----

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

 

The Company evaluates segment performance based on segment EBITDA. Areconciliation of segment EBITDA to consolidated income before income taxesfollows:

 

24

----

 

 

| ** **                                 | ** ** | **Three months ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **July 2, 2005**  | ** ** | **June 26, 2004** | ** ** |
| ** **                                 | ** ** | ** **             | ** ** | **(as restated)(3)** | ** ** |
| Total segment EBITDA                       |       | $                      | 69.9       |   | $ | 58.4 |   |
| Unallocated corporate costs                |       | (9.2                   | )          | (25.0 | ) |
| Interest expense and early repayment costs |       | (18.5                  | )          | (18.9 | ) |
| Depreciation and amortization              |       | (11.4                  | )          | (16.3 | ) |
| Income before income taxes                 |       | $                      | 30.8       |   | $ | (1.8 | ) |

 

----

(2)           Percentages are bysegment, if applicable.

 

(3)           See Note 2 for adiscussion of the restatement.

 

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

 

Water infrastructure net sales for the three months ended July 2,2005 were $172.1 million, or a 0.4% decrease as compared to $172.8 millionfor the three months ended June 26, 2004. The sales volume for hydrantsand valves decreased for our third quarter of 2005 as compared to our thirdquarter of 2004.  There was a priceincrease in May 2004 that we believe resulted in customers placing alarger-than-usual amount of orders ahead of that date in order to get thebenefit of lower pricing, which subsequently resulted in higher shipmentsduring the third quarter of 2004. There was no similar price increase announcedduring the third quarter of 2005.  Theimpact of the decrease in hydrant and valve volumes was offset by the effectsof price increases on those same products.

 

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

 

*Gross Profit.*  Gross profit for the three months ended July 2,2005 was $96.7 million, or a 14.3% increase as compared to$84.6 million for the three months ended June 26, 2004. Gross profit,as a percentage of net sales, or gross margin, increased from 29.3% for ourthird quarter of 2004 to 32.6% for our third quarter of 2005.

 

Water infrastructure gross profit for the three months ended July 2,2005 was $64.5 million, or a 14.0% increase as compared to$56.6 million for the three months ended June 26, 2004. Gross profit,as a percentage of net sales, increased from 32.8% for our third quarter of2004 to 37.5% for our third quarter of 2005. The increase in gross profit wasprimarily driven by price increases and the continued strong performance of theresidential construction market. Partially offsetting the effects of higherprices were higher raw material costs (most notably brass ingot and scrapsteel) due to worldwide supply and demand issues. We cannot provide assurancesthat any future increases in raw material costs can be passed on to ourcustomers.

 

Piping systems gross profit for the three months ended July 2,2005 was $32.2 million, or a 15.0% increase as compared to $28.0 millionfor the three months ended June 26, 2004. Gross profit, as a percentage ofnet sales, increased from 24.1% to 25.8%. The increase in gross profit wasprimarily driven by price increases. Increased raw material costs partiallyoffset the effects of the higher prices. We cannot provide assurances that wecan continue to pass on cost increases to our customers.

 

*Selling, General & AdministrativeExpense.* Selling, General and Administrative expenses (“SG&A”) for the threemonths ended July 2, 2005 were $47.8 million, or a 2.4% increase ascompared to $46.7 million for the three months ended June 26, 2004.As a percentage of net sales, SG&A decreased from 16.2% for our thirdquarter of 2004 to 16.1% for our third quarter of 2005.

 

Water infrastructure SG&A for the three months ended July 2,2005 was $16.7 million, or a 2.5% increase as compared to $16.3 millionfor the three months ended June 26, 2004. As a percentage of net sales,SG&A increased slightly from 9.4% for our third quarter of 2004 to 9.7% forour third quarter of 2005. The increase was primarily due to compensation andbenefit costs for additional personnel.

 

Piping systems SG&A for the three months ended July 2, 2005was $19.3 million, or a 3.0% decrease as compared to $19.9 million for thethree months ended June 26, 2004. As a percentage of net sales, SG&Adecreased from 17.1% for our third quarter of 2004 to 15.5% for our thirdquarter of 2005. The decrease was primarily due to a reduction in legalexpenses and

 

25

----

 

foreigncurrency losses for Canadian transactions recognized in the third quarter of2004.  There were no similar foreigncurrency losses in the third quarter of 2005. These decreases were partially offset by a moderate increase in sellingcosts of $0.6 million, primarily due to higher sales commissions.

 

Corporate expenses for the three months ended July 2, 2005 were$11.8 million as compared to $10.5 million for the three months ended June 26,2004. Significant factors contributing to costs in the third quarter of 2005include consulting fees of $1.1 million related to efforts to becomecompliant with public company reporting and Sarbanes-Oxley internal controlrequirements, $1.4 million related to compensation payments to currentemployees and directors to offset additional taxes owed by them as a result ofthe revaluation of compensation paid in Muller Water stock in 2004, $1.6million of professional fees related to efforts to sell the Company (see Note5), increased board of director fees of $0.2 million, increased legal, auditand other consulting fees of $0.7 million, and increased salary andbenefit costs of $0.4 million associated with additional accounting andlegal staffing. These items are offset by a $4.0 million reduction inamortization expense for the third quarter of 2005 as compared to the thirdquarter of 2004 due to an intangible asset becoming fully amortized during thefourth quarter of 2004. Corporate expenses consist primarily of corporatestaff, benefits, legal and facility costs.

 

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

 

There was no stock compensation expense forthe three months ended July 2, 2005.

 

*Interest Expense.*  Interest expense for the three months ended July 2,2005 was $18.5 million, or a $0.4 million decrease from$18.9 million for the three months ended June 26, 2004. Interestexpense for the three months ended July 2, 2005, included$3.4 million of additional interest expense and amortization of deferredfinancing fees on $406.9 million of net additional debt resulting from theCompany’s recapitalization in April 2004. This increase was offset by a$6.6 million write-off of term debt deferred financing fees during the threemonths ended June 26, 2004 in connection with the April 2004recapitalization.  Also, gains recordedon interest rate swaps were $2.8 million lower in 2005 than in 2004 asmore swap agreements expired and were not renewed.

 

*Income Tax Expense.*  The effective tax rates (excluding discretethird quarter items) for three months ended July 2, 2005 and June 26,2004 were 38% and 28%, respectively. For the third quarter of 2005, the Companyadjusted its tax accruals downward by approximately $0.7 million due to theexpiration of statutes of limitation. Discrete third quarter events in 2004 included the conclusion of thefederal and certain state tax examinations and the expiration of certain statestatutes of limitation which allowed the Company to adjust tax accrualsdownward by approximately $6.4 million. Partially offsetting these items in thethird quarter of 2004 were $2.3 million of charges related to Foreign TaxCredits and the effects of other items, including changes in the effective rateon prior period deferred tax balances.

 

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

 

Water infrastructure EBITDA for the three months ended July 2,2005 was $52.7 million, which was $6.7 million or 14.6% higher thanthe $46.0 million for the three months ended June 26, 2004. Theincreased EBITDA resulted primarily from increased prices, partially offset byadditional SG&A spending as discussed above.

 

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

 

26

----

 

**Results of Operations**

 

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

 
| ** **                                                     | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | **2005 vs. 2004** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                     | ** ** | **Nine months ended**     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | **Change in**     | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | **Percentage**   | ** ** | ** **        | ** ** | **Percentage**   | ** ** | ** **        | ** ** | **percentage** | ** ** |
| ** **                                                     | ** ** | **July 2,**          | ** ** | **of net sales** | ** ** | **June 26,** | ** ** | **of net sales** | ** ** | **Increase/**     | ** ** | **of** | ** ** |
| ** **                                                     | ** ** | **2005**                  | ** ** | **(2)**          | ** ** | **2004**          | ** ** | **(2)**          | ** ** | **(decrease)**    | ** ** | **net sales** | ** ** |
| ** **                                                     | ** ** | ** **                | ** ** | ** **       | ** ** | **(restated)**    | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **(dollars in millions)** | ** ** |
| **Net sales**                                                  | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | $                         | 480.8      |             | 57.4       | %                 | $          | 434.7            |       | 58.3              | %          | $ | 46.1 |   | (0.9 | )% |
| Piping systems                                                 |       | 357.4                     |       | 42.6             |       | 310.9             |       | 41.7             |       | 46.5              |       | 0.9 |   |
| Consolidated                                                   |       | 838.2                     |       | 100.0            |       | 745.6             |       | 100.0            |       | 92.6              |       | — |   |
| **Gross profit**                                               | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 166.1                     |       | 34.5             |       | 139.9             |       | 32.2             |       | 26.2              |       | 2.3 |   |
| Piping systems                                                 |       | 94.4                      |       | 26.4             |       | 70.0              |       | 22.5             |       | 24.4              |       | 3.9 |   |
| Consolidated                                                   |       | 260.5                     |       | 31.1             |       | 209.9             |       | 28.2             |       | 50.6              |       | 2.9 |   |
| **Selling, general and administrative  expenses**              | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 49.5                      |       | 10.3             |       | 44.8              |       | 10.3             |       | 4.7               |       | — |   |
| Piping systems                                                 |       | 59.8                      |       | 16.7             |       | 53.4              |       | 17.2             |       | 6.4               |       | (0.5 | ) |
| Corporate                                                      |       | 29.8                      |       | 3.6              |       | 27.1              |       | 3.6              |       | 2.7               |       | — |   |
| Consolidated                                                   |       | 139.1                     |       | 16.6             |       | 125.3             |       | 16.8             |       | 13.8              |       | (0.2 | ) |
| **Stock compensation expense**                                 | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Corporate                                                      |       | —                    |       | —           |       | 21.2              |       | 2.8              |       | (21.2             | )          | (2.8 | ) |
| **Facility rationalization, restructuring and  related costs** | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 1.6                       |       | 0.3              |       | —            |       | —           |       | 1.6               |       | 0.3 |   |
| Piping systems                                                 |       | —                    |       | —           |       | 0.9               |       | 0.3              |       | (0.9              | )          | (0.3 | ) |
| Consolidated                                                   |       | 1.6                       |       | 0.2              |       | 0.9               |       | 0.1              |       | 0.7               |       | 0.1 |   |
| **Operating income**                                           | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 115.0                     |       | 23.9             |       | 95.1              |       | 21.9             |       | 19.9              |       | 2.0 |   |
| Piping systems                                                 |       | 34.6                      |       | 9.7              |       | 15.7              |       | 5.0              |       | 18.9              |       | 4.7 |   |
| Corporate                                                      |       | (29.8                     | )          | (3.6             | )          | (48.3             | )          | (6.5             | )          | 18.5              |       | 2.9 |   |
| Consolidated                                                   |       | 119.8                     |       | 14.3             |       | 62.5              |       | 8.4              |       | 57.3              |       | 5.9 |   |
| Interest expense                                               |       | (53.6                     | )          | (6.4             | )          | (39.3             | )          | (5.3             | )          | (14.3             | )          | (1.1 | ) |
| Interest income                                                |       | 1.0                       |       | 0.1              |       | 0.3               |       | —           |       | 0.7               |       | 0.1 |   |
| Income before income taxes                                     |       | 67.2                      |       | 8.0              |       | 23.5              |       | 3.2              |       | 43.7              |       | 4.8 |   |
| Income tax expense                                             |       | 25.1                      |       | 3.0              |       | 5.5               |       | 0.7              |       | 19.6              |       | 2.3 |   |
| Net income                                                     |       | $                         | 42.1       |             | 5.0        | %                 | $          | 18.0             |       | 2.4               | %          | $ | 24.1 |   | 2.6 | % |
| **Segment EBITDA(1)**                                          | ** ** | ** **                | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Water infrastructure                                           |       | 131.9                     |       | 27.4             |       | 113.0             |       | 26.0             |       | 18.9              |       | 1.4 |   |
| Piping systems                                                 |       | 47.5                      |       | 13.3             |       | 28.4              |       | 9.1              |       | 19.1              |       | 4.2 |   |
| Total segment EBITDA                                           |       | $                         | 179.4      |             | 21.4       |              | $          | 141.4            |       | 19.0              |       | $ | 38.0 |   | 2.4 |   |

 

----

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

 

The Company evaluates segment performancebased on segment EBITDA. A reconciliation of segment EBITDA to consolidatedincome before income taxes follows:

 

27

----

 

| ** **                                 | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **July 2, 2005** | ** ** | **June 26, 2004** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | **(as restated)(3)** | ** ** |
| Total segment EBITDA                       |       | $                     | 179.4      |   | $ | 141.4 |   |
| Unallocated corporate costs                |       | (21.8                 | )          | (29.1 | ) |
| Interest expense and early repayment costs |       | (53.6                 | )          | (39.3 | ) |
| Depreciation and amortization              |       | (36.8                 | )          | (49.5 | ) |
| Income before income taxes                 |       | $                     | 67.2       |   | $ | 23.5 |   |

 

----

(2)           Percentages are bysegment, if applicable.

 

(3)           See Note 2 for adiscussion of the restatement.

 

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

 

Water infrastructure net sales for the nine months ended July 2,2005 were $480.8 million, or a 10.6% increase as compared to$434.7 million for the nine months ended June 26, 2004. This increasewas driven primarily by price increases implemented in the second half of 2004and during the second quarter of 2005, as well as increased volumes due to thecontinued strong performance of the residential construction market.

 

Piping systems net sales for the nine months ended July 2, 2005were $357.4 million, or a 15.0% increase as compared to $310.9 million forthe nine months ended June 26, 2004. This increase was driven primarily byprice increases implemented in the second half of 2004 and the first half of2005, as well as $9.5 million of additional Star product sales. Weacquired the Star business in January 2004 (see Note 5).

 

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

 

Water infrastructure gross profit for the nine months ended July 2,2005 was $166.1 million, or an 18.7% increase as compared to$139.9 million for the nine months ended June 26, 2004. Gross profit,as a percentage of net sales, increased from 32.2% for our first nine months of2004 to 34.5% for our first nine months of 2005. The increase in gross profitwas primarily driven by price increases and the continued strong performance ofthe residential construction market. Partially offsetting the effects of higherprices were higher raw material costs (most notably brass ingot and scrapsteel) due to worldwide supply and demand issues. We cannot provide assurancesthat any future increases in raw material costs can be passed on to ourcustomers.

 

Piping systems gross profit for the nine months ended July 2, 2005was $94.4 million, or a 34.9% increase as compared to $70.0 million forthe nine months ended June 26, 2004. Gross profit, as a percentage of netsales, increased from 22.5% to 26.4%. The increase in gross profit wasprimarily driven by price increases. Increased raw material costs partiallyoffset the effects of the higher prices. We cannot provide assurances that wecan continue to pass on cost increases to our customers.

 

*Selling, General & AdministrativeExpense.* Selling, General and Administrative expenses (“SG&A”) for the ninemonths ended July 2, 2005 were $139.1 million, or an 11.0% increaseas compared to $125.3 million for the nine months ended June 26,2004. As a percentage of net sales, SG&A decreased from 16.8% for our firstnine months of 2004 to 16.6% for our first nine months of 2005.

 

Water infrastructure SG&A for the nine months ended July 2,2005 was $49.5 million, or a 10.5% increase as compared to $44.8 millionfor the nine months ended June 26, 2004. As a percentage of net sales,SG&A remained steady at 10.3% for both our first nine months of 2004 and2005. Significant factors contributing to the higher costs include increasedmanagement incentive compensation costs of $1.3 million related to higherearnings, increased sales commissions of $0.3 million related to highersales, and increased wages and benefit costs of $1.2 million.

 

Piping systems SG&A for the nine months ended July 2, 2005 was$59.8 million, or a 12.0% increase as compared to $53.4 million for thenine months ended June 26, 2004. As a percentage of net sales, SG&Adecreased from 17.2% for our first nine months of 2004 to 16.7% for our firstnine months of 2005. Significant factors contributing to the higher costsinclude

 

28

----

 

increasedselling costs of $3.7 million primarily due to higher sales commissions,increased warehousing costs of $1.1 million primarily related to the Starproduct line and increased management incentive compensation cost of$1.1 million due to higher earnings.

 

Corporate expenses for the nine months ended July 2, 2005 were$29.8 million as compared to $27.1 million for the nine months ended June 26,2004. Significant factors contributing to higher costs for the first ninemonths of 2005 were: legal and audit fees of $3.0 million related to aninternal investigation (see Note 2), accounting and legal fees of$1.1 million related to SEC filing matters, consulting fees of$2.6 million related to efforts to become compliant with public companyreporting and Sarbanes-Oxley internal control requirements, $1.4 millionrelated to compensation payments to current employees and directors to offsetadditional taxes owed by them as a result of the revaluation of compensationpaid in Muller Water stock in 2004, $1.6 million of professional fees relatedto efforts to sell the Company (see Note 5), increased board of director feesof $0.2 million, increased incentive compensation costs of $1.6 million,increased legal, audit and other consulting fees of $1.4 million, andincreased salary, benefit, recruiting and relocation costs of $1.2 millionassociated with additional accounting and legal staffing. These items areoffset by a $12.0 million reduction in amortization expense for the firstnine months of 2005 as compared to the first half of 2004 due to an intangibleasset becoming fully amortized during the fourth quarter of 2004. Corporateexpenses consist primarily of corporate staff, benefits, legaland facility costs.

 

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

 

There was no stock compensation expense forthe nine months ended July 2, 2005.

 

*Facility Rationalization, Restructuring andRelated Costs.* There was $1.6 million of restructuring costs for the nine monthsended July 2, 2005, related primarily to severance payments and to thetermination of operating leases for the building and machinery at a waterinfrastructure plant in Colorado that ceased manufacturing and beganoutsourcing a product line in February 2005.

 

There was $0.9 million of facility rationalization costs for thenine months ended June 26, 2004, related primarily to future leaseobligations at a closed piping systems facility in New Jersey and environmentalissues at a closed piping systems plant in Georgia.

 

*Interest Expense.*  Interest expense for the nine months ended July 2,2005 was $53.6 million, or a $14.3 million increase from$39.3 million for the nine months ended June 26, 2004. Interestexpense for the nine months ended July 2, 2005, includes$22.1 million of additional interest expense and amortization of deferredfinancing fees on $406.9 million of net additional debt resulting from theCompany’s recapitalization in April 2004. In the nine months ended June 26,2004, interest expense included a $6.6 million write-off of term debt deferredfinancing fees related to the April 2004 recapitalization, and a$7.0 million early redemption penalty and a write-off of $0.4 millionin deferred financing fees related to the early redemption of$50.0 million of senior subordinated debt in November 2003. Also,gains recorded on interest rate swaps were $6.2 million lower in 2005 thanin 2004 as more swap agreements expired and were not renewed.

 

*Income Tax Expense.*  The effective tax rates (excluding discretethird quarter items) for the nine months ended July 2, 2005 and June 26,2004 were 38% and 41%, respectively. Discrete third quarter events in 2005 and2004 allowed the Company to adjust tax accruals, as described in the quarterlycomparison section.

 

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

 

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

 

Piping systems EBITDA was $47.5 million for the nine months ended July 2,2005, which was $19.1 million or 67.3% higher than the $28.4 millionreported for the nine months ended June 26, 2004. The increased EBITDAresulted primarily from increased prices and additional Star gross profit,partially offset by additional SG&A spending as discussed above.

 

29

----

 

**Liquidity and Capital Resources**

 

Our principal sources of liquidity have been and are expected to becash flow from operations and borrowings under the senior credit facility. Ourprincipal uses of cash will be debt service requirements as described below,capital expenditures, working capital requirements, dividends to our parentcompany and possible acquisitions.

 

*Debt Service*

 

As of July 2, 2005 we had: (a) total consolidatedindebtedness of approximately $930.8 million; and (b) approximately$58.5 million of borrowings available under our senior revolving creditfacility, subject to customary conditions. As of July 2, 2005, we hadobtained $21.5 million in letters of credit under the senior revolvingcredit facility, which reduced availability for borrowings thereunder. Oursignificant debt service obligations could have material consequences to oursecurity holders. Our key financial covenants are dependent on attainingcertain levels of EBITDA, as defined in the respective debt arrangements. Themost restrictive covenant in effect at July 2, 2005 related to ourleverage ratio, as defined in the debt arrangements, which requiredapproximately $162****million ofEBITDA over the trailing twelve months, based on our net debt outstanding. OurEBITDA, as defined in the agreement, exceeded $230 million over thetrailing twelve months ended July 2, 2005.

 

*Capital Expenditures*

 

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

 

*Distributions to our Parent Company*

 

Our parent company, Mueller Water Products, Inc. (“Mueller Water”),has no material assets other than its ownership of our capital stock and,accordingly, depends upon distributions from us to satisfy its cash needs.Mueller Water’s principal cash needs will be debt service on its SeniorDiscount Notes due 2014. The Mueller Water notes do not require cash interestpayments until 2009 and contain restrictive covenants that will, among other things,limit the ability of Mueller Water and its subsidiaries (including us) to incurdebt, pay dividends and make investments. Neither we nor any of oursubsidiaries guarantee the parent company notes. Mueller Water, however, is aholding company and its ability to pay interest on the parent company noteswill be dependent upon the receipt of dividends from its subsidiaries. We arecurrently Mueller Water’s only direct subsidiary.

 

*Sources of Funds*

 

We anticipate that our operating cash flow, together with permittedborrowings under the senior credit facility, will be sufficient to meet ouranticipated future operating expenses, capital expenditures and debt serviceobligations as they become due for at least the next twelve months. However,our ability to make scheduled payments of principal of, to pay interest on orto refinance our indebtedness and to satisfy our other debt obligations willdepend upon our future operating performance, which will be affected by generaleconomic, financial, competitive, legislative, regulatory, business,environmental and other factors beyond our control.

 

From time to time we may explore additional financing methods and othermeans to lower our cost of capital, which could include stock issuance or debtfinancing and the application of the proceeds therefrom to the repayment ofbank debt or other indebtedness. In addition, in connection with any futureacquisitions, we may require additional funding which may be provided in theform of additional debt or equity financing or a combination thereof. There canbe no assurance that any additional financing will be available to us onacceptable terms.

 

*Walter Industries Merger*

 

Under the merger agreement between Walter Industries and Mueller Waterand prior to merger closing, the Company will commence a tender offer andconsent solicitation for the Company’s second priority senior secured floatingrate notes due 2011.  The consummation of the tender offer and consentsolicitation is expected to occur simultaneously with the consummation of themerger, but it is not a condition to the merger closing.  The Company’ssenior credit facility will be refinanced at merger closing.  MuellerWater’s 14 3⁄4% senior discount notes due 2014 and the Company’s 10% seniorsubordinated notes due 2012 will remain outstanding after the merger iscompleted.   However, holders ofthese notes will have the right to put them to their respective issuersfollowing the change of control resulting from the consummation of the mergertransaction in accordance with the respective indentures.  The Companyanticipates that, in connection with the merger, the Company will incur additional debt.  As a result, the Company’sleverage will increase, increasing its debt service obligations.  Theincreased leverage could adversely affect the outstanding notes of MuellerWater and the Company going forward.

 

As a result of the pending acquisition by WalterIndustries, it is expected that Walter Industries’ US Pipe subsidiarywill be contributed to the Company, which will have an impact on the Company’sfinancial statements by, for example, lowering the margins of the consolidatedcompany.  In addition, we expect that ourreporting segments may be changed after the merger.  We also expect thatpurchase accounting adjustments could increase non-cash deprecationand amortization expense.

 

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

 

***Historical***

 

Historically, our financing requirements have been funded primarilythrough cash generated by operating activities and borrowings under ourrevolving credit facility. From time to time, we have also raised additionalfunds through term debt offerings.

 

*Cash flows from operating activities.*  Net cash provided by operations was$31.2 million for the first nine months of 2005, compared to net cashprovided of $51.4 million for the first nine months of 2004. Significantchanges in working capital balances in the first nine months of 2005 included a$49.5 million increase in inventories. Water infrastructure inventoriesincreased $25.9 million during the nine months ended July 2, 2005.Significant contributing factors to the increase include higher raw material

 

30

----

 

costs of approximately $7 million, aswell as a seasonal build of approximately $10 million to meet anticipatedfourth quarter demand.  Othercontributing factors include $1.8 million of increased on-hand quantities ofraw material due to larger purchases to achieve lower prices, $1.8 million ofinventory costs associated with a large, highly-engineered project scheduled toship late in the fourth quarter of 2005, and $1.2 million in Canadian productinventories (purchased from other water infrastructure locations) required toservice Canadian customer requirements. Piping systems inventories increased $23.6 million during the ninemonths ended July 2, 2005. Increased material and labor costs accountedfor approximately $7 million of the increase. Approximately $14 million was dueto increased foreign product inventories required to service North American andEuropean customer requirements.  Of this$14 million, approximately $2 million is related to the start-up of Europeanexport efforts, while the remaining $12 million is related to ongoing effortsto make available a full line of foreign-sourced products to our North Americancustomers.

 

*Cash flows used in investing activities.*  In the first nine months of 2005 we had netcash used in investing activities of $ million compared to net cash usedin the first nine months of 2004 of $37.2 million. This was primarily dueto $19.8 million spent during the second quarter of 2004 for theacquisitions of Star and Modern Molded (see Note 5).

 

*Cash flows from financing activities.*  Cash flows used in financing activitiesdecreased from $62.4 million in the first nine months of 2004 to$ million in the first nine months of 2005. This was primarily due toearly payment of $50 million of subordinated notes due 2009 in the firstquarter of 2004.

 

**Off-Balance Sheet Arrangements**

 

We do not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. In addition, we do not have any undisclosedborrowings or debt, and we have not entered into any derivative contracts (otherthan those described in “—Quantitative and Qualitative Disclosure About Market Risk”) or synthetic leases. We are, therefore,not materially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

We utilize letters of credit and surety bonds in the ordinary course ofbusiness to ensure performance of contractual obligations. As of July 2,2005, we had $21.5 million of letters of credit and $16.3 million ofsurety bonds outstanding.

 

**Contractual Obligations**

 

Our contractual obligations as of July 2, 2005:

 

**Payments Due by Period**

 
| **Contractual Obligations**           | ** ** | **Less than  1 Year**     | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|-------------------|------------|-----------|------------|
| ** **                            | ** ** | **(dollars in millions)** | ** ** |
| Long-term debt                        |       |                      |       |          |       |          |       |              |       |      |       |
| Principal on long-term debt           |       | $                         | 2.9        |          | 5.8        |          | 5.8        |              | 914.0      |      | 928.5      |   |
| Interest on long-term debt(1)         |       | 72.4                      |       | 143.9         |       | 143.2         |       | 117.3             |       | 476.8     |       |
| Capital lease obligations             |       | 1.0                       |       | 1.2           |       | 0.1           |       | —            |       | 2.3       |       |
| Operating leases                      |       | 8.8                       |       | 11.3          |       | 3.0           |       | 2.9               |       | 26.0      |       |
| Unconditional purchase obligations(2) |       | 6.5                       |       | —        |       | —        |       | —            |       | 6.5       |       |
| Other long-term obligations(3)        |       | —                    |       | —        |       | —        |       | —            |       | —    |       |
| Total contractual cash obligations    |       | $                         | 91.6       |          | 162.2      |          | 152.1      |              | 1,034.2    |      | 1,440.1    |   |

 

----

(1)                                  Interest on thesenior credit facility and secured notes is calculated using LIBOR of 3.54% and3.21% respectively, the rates applicable under these debt instruments and ineffect on July 2, 2005. Each increase or decrease in LIBOR of 0.125% wouldresult in an increase or decrease in annual interest on the senior creditfacility and secured notes of $0.8 million. Because the interest ratesunder the senior credit facility and secured notes will be variable, actualpayments may differ. Interest does not include payments that could be requiredunder our interest-rate swap agreements, which payments will depend uponmovements in interest rates and could vary significantly. The payments due onthe

 

31

----

 

existing interestrate swaps expiring in July 2005 and May 2007 are estimated to beapproximately $0.5 million, net of LIBOR interest of 3.54% received fromcounterparties.

 

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

 

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

 

**Effect of Inflation; Seasonality**

 

We do not believe that general inflation has had a material impact onour financial position or results of operations, with the exception of recentincreases in the cost of our raw materials.

 

Our business is largely dependent upon the North American constructionindustry, which is very seasonal due to the impact of winter or wet weatherconditions. Our net sales and operating income have historically been lowest,and our working capital needs have been highest, in the three month periodsending around December 31 and March 31, when the northern UnitedStates and all of Canada generally face weather that restricts significantconstruction activity and we build working capital in anticipation of the peakconstruction season, during which time our working capital tends to be reduced.

 

**Critical Accounting Policies**

 

Our significant accounting policies are described in our auditedconsolidated financial statements for the year ended September 30, 2004 asfound on Form 10-K (File No. 333-117473). While all significantaccounting policies are important to our consolidated financial statements,some of these policies may be viewed as being critical. Such policies are thosethat are both most important to the portrayal of our financial condition andrequire our most difficult, subjective and complex estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues, expenses andrelated disclosure of contingent assets and liabilities. These estimates arebased upon our historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Our actual results may differfrom these estimates under different assumptions or conditions.

 

**Recently Issued Accounting Standards**

 

In December 2004, the Financial Accounting Standards Board issuedSFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replaces SFASNo. 123, “Accounting for Stock-Based Compensation,” and supersedes APBOpinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R)requires compensation costs related to share-based payment transactions to berecognized in the financial statements over the period that an employeeprovides service in exchange for the award. Public companies are required toadopt the new standard using a modified prospective method and may elect torestate prior periods using the modified retrospective method. Under themodified prospective method, companies are required to record compensation costfor new and modified awards over the related vesting period of such awardsprospectively and record compensation cost prospectively for the unvestedportion, at the date of adoption, of previously issued and outstanding awardsover the remaining vesting period of such awards. No change to prior periodspresented is permitted under the modified prospective method. Under themodified retrospective method, companies record compensation costs for priorperiods retroactively through restatement of such periods using the exact proforma amounts disclosed in the companies’ footnotes. Also, in the period ofadoption and after, companies record compensation based on the modifiedprospective method. SFAS No. 123(R), as amended in April 2005 forcompliance dates, allows companies to implement the standard at the beginningof their next fiscal year. The Company plans to adopt SFAS No. 123(R) asof October 1, 2005, the beginning of its next fiscal year and to use themodified prospective method. The adoption of SFAS 123(R) is not expectedto have a material impact on the Company’s financial statements for the yearended September 30, 2005.

 

In November 2004, the Financial Accounting Standards Board issuedSFAS No. 151, “Inventory Costs.” SFAS No. 151 amends the guidance inARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial. This Statement requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal.” In addition, this Statement requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities.

 

32

----

 

SFAS No. 151 is effectivefor fiscal years beginning after June 15, 2005. The Company intends toadopt SFAS No. 151 on October 1, 2005, the beginning of its 2006fiscal year. The adoption of SFAS No. 151 is not expected to have a materialimpact on the Company’s financial statements.

 

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

 

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

 

**ITEM 3.****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

The nature of market risks faced by the Company at July 2, 2005were the same as disclosed in the Company’s Annual Report on Form 10-K forthe year ended September 30, 2004. We are exposed to various market risks,which are potential losses arising from adverse changes in market rates andprices, such as interest rates, foreign exchange fluctuations and rawmaterials. We do not enter into derivatives or other financial instruments fortrading or speculative purposes.

 

At July 2, 2005 we had fixed rate debt of $317.3 million andvariable rate debt of $613.5 million. The pre-tax earnings and cash flowsimpact resulting from a 100 basis point increase in interest rates on variablerate debt, holding other variables constant and excluding the impact of thehedging agreements described below, would be approximately $6.1 millionper year.

 

We have entered into interest rate swap agreements with a notionalprincipal amount of $100.0 million in order to reduce interest rate risksand manage interest expense. The swap agreements, which mature in July 2005and May 2007, effectively convert floating rate debt under our creditfacility into fixed-rate debt and carried an average fixed interest rate of5.77% at July 2, 2005.

 

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

 

Our strategy for management of currency risk relies primarily onconducting our operations in a country’s respective currency and may, from timeto time, involve currency derivatives, primarily forward foreign exchangecontracts, to reduce our exposure to currency fluctuations. As of July 2,2005, we had foreign exchange contracts outstanding with a notional principalamount of $3.2 million to hedge our Canadian operations’ exposure tocurrency fluctuations on products purchased from United States suppliers andpurchases of equipment from European suppliers.

 

**ITEM 4.****CONTROLS AND PROCEDURES.**

 

As previously reported, in January 2005, the Company received awritten investigative report from the independent law firm retained by us toconduct an internal investigation of a whistle-blower complaint that allegedaccounting improprieties. The investigative report did not identify any fraudor intentional misconduct by the Company or any of its employees. However, thereport identified deficiencies in the Company’s accounting policies, internalcontrols and related matters. In connection with the audit of our fiscal 2004results and as a result of the investigation, we have concluded that theconditions that currently exist at the Company represent reportable conditions(as defined in AU 325, “Communication of Internal Control Related Matters NotedIn

 

33

----

 

An Audit”, ofthe AICPA professional standards) that collectively constitute a materialweakness in our internal control over financial reporting.

 

As previously reported, our Board has adopted the recommendations ofthe investigative report and, at this time, we are continuing to take steps toimprove our disclosure controls and procedures, including our internal controlstructure and procedures for financial reporting to enhance our ability toproduce SEC reports within the time periods and in the form required under theExchange Act. In order to comply with these requirements, we:

 

•                  reassigned our Chief Financial Officer, appointed anInterim Chief Financial Officer and are in the process of hiring additionalaccounting and finance staff;

 

•                  have introduced increased training for our existingfinancial and accounting and other staff;

 

•                  have retained third party consultants withsignificant SEC financial reporting experience to provide assistance incomplying with SEC reporting requirements;

 

•                  have formed a disclosure committee to supervise the preparation of our Exchange ActReports and other public communications;

 

•                  are in the process of improving our controls over,and developing written policies and procedures that will cover, all of oursignificant accounting processes, including the making of journal entries, thedevelopment and communication of income tax provisions, information data conversionissues and program changes, revenue recognition and assessing financialexposures;

 

•                  have retained a third-party consultant to assist usin improving and centralizing our control over our information technology; and

 

•                  continue to implement global compliance initiativesunder the direction of our Chief Compliance Officer.

 

The Company’sChief Executive Officer and Interim Chief Financial Officer, with theparticipation of senior management, evaluated the effectiveness of theCompany’s disclosure controls and procedures as of July 2, 2005, the last dayof the period covered by this report. Based on deficiencies previouslyreported, our chief executive officer and interim chief financial officer haveconcluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934, as amended) at July 2,2005 were not effective. Nonetheless, our chief executive officer and interimchief financial officer believe that the procedures we performed in connectionwith our preparation of this quarterly report, including, in particular,increased review and analysis of transactions, account balances and journalentries in the areas where weaknesses were identified, provide reasonableassurance that the identified deficiencies did not lead to materialmisstatements in our consolidated financial statements presented in thisquarterly report.

 

There were no significant changes in our internal controls overfinancial reporting or other factors that have materially affected or arereasonably likely to materially affect these internal controls over financialreporting as of the end of the period covered by this report.

 

**PART IIOTHER INFORMATION**

 

**Item 6.****Exhibits.**

 
| 3.1  |   | Certificate of Incorporation of Mueller Group, Inc. (1)                                                           |
|------|--------|------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | By-Laws of Mueller Group, Inc. (1)                                                                                |
| 31.1 |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes–Oxley Act of 2002*         |
| 31.2 |   | Certification of Interim Chief Financial Officer pursuant to  Section 302 of the Sarbanes–Oxley Act of 2002* |

 

34

----

 
| 32.1 |   | Certification of the Chief Executive Officer pursuant to  Section 906 of the Sarbanes–Oxley Act of 2002*         |
|------|--------|----------------------------------------------------------------------------------------------------------------------------|
| 32.2 |   | Certification of the Interim Chief Financial Officer pursuant to  Section 906 of the Sarbanes–Oxley Act of 2002* |

 

----

(1)                                  Previously filed asan Exhibit to our Registration Statement on Form S-4 as filed withthe SEC on July 19, 2004.

 

*              Filed herewith.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

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

 

35

----