UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from                       to                          

Commission file number 333-102430

NATIONAL WATERWORKS, INC.

Registrant’s telephone number, including area code (254) 772-5355

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in

definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No x

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

     The aggregate value of the common stock held by non-affiliates of the registrant as of June 30, 2003 (based upon the book value per share of the common stock) was $0.0.

     As of March 2, 2004, the registrant had 100 shares of common stock outstanding.

Documents Incorporated by Reference: None

Table of Contents

NATIONAL WATERWORKS, INC.

FORM 10-K

TABLE OF CONTENTS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Unless the context otherwise requires, “we,” “us”, “our” and National Waterworks refer to National Waterworks, Inc., a Delaware corporation.

     This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “projects,” “forecasts,” “plans,” “intends,” “believes,” “may,” “should”, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including without limitation, management’s examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved.

     There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in this report, including the factors set forth under the caption “Risk Factors” in Item 7 of this report. We assume no obligation to publicly update any forward-looking statements contained in this report.

ITEM 1. BUSINESS

General

     We are a leading distributor of water and wastewater transmission products in the United States with approximately a 20% share of the estimated $6 billion U.S. waterworks products distribution market. We distribute a full line of products including pipe, fittings, valves, meters, service and repair products, fire hydrants and other components that are used to transport clean water and wastewater between reservoirs and treatment plants and residential and commercial locations. In addition, we provide a broad array of value-added services such as project estimation, project management and product advice. Our products are integral to building, repairing and maintaining water and wastewater (sewer) systems and serve as part of the basic municipal infrastructure required to support population and economic growth and residential and commercial construction. Through our network of 133 branches in 35 states, we sell to municipalities directly and contractors who serve municipalities and also perform residential, commercial and industrial waterworks projects.

     In 2003, we purchased products from over 3,800 suppliers and sold to over 27,000 customers. We offer both our suppliers and customers essential services by providing customers with a single source for water and wastewater transmission products, which substantially reduces their need to manage inventory and multiple vendor relationships. None of our suppliers offers a complete waterworks product line, and the majority lack the scale, infrastructure, such as a large, local sales force, and expertise to service the broad customer base directly. By aggregating the supply of our products, we relieve our suppliers of the need to maintain a local inventory and a local sales force and the related credit and accounts receivable functions.

     Our branches compete on a local basis and benefit from our large scale and national coverage. We empower and create incentives for our branch managers to customize product and service offerings in response to the needs of local customers and to adapt to changing local market dynamics, within the pricing and purchasing parameters established by senior management. We believe that this strategy promotes an entrepreneurial approach at the branch level while maintaining appropriate management control and pricing discipline through our entire network. Our branches are operated by managers and sales personnel with significant industry expertise, local knowledge and long-standing customer relationships. Our customized IT system supports our sales personnel and provides benefits to our customers, including expedited project estimation and bid preparation; real-time pricing, availability and order status information; on-line ordering and purchase processing; and material and project management. At the same time, our single IT system provides

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detailed operating data on a daily basis at the branch and customer levels which allows our branch and senior management to closely monitor branch operating performance. Our preferred vendor programs typically include volume purchase incentives and other benefits, including cash discounts and extended payment terms. In 2003 over 80% of our purchases were under preferred vendor programs and we continue to establish or enhance these relationships with new and existing suppliers.

Overview of Our Business

History

     In 1996, United States Filter Corporation acquired Davis Water & Waste Industries, Inc. (which changed its name to U.S. Filter Distribution Group, Inc. (“U.S. Filter”)) with the goal of creating the first nationwide waterworks products distribution network. At that time, no national waterworks distribution platform existed in the United States, and the sector was primarily comprised of regional and local firms. Through the acquisition and combination of four additional large-scale regional waterworks products distributors in 1996 and 1997, U.S. Filter became a major participant in the sector. Each of these regional acquisitions and the majority of our other acquisitions had been in business for over 20 years and were the source of the majority of U.S. Filter’s senior and branch management. In November 2002, we purchased substantially all of the assets and businesses of, and assumed certain liabilities and obligations of U.S. Filter, which we refer to herein as the “Acquisition.”

     We have continued to increase our revenues through organic growth, including market share gains and new branch openings, as well as through selected strategic acquisitions. Since the beginning of 2000, we have opened or acquired 13 new branches, while closing or consolidating 20 branches in order to eliminate branch overlap due to acquisitions and to improve our profitability and return on managed assets. We identify acquisition opportunities that allow us to expand our local market positions, geographic coverage or local product lines. As we expanded our branch network, we also broadened our product mix to meet the demands of customers in our diverse local markets.

Business Operations

     Regional Organization and Branch Network. We are organized geographically into six different regions in the United States (Midwest, Southwest, Pacific, Southeast, Mid-South and Mid-Continent). While we are organized regionally, our distribution network operates on a branch system. Each region has from 16 to 29 branches and a regional vice president responsible for overall sales and operations. This regional structure enables us to address the specific management, strategic, operational and other needs of each region. Our network of 133 branches covers 35 states, the majority of which are located in regions that have historically experienced population and economic growth.

     Branch Management. We believe that our branch network and management structure brings many benefits, including entrepreneurship, flexibility, and long-term customer relationships at the local level. Each branch is managed by a district/branch manager, who is typically supported by a branch operations manager. We believe that our branch managers are able to maximize their branch’s financial performance due to the flexibility with which they operate within the company-wide management and control structure. This structure enables a branch manager to tailor his or her branch’s particular strategy, marketing and product and service offerings to address the needs of customers in the local market. Our senior management establishes pricing and purchasing parameters, which branch managers are able to adjust within a specified range to enhance their branch’s results and address specific customer situations.

     Our compensation programs align our interests with those of our employees by linking compensation levels to the achievement of branch or region specific goals based on profitability and return on managed assets. These incentive programs give managers, sales personnel and all other employees an opportunity to personally benefit from improving these metrics, reducing costs, developing local market niches and adapting to changing market conditions. We also benefit from this program as a substantial portion of our employee-related costs is variable based on financial performance.

     The majority of our district/branch managers have spent substantially all of their careers in their local markets. Given

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our managers’ strong industry and local expertise, they are empowered to manage their own customer relationships, sales force, other personnel, pricing for product sales and purchases within company-wide parameters, inventory and other activities. While branches benefit from this expertise and entrepreneurship, they also benefit from being part of our nationwide network. At the corporate level, we:

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set overall financial, operating and strategic goals and parameters, including guidelines for pricing and working capital management;

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support our branches with services such as IT, credit, human resources, finance, accounting and legal, among others;

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negotiate preferred vendor purchasing programs;

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provide tools that support value-added customer services;

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provide training and operational support; and

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help branches to meet their goals through management assistance and transferring best practices.

     Branch Operations. A branch’s organization varies depending on its size. Our branches averaged over $9 million of net sales in 2003. A typical branch consists of 9-12 people, including a branch manager, a branch operations manager, outside sales personnel, inside sales personnel and support/warehouse personnel. In larger branches, the staff may also include a sales manager, a purchasing manager and/or an estimator. When several branches are in close proximity to each other, a district manager may oversee all such branches as opposed to having individual managers at each branch. In these cases, the branch operations managers in that district tend to be more senior and experienced managers. Each branch customizes its product and service offerings based on its local market. A typical branch offers 2,400 to 3,000 products and stocks 1,000 to 1,600 items.

     We receive our orders from customers either directly or through negotiated or competitive bids, which are typically evaluated based on service, availability, reliability and price. A new order or bid is either generated by, or input into, our IT system for scheduling, inventory management, ordering from a supplier, if necessary, and billing. Products are delivered either from the relevant branch’s inventory, another branch’s inventory or in the case of large or long-lead time orders, directly from the manufacturer to the customer (“direct” sales). Direct sales accounted for approximately 35% of our net sales in 2003. Direct sales and the ability to access other branches’ inventory allow our branches to reduce their inventory and the related holding and handling costs. In addition, our IT system automatically generates recommended purchasing reports to replenish our inventory as products are sold.

Products and Service Overview

     Products.

     A typical waterworks system is comprised of many components, including reservoirs and other water sources, water treatment plants and pumping stations, wastewater treatment plants and residential and commercial customers. We distribute products that comprise the water and wastewater transmission network within the waterworks system. Our primary products include pipe, fittings, valves, meters and hydrants and service/repair products. We also offer other complementary products for waterworks construction and maintenance/repair.

     Pipe. Piping products are our primary waterworks product and generate the greatest portion of our net sales, approximately 40% in 2003, but a smaller portion of our gross profits. Given the relatively large size and weight of pipe and typically large size of pipe orders, the majority of our pipe sales are shipped directly from the manufacturer to the customer, which reduces our handling costs, inventory and exposure to changes in raw material prices. We distribute a broad range of pipe made from different materials, including polyvinyl chloride, or PVC, ductile iron, copper, polyethylene and high-density polyethylene, or HDPE. PVC pipe and ductile iron pipe are the most commonly used and account for the majority of our pipe sales.

     Fittings. Fittings are used to connect pipe to other pipe sections, valves and other devices. Fittings complement our broad pipe products line with high customer overlap and generate higher gross margins. In 2003, fittings accounted for

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approximately 15% of our net sales. We distribute a broad range of fittings made from PVC, ductile iron, and to a lesser extent, copper, brass and HDPE.

     Valves. Valves are used to control the flow of water and wastewater within transmission networks and, similar to fittings, complement our other product offerings. In 2003, valves accounted for approximately 12% of our net sales. Besides an array of standard valves, we also distribute backflow preventers, which primarily prevent reverse flow of liquid in the water system.

     Meters and Hydrants. In 2003, meters and hydrants accounted for approximately 9% and 6% of our net sales, respectively. Meters typically are higher gross margin products. Meters measure the amount of liquid that flows through pipes and are critical to municipalities and other water and wastewater system operators for billing purposes. New meter technology, such as the ability to receive data electronically, and the importance of water-related revenues to municipalities has led to growth in meter sales. Hydrants are important for public safety for firefighting purposes.

     Service/Repair Products. Our service and repair products include water cut-off devices, clamps, and other products. In 2003, these products accounted for approximately 7% of our net sales. Local availability and timely delivery of these products are key to meeting customer needs since many of these products are generally used for emergency repairs.

     Other Products. We also offer other complementary products that are necessary for water and wastewater systems or in order to be a full product supplier. These products carry a relatively high gross margin and accounted for approximately 11% of our net sales in 2003. Examples include access boxes that protect valves and meters from theft, damage, or destruction; iron castings, including grates and manhole covers, which fit into or on top of waterworks structures; and tools specific to waterworks construction and maintenance, as well as general hand tools.

     The sale of water and wastewater transmission products is subject to seasonal and weather-related fluctuations. Coincident with annual construction seasonality, our net sales are typically higher during the second and third calendar quarters and lower during the first and fourth quarters due to reduced construction activity during the winter. Adverse weather conditions in our markets may also decrease the level of construction activity.

     Customer Service. We focus on offering our customers consistent, high quality local service and a broad range of value-added services, which result in long-term customer relationships. Initially, we assist contractor customers in the preparation of their bids with product knowledge and advice, cost estimates, inventory levels and product standardization. In addition, our sales representatives maintain databases of local specifications and provide customized databases for contractors. After a contractor begins a project, we focus on reducing their total project cost by:

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reducing their inventory cost;

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expediting the completion of the project through the timely and coordinated delivery of the necessary waterworks products; and

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reducing the related administrative burdens.

     Through the combination of these services, we believe that we have been able to reduce our contractor customers’ focus on product pricing by reducing their overall costs and downtime and improving their project planning and execution. We provide our municipal customers with similar services and benefits.

     We also leverage our sophisticated IT system to provide superior customer service. The IT system is specifically designed to provide our customers and our sales force with direct, quick, accurate and convenient access to data (including product pricing and availability and past and current order information) in a variety of electronic mediums (on-line, fax, email, EDI and spreadsheet). Our sales representatives can access our IT system either from their desktop computer or remotely from laptop computers, and transmit and receive updated information on a real-time basis. Our customers have access to their accounts and our product and service offerings over a secure and real-time Internet system.

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Customers

     We have a diversified customer base, which minimizes our exposure to any particular customer, customer type or region. Substantially all of our customers are local in nature and include municipalities, public works contractors who serve municipalities, private waterworks contractors who perform residential, commercial and industrial construction projects and industrial customers. Our 2003 revenues were split approximately evenly between publicly-funded and privately-funded sales. These sectors are affected by different macroeconomic variables, which we believe reduce our exposure to adverse conditions in any particular sector. In 2003, we served over 9,000 municipal customers and over 18,000 contractor and industrial/other customers. During 2003, approximately 86% of our net sales were from customers to whom we sold products in each of the last three years, demonstrating the stability of our customer base. We have established long-term relationships with the majority of our customers, but no single customer accounts for a meaningful share of our revenues. In 2003, our largest customer accounted for less than 1% of our net sales and our largest region accounted for approximately 22% of our net sales.

Suppliers and Preferred Vendor Programs

     We purchase products from over 3,800 suppliers and substantially all of our primary suppliers have supplied us for over ten years. We utilize multiple suppliers for substantially all of our products. We purchase from both national suppliers and local or regional suppliers, which allows our branch managers to customize their product offering for their local market. Our largest supplier accounted for approximately $135 million or 13% of product purchases in 2003. The products we purchase from this supplier are also sourced from other suppliers.

     We have established preferred vendor programs to more effectively leverage our purchasing power with suppliers. As part of this effort, we have significantly reduced our supplier base, which has resulted in stronger, strategic relationships with a core group of vendors and more reliable deliveries, reduced errors and better purchasing terms. Our preferred vendor programs typically include volume purchase incentives and other benefits, including cash discounts and extended payment terms. Over 130 of our suppliers have attained preferred vendor status, and we continue to establish or enhance these relationships with new and existing suppliers. In 2003, we purchased over 80% of our products from these preferred vendors.

Marketing and Sales

     We have approximately 250 sales representatives experienced in the water and wastewater transmission products distribution sector. These sales representatives have in-depth product and technical knowledge, significant local experience and long-term customer relationships, all of which are critical to our success. In addition, we believe that our leading market position, high-quality service offering and innovative compensation program result in a low turnover among our sales force.

     Our field sales representatives are based at branches and are responsible for generating sales, providing all of our basic and value-added services to customers and establishing new customer relationships. These sales representatives are highly qualified professionals and participate in ongoing training programs. Our service-oriented philosophy and incentive compensation program encourage our sales representatives to proactively participate in product selection; provide product specifications, usage data, product alternatives within required product specifications and project bids; and participate in the collection of accounts receivable.

     We also have regionally based product specialists, who support the outside sales representatives in their respective region. These specialists have expertise with respect to specific product and service offerings. In addition, we have customer service representatives which support the outside sales force. These customer service representatives are responsible for entering and tracking orders, answering technical questions and sourcing products. The customer service representatives provide us with additional depth to our customer relationships and a pool of talent for future outside sales representatives.

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     Accounts Receivable. We proactively manage our accounts receivable with customers. We maintain detailed, up-to-date credit history and receivables information on over 27,000 customers and conduct extensive credit checks on new customers (including trade and banking references, independent credit reports and financial statement analyses). Since the beginning of 2000, on average, less than 9% of accounts receivable have been outstanding greater than 90 days and bad debt expense has averaged approximately .08% of net sales. Our credit department, which includes national and regional professionals, is responsible for approving customers’ credit, collecting receivables and ensuring that appropriate state and local bond and lien statutes are followed.

     We maintain all of our credit and receivables information on our IT system, allowing easy access by our credit department and branch managers. A customer’s status is automatically reviewed by the IT system during order entry and product shipment to ensure that branches operate within credit guidelines. We set a pre-determined credit limit for each customer in our IT system which automatically prevents additional sales absent appropriate approvals if the customer’s credit limit is exceeded. We are also able to generate daily reports that highlight any potential issues to our credit professionals and branch managers. Customers can also track their outstanding balances online to accelerate the payment process. Finally, our sales representatives are typically incentivized to collect receivables and forfeit a portion of the related sales commission if collection does not occur on a timely basis.

Management Information Systems

     Our IT system is critical to our success and we believe it provides us with a competitive advantage. We have developed a single infrastructure that integrates our customer service, management, operational and financial functions in a reliable, flexible and easy to operate system. The system is easily scalable to support additional organic growth and acquisitions and currently has unused capacity. We leverage our IT system to provide superior, customized service, which reduces our customers’ costs and improves our operating efficiency. Examples of customer service benefits include:

     Material Management Online. Our Internet interface allows our customers to manage all aspects of their accounts on a secure, online and real-time basis. Our customers can:

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access product pricing and availability and place orders, including using their own product numbers which are automatically converted to our product numbers;

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access order information (including status, delivery schedule and past invoices);

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release products for delivery;

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access account-specific catalogs, including account-specific pricing and past preferences; and

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view local specifications and requirements.

     Project Management. We offer numerous project management services to reduce our customers’ cost and to allow them to bid on more projects. Through this system, we provide over 10,000 project estimates monthly. We can either:

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integrate price-supported product databases into a contractor’s estimating system;

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provide access to our own estimating system; or

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generate the estimate ourselves in the format requested by the customer (e.g., spreadsheets via email).

     Our estimating system is integrated with the rest of our IT system, allowing for a seamless interface between sales and operations. During a project, our customers can receive project-specific management reports and other information (e.g., shipment and payment status, products released against the bid, change orders and invoices) via the Internet, email, or fax, which result in more efficient project management. Our customers can receive their invoices via email on a daily basis to expedite billing their customers.

     From an internal point-of-view, our IT system improves our efficiency, profitability and asset management. It integrates all of our locations and key functions and provides easy access to detailed, up-to-date information. Benefits include:

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nationwide and local real-time control of pricing for sales and purchases, including for individual customers;

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the ability to monitor individual customer’s profitability and accounts receivable, including preset credit limits which prevent additional sales if exceeded;

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better inventory management and sharing across branches;

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expedited and automatic posting, matching and processing of orders, receivables and payables; and

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integrated payroll and accounting, including the ability to quickly consolidate financial results from our branches.

     The system generates management reports that track key metrics on regional, branch and customer basis, which allows us to monitor and more effectively manage our business at all levels and to set sales strategies.

     We have established emergency contingencies to protect our IT system and test our preparedness and contingency plan yearly. Such measures include automatic re-establishment of a branch’s connection to the system if it is lost and a fully functional, secure back-up location provided by a third-party.

Raw Materials

     We do not manufacture any products. However, our suppliers are susceptible to fluctuations in certain raw material prices, which can impact our purchase and sales prices for these products. PVC pipe accounted for approximately 21% of our 2003 net sales, and is susceptible to price fluctuations. The purchase price of PVC pipe ranged from $0.29 to $0.60 per pound between 1997 and 2003, which we believe to be the most recent peak to trough period. Our average 2003 PVC purchase price was $0.41 per pound and ranged from a quarterly average of $0.39 to $0.44 per pound. We believe that we take minimal raw material price risk, based on our high inventory turns, sales shipped directly from manufacturers to customers, ability to quickly pass price fluctuations on to customers and our relatively small average project size and short timing. In addition, when we enter into longer-term arrangements with our customers, we typically enter into similar term arrangements with our suppliers.

Employees

     As of December 31, 2003, we had approximately 1,447 employees, including 1,436 full-time employees and 11 part-time employees. As of December 31, 2003, approximately 220 of our employees were in managerial positions, 275 were in sales positions and 952 were in warehouse/delivery and general administrative positions. In addition, 12 of our employees at three branches were unionized pursuant to collective bargaining agreements that expire in July 2004 and December 2006. We believe that we have good relationships with our employees and low voluntary turnover.

Competition

     In each of our local markets, we typically compete with three to five other distributors. Generally, local competition includes a branch of one or both of the other two national distributors, Hughes Supply, Inc. and Wolseley PLC. We also compete with other local and regional distributors. The principal methods of competition include offering prompt local service, fulfillment capability, local knowledge, breadth of product and service offerings, total cost to the customer, and price. We believe we compete successfully in these areas.

Environmental Matters

     Our facilities and operations are subject to federal, state and local environmental and workplace health and safety requirements, including those relating to the handling, storage and disposal of hazardous materials and wastes and the cleanup of properties affected by pollutants. Historically, we have not had, nor do we currently anticipate, any material adverse effect on our business or financial condition as a result of our efforts to comply with, or our liability under, such requirements. Our operations consist of distribution of water and wastewater transmission products rather than manufacturing, so we are not significantly regulated from an environmental standpoint.

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     In the future, federal, state or local governments could enact new or more stringent laws or regulations concerning environmental and workplace health and safety matters that could affect our operations. We could be found to be in violation of these or other environmental laws and regulations and we could be held liable for contamination that may be found at our facilities or off-site locations where we have sent wastes. We are currently not aware of circumstances where a violation of or a liability under environmental requirements could have a material adverse effect on our business or financial condition.

     Certain of U.S. Filter’s predecessors distributed or may have distributed cement pipe containing asbestos. Certain of these predecessors are or have been defendants in lawsuits seeking to recover personal injury and other damages for alleged exposure to asbestos in these pipes, and at December 31, 2003, 111 lawsuits remained outstanding. Total defense and settlement costs paid in these settled actions through December 31, 2003 by U.S. Filter have been approximately $2.5 million, the majority of which has been paid by insurance companies. The Acquisition was structured as an asset purchase, and we did not assume any existing or future asbestos-related liabilities relating to U.S. Filter or its predecessors. U.S. Filter and United States Filter Corporation retained these liabilities and jointly and severally agreed to indemnify and defend us from and against these liabilities on an unlimited basis with no termination date. United States Filter Corporation and U.S. Filter also agreed that, until November 22, 2012, U.S. Filter will, and United States Filter Corporation will cause U.S. Filter to maintain U.S. Filter’s corporate existence and ensure that U.S. Filter has sufficient funds to pay any and all of its debts and other obligations, including liabilities retained by U.S. Filter and its indemnification obligations, as and when they become due. In addition, Veolia Environnement (“Veolia,” formerly Vivendi Environnement S.A.) has guaranteed all obligations of United States Filter Corporation and U.S. Filter under the asset purchase agreement, including the indemnity discussed above, up to an aggregate of $50.0 million for a period ending November 22, 2017. Historically, courts have not held the acquirer of an entity’s assets liable for liabilities that are not assumed as part of the transaction unless the asset buyer is found to be a “successor” to the asset seller. Accordingly, we could become subject to asbestos liabilities in the future to the extent we are found to be a successor to U.S. Filter and to the extent U.S. Filter, United States Filter Corporation and Veolia are unable to fulfill their contractual obligations.

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ITEM 2. PROPERTIES

     We have 133 distribution branches in 35 states. We lease and own 105 and 28 branches, respectively. Our facilities are used for storing inventory and maintaining office space and typically consist of a one-to-two acre lot adjacent to a warehouse/office building. We typically enter into leases with terms ranging from two to five years that include renewal options. In addition, we lease our principal executive offices in Waco, Texas and own our two other administrative centers.

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ITEM 3. LEGAL PROCEEDINGS

     In addition to those items disclosed above in “Item 1. Business” under the caption “Environmental Matters” which are incorporated by reference into this item, we are from time to time involved in litigation incidental to the conduct of our business. We believe that no litigation currently pending against us, if adversely determined, would have a material adverse effect on our financial position or results of operations.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          There is no established trading market for our common stock. As of March 2, 2004, one hundred percent of our stock was held by our parent, National Waterworks Holdings, Inc. (“Holdings”). In 2003, we paid dividends aggregating $39.3 million in respect of our outstanding common stock. We did not pay any dividends in respect of our common stock in 2002.

          Our senior secured credit facility and the indenture governing our senior subordinated notes both contain covenants that limit our ability to pay dividends.

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ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected historical financial and other operating data of:

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National Waterworks as of December 31, 2003 and 2002, for the year ended December 31, 2003 and for the period from November 22 to December 31, 2002. This information was derived from our audited financial statements included elsewhere in this report; and

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U.S. Filter as of November 21, 2002 and for the period from January 1 to November 21, 2002, as of and for the years ended December 31, 2001 and 2000, as of and for the eight months ended December 31, 1999, as of and for the one month ended April 30, 1999. Information was derived from U.S. Filter’s audited financial statements; and

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U.S. Filter as of and for the three months ended March 31, 1999. Information was derived from U.S. Filter’s unaudited financial statements.

     On April 23, 1999, Veolia acquired United States Filter Corporation, the parent of U.S. Filter. That acquisition was accounted for as a purchase and the related purchase accounting adjustments have been reflected (“pushed-down”) in the consolidated financial statements of U.S. Filter for periods subsequent to April 30, 1999.

     In the opinion of management, the unaudited financial information referred to above includes all adjustments, consisting of only normal non-recurring adjustments, considered necessary for a fair presentation of this information.

     The information set forth below should be read in conjunction with the information under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this report.

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(1) On April 23, 1999, the date of the United States Filter Corporation acquisition by Veolia, U.S. Filter recognized approximately $15.2 million in compensation expense associated with settlement of outstanding stock options of United States Filter Corporation held by certain of its employees.

(2) Reflects completion bonuses paid by United States Filter Corporation to certain members of management and other key employees of U.S. Filter upon consummation of the Acquisition.

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(3) In connection with the Acquisition, we recorded a $13.0 million inventory revaluation adjustment pursuant to Statement of Financial Accounting Standards No. 141, Business Combinations. Of this amount, $9.0 million was recognized in costs of goods sold for the period November 22 to December 31, 2002. The remaining $4.0 million was recognized in cost of goods sold during the quarter ended March 28, 2003.

(4) Reflects an impairment charge relating to the adoption of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets. See Note 4 to the audited financial statements included elsewhere in this report.

(5) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes and cumulative effect of a change in accounting principle and fixed charges. Fixed charges consist of interest, whether expensed or capitalized; amortization of debt issuance costs; and one-third of rent expense, which management believes to be representative of the interest factor thereon. For the period from November 22, 2002 to December 31, 2002, fixed charges exceeded earnings by $2.4 million. The deficiency in the period ended December 31, 2002 included a $2.5 million write-off of financing fees related to financing the Acquisition which is included in interest expense, net, as well as the effect of the inventory revaluation adjustment referred to in note (3) above. For the one month ended April 30, 1999, fixed charges exceeded earnings by $14.1 million. The deficiency in the one-month period ended April 30, 1999 included the $15.2 million stock option redemption expense discussed in note (1) above.

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ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion and analysis in conjunction with the financial statements and related notes included elsewhere in this report.

Overview

     We are a leading distributor of water and wastewater transmission products in the United States with approximately a 20% share of the estimated $6 billion U.S. waterworks product distribution market. We began operations in 1996 when United States Filter Corporation acquired Davis Water & Waste Industries, Inc. (which changed its name to U.S. Filter Distribution Group, Inc.) with the goal of creating the first nationwide waterworks products distribution network. Through the acquisition and combination of four additional large-scale regional waterworks products distributors in 1996 and 1997, we became a major participant in the sector. We have continued to increase our revenues through organic growth, including market share gains, new branch openings and selected strategic acquisitions. In November, 2002, we purchased substantially all of the assets and businesses of, and assumed certain liabilities and obligations of U.S. Filter, becoming a stand alone company.

     We generate revenue by distributing a full line of products including pipe, fittings, valves, meters, service and repair products, fire hydrants and other components that are used to transport clean water and wastewater between reservoirs and treatment plants and residential and commercial locations. In addition, we provide a broad array of value-added services such as project estimation, project management and product advice. We face a variety of challenges and opportunities in responding to the dynamics of the water and wastewater transmission industry characterized by evolving customer needs and intense competition. Our products are integral to building, repairing and maintaining water and wastewater (sewer) systems and serve as part of the basic municipal infrastructure required to support population and economic growth and residential and commercial construction. Through our network of 133 branches in 35 states, we sell to municipalities directly and to contractors who serve municipalities and also perform residential, commercial and industrial waterworks projects. In addition to significant customer and geographic diversification, our 2003 net sales were split approximately evenly between publicly-funded and privately-funded sales. The following table sets forth our net sales by product category as a percentage of 2003 net sales:

     Our strategy revolves around expanding and strengthening our market presence while focusing on customer service. Additionally, we partner with preferred vendors, manage working capital, and work toward improved profitability to improve our overall financial strength. Our financial strength and ability to adapt to current economic conditions is dependent in part on our generation of cash flow, effective working capital management, and growth in our business. Additionally, we attempt to mitigate the effect of economic conditions through a highly variable cost structure and low capital spending requirements.

     We generate cash primarily from our operations. During 2003 we generated $37.0 million in cash flow from operating activities while our cash and cash equivalents decreased $21.2 million. We paid a dividend of $39.3 million and reduced our long-term borrowings by $10.0 million. We also paid $3.2 million in acquisition costs consisting primarily of the post-closing purchase price adjustment related to the Acquisition, and paid $5.5 million of financing fees principally related to the August 2003 amendment to our senior credit facility.

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Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.

     An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the financial statements.

     Allowance for Doubtful Accounts. Since the beginning of 2000, on average, our bad debt expense has been only 0.08% of net sales. We evaluate the collectibility of accounts receivable based on historical trends, customer transaction history, accounts receivable aging and an evaluation of customer credit worthiness. Initially, a monthly provision is made based on historical experience. On a quarterly basis, we perform a detailed analysis of accounts receivable and adjust the allowance for doubtful accounts when necessary. While we have a large customer base that is geographically diverse, an economic slowdown in the markets in which we operate may result in higher uncollected accounts receivable and therefore the need to revise estimates for bad debts. To the extent actual credit experience or other assumptions used by management change, the allowance for doubtful accounts would be adjusted, which could affect our operating results.

     Inventories. Since the beginning of 2000, our slow moving inventory has averaged less than 2% of our total inventory. We periodically evaluate our inventories to ensure they are recorded at the lower of cost or market value. The inventory reserve is adjusted monthly based on a review of slow moving inventories as well as other factors including potential adjustments from physical inventory counts. Significant unusual events giving rise to changes in our inventory valuation are reserved when appropriate. To the extent future events impact, either favorably or unfavorably, the salability of our products, our inventory reserves could differ significantly resulting in higher or lower future inventory accruals.

     Goodwill and Long-Lived Assets. We review the carrying value of our goodwill for impairment at least annually. To accomplish this, we utilize a third party independent appraiser to assess the fair value of each of our reporting units. The fair value of a reporting unit may be estimated using methods such as a discounted cash flow analysis and market approaches. The Company compares the fair value estimate to the unit’s carrying value. If the carrying value of a reporting unit exceeds its fair value estimate, an indication exists that goodwill is impaired and we must perform additional analysis to determine the extent of any impairment. Any such impairment would be reflected as a charge in the statement of operations at that time. See Recent Accounting Pronouncements below for a discussion concerning our adoption of SFAS No. 142, Goodwill and Other Intangible Assets.

     Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or other changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from the asset’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

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     Consideration Received From Vendors. We enter into agreements with many of our vendors providing for inventory purchase rebates (“vendor rebates”) upon achievement of specified volume purchasing levels. We accrue the receipt of vendor rebates as part of our cost of sales for products sold based on progress towards earning the vendor rebates, taking into consideration cumulative purchases of inventory to date and projected purchases through the end of the year. An estimate of unearned vendor rebates is included in the carrying value of inventory at a period end for vendor rebates received on products not yet sold. While management believes that we will continue to recognize consideration from vendors pursuant to underlying agreements, there can be no assurance that vendors will continue to provide comparable amounts of vendor rebates in the future, which could impact our operating results.

Results of Operations

     The following table sets forth the percentage relationship that certain items from our financial statements bear in relation to net sales:

     The following discussions regarding the year ended December 31, 2002 are based on the combined results of operations of U. S. Filter for the period from January 1 to November 21, 2002 and of National Waterworks for the period from November 22 to December 31, 2002. The Acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, and the excess of the purchase consideration over the historical basis of the net assets acquired has been applied to revalue the assets acquired and liabilities assumed to their fair values at November 22, 2002, the date of the Acquisition. Goodwill of $465.7 million was recognized in our financial statements as a result of the Acquisition. A $3.1 million post-closing purchase price adjustment made by National

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Waterworks in the first quarter of 2003 was reflected as an adjustment to goodwill in our financial statements for the quarter ended March 28, 2003. The combined 2002 results discussed below are not necessarily indicative of what the full year 2002 would have been had the change in ownership resulting from the Acquisition not occurred.

Year Ended December 31, 2003 Compared to Combined Year Ended December 31, 2002

Certain Financial Statement Impacts of the Acquisition. As more fully discussed below, the revaluation of the net assets acquired in the Acquisition did not affect our net sales. However, we recorded a $13.0 million valuation increase in inventory at November 22, 2002 as a result of the asset revaluation. While the increase in the value of our inventory had no cash impact, it did increase our costs of goods sold, adversely impacting our gross profit. We recognized $9.0 million of the impact of the inventory revaluation during the period of November 22 to December 31, 2002. The final $4.0 million of the inventory revaluation was recognized in the first quarter of 2003.

Net Sales. Net sales for the year ended December 31, 2003 increased $125.4 million, or 10.9%, to $1,278.4 million from $1,153.0 million for the year ended December 31, 2002. The increase reflects the combined effects of a $6.0 million increase in net sales from our acquisition of Utility Piping Systems, Inc., a regional waterworks distribution company operating in Pennsylvania, New Jersey and Delaware, which we acquired on March 29, 2002, and a $119.4 million increase in net sales of our historical operations. A portion of the increase was attributable to an increase in net sales of PVC pipe of $29.3 million primarily resulting from the pass through of an approximate 13% increase in our purchase price of PVC pipe products. The remaining increase in net sales of our historical operations was attributable to increases recorded in all product areas brought by continued favorable economic conditions.

Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2003 increased $96.6 million, or 10.6%, to $1,010.4 million from $913.8 million for the year ended December 31, 2002. The increase reflects an increase in cost of goods sold of our historical operations which was primarily attributable to the increase in cost of goods sold of PVC pipe products of $27.6 million and increased volume in all other product categories. Additionally the increase reflects the combined effects of a $4.8 million increase in cost of goods sold associated with sales resulting from our acquisition of Utility Piping Systems, Inc. and the recognition of the final $4.0 million impact of the inventory revaluation discussed above. As a percentage of net sales, cost of goods sold decreased to 79.0% in 2003 compared to 79.3% in 2002.

Gross Profit. As a result of the foregoing, gross profit for the year ended December 31, 2003 increased $28.8 million, or 12.0%, to $268.0 million from $239.2 million for the year ended December 31, 2002. Gross profit increased as a result of our acquisition of Utility Piping Systems, Inc. and increased volume in our historical operations, and was partially offset by the adverse impact of the inventory revaluation, representing 0.3% of net sales, recognized during the 2003 period. Our gross profit margin increased to 21.0% in 2003 compared to 20.7% in 2002 as a result of the foregoing factors.

Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2003 increased $12.6 million, or 8.2%, to $167.2 million from $154.6 million for the year ended December 31, 2002. This increase is primarily related to the sales volume increases discussed above and $0.9 million of additional expenses resulting from our acquisition of Utility Piping Systems, Inc. As a percentage of net sales, selling, general and administrative expenses were 13.1% in 2003 compared to 13.4% in 2002.

Loss—Accounts Receivable Securitization. Loss—accounts receivable securitization was $2.5 million for the year ended December 31 2002. This loss reflects the sale of a portion of our accounts receivable at a discount relating to an accounts receivable securitization facility that we entered into on December 19, 2001. For more information, see “—Liquidity and capital resources” below. The facility was repaid and terminated in November 2002. Accordingly, there was no related activity in 2003.

Depreciation and Amortization. Depreciation and amortization expenses for the year ended December 31, 2003 were $2.6 million, compared to $3.4 million for the year ended December 31, 2002. Depreciation includes depreciation of property, plant and equipment.

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Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2003 increased $19.5 million, or 24.7%, to $98.3 million from $78.8 million for the year ended December 31, 2002. As a percentage of net sales, operating income increased to 7.7% in 2003 from 6.8% in 2002.

Completion Bonuses. In connection with the Acquisition, we recognized $6.2 million in non-recurring compensation expense in 2002 for payments made by U. S. Filter to certain members of our management upon consummation of the Acquisition.

Interest Expense, Net. Interest expense, net for the year ended December 31, 2003, was $41.3 million, compared to $6.9 million for the year ended December 31, 2002. The increase reflects interest related to the additional debt we incurred on November 22, 2002 to finance the Acquisition.

Income Taxes. Our effective income tax rate for the year ended December 31, 2003 was approximately 40.9% compared to 38.8% for the year ended December 31, 2002.

Cumulative Effect of Change in Accounting Principle. As a result of the adoption of SFAS No. 142 prior to the consummation of the Acquisition, U.S. Filter completed an assessment of whether its goodwill was impaired at January 1, 2002, the date of adoption of SFAS No. 142. As a result of this assessment, U.S. Filter concluded that it was probable that the goodwill then assigned to its reporting units was impaired based in part upon the anticipated sale price of substantially all of its assets and liabilities to National Waterworks. Accordingly, 2002 included a charge for the estimated goodwill impairment of $459.0 million.

Net Income (Loss). As a result of the foregoing, and excluding the cumulative effect of a change in accounting principle in 2002, net income decreased $6.7 million to $33.6 million from $40.3 million for the year ended December 31, 2003 and 2002, respectively.

Combined Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Certain Financial Statement Impacts of the Acquisition. As more fully discussed below, the revaluation of the net assets acquired in the Acquisition did not affect our net sales. However, we recorded a $13.0 million increase in inventory at November 22, 2002 as a result of the asset revaluation. While the increase in the value of our inventory had no cash impact, it did increase our costs of goods sold in the November 22 to December 31, 2002 period, adversely impacting our gross profit during this period. We recognized $9.0 million of the inventory revaluation during the period of November 22 to December 31, 2002 and the remaining $4.0 million impact of the inventory revaluation in the first quarter of 2003.

Due to the short period between the consummation of the Acquisition on November 22, 2002 and December 31, 2002, we recognized only a portion of the expected $1.0 million annual increase in our selling, general and administrative expenses resulting from our now being an independent stand-alone entity. In addition, the impact on interest expense resulting from the indebtedness incurred under our senior credit facility and the senior subordinated notes to finance the Acquisition was minimal and only reflected in the short November 22 to December 31, 2002 time period. Finally, during the period of November 22 to December 31, 2002, we recognized a $2.5 million charge relating to the write-off of deferred financing fees related to the Acquisition.

Net Sales. Net sales for the year ended December 31, 2002 increased $32.7 million, or 2.9%, to $1,153.0 million from $1,120.3 million for the year ended December 31, 2001. The increase reflects the combined effects of a $30.8 million increase in net sales from our acquisition of Utility Piping Systems, Inc. and a $1.9 million increase in net sales of our historical operations. The increase of $1.9 million in net sales of our historical operations was primarily attributable to an increase in our sales price of PVC pipe, which primarily reflected an approximate 6% increase in our purchase price of PVC pipe. The PVC price increase, combined with a volume increase in sales of meters was partially offset by slightly weaker volume in other product areas. Additionally, the closing of two under-performing branches in 2001 accounted for a $2.6 million decrease in net sales of our historical operations for the period.

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Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2002 increased $33.2 million, or 3.8%, to $913.8 million from $880.6 million for the year ended December 31, 2001. The increase reflects the combined effects of a $24.0 million increase in cost of goods sold associated with sales resulting from our acquisition of Utility Piping Systems, Inc. and the recognition of $9.0 million of the impact of the inventory revaluation discussed above. As a percentage of net sales, cost of goods sold increased to 79.3% for 2002 compared to 78.6% in 2001.

Gross Profit. As a result of the foregoing, gross profit for the year ended December 31, 2002 decreased $0.6 million, to $239.2 million from $239.8 million for the year ended December 31, 2001. Gross profit increases as a result of our acquisition of Utility Piping Systems, Inc. and a higher proportion of sales shipped from our inventory, which carry a higher gross margin than sales shipped directly from our suppliers, were offset by the adverse impact of the inventory revaluation recognized during the period of November 22 to December 31, 2002. Our gross profit margin decreased to 20.7% in 2002 compared to 21.4% in 2001 as a result of the foregoing factors.

Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2002 increased $2.1 million, or 1.4%, to $154.6 million from $152.5 million for the year ended December 31, 2001. This increase reflected additional expenses resulting from our acquisition of Utility Piping Systems, Inc. and approximately $0.4 million of incremental costs of operating on a stand alone basis, principally related to auditing and tax services, partially offset by the elimination of expenses associated with the closing of the two branches discussed above. As a percentage of net sales, selling, general and administrative expenses were 13.4% in 2002 compared to 13.6% in 2001.

Loss—Accounts Receivable Securitization. Loss—accounts receivable securitization was $2.5 million and $0.5 million for the year ended December 31, 2002 and 2001, respectively. This loss reflects the sale of a portion of our accounts receivable at a discount relating to an accounts receivable securitization facility that we entered into on December 19, 2001. For more information, see “—Liquidity and capital resources” below. The facility was repaid and terminated in November 2002.

Depreciation and Amortization. Depreciation and amortization expenses for the year ended December 31, 2002 were $3.4 million in the aggregate, compared to $28.6 million for the year ended December 31, 2001. Depreciation includes depreciation of property, plant and equipment. Historically, amortization was comprised primarily of amortization of goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we ceased amortizing goodwill as of January 1, 2002. Goodwill amortization was $25.0 million for the year ended December 31, 2001. As a percentage of net sales, depreciation and amortization for the period decreased to 0.3% in 2002 compared to 2.6% in 2001.

Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2002 increased $20.6 million, or 35.4%, to $78.8 million from $58.2 million for the year ended December 31, 2001. As a percentage of net sales, operating income increased to 6.8% for 2002 from 5.2% for 2001, which is primarily attributable to the adoption of SFAS No. 142 discussed above.

Completion Bonuses. In connection with the Acquisition, we recognized $6.2 million in non-recurring compensation expense in 2002 for payments made by U. S. Filter to certain members of our management upon consummation of the Acquisition.

Interest Expense, Net. Interest expense, net for the year ended December 31, 2002 was $6.9 million compared to less than $0.1 million in 2001. The increase reflects the additional debt we incurred on November 22, 2002 to finance the Acquisition. Included in interest expense, net in 2002 is a $2.5 million write-off of deferred financing costs relating to an unutilized bridge facility. During the 2001 period, we reduced our long-term debt outstanding primarily as a result of the repayment of a $1.2 million note payable that matured in June 2001.

Income Taxes. Our effective income tax rate for the year ended December 31, 2002 was approximately 38.8% compared to 55.0% for the year ended December 31, 2001. The change resulted primarily from the elimination of goodwill amortization described above. Our effective tax rate for the year ended December 31, 2001 exceeded statutory tax rates primarily due to the non-deductibility for tax purposes of goodwill amortization.

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Cumulative Effect of Change in Accounting Principle. As a result of the adoption of SFAS No. 142 prior to the consummation of the Acquisition, U.S. Filter completed an assessment of whether its goodwill at January 1, 2002, the date of adoption of SFAS No. 142, was impaired. As a result of this assessment, U.S. Filter concluded that it was probable that the goodwill then assigned to its reporting units was impaired based in part upon the anticipated sale price of substantially all of its assets and liabilities to National Waterworks. Accordingly, the Acquisition period from January 1 to November 21, 2002 included a charge for the estimated goodwill impairment of $459.0 million. No similar charges were recorded for the 2001 period. During this period, goodwill was primarily comprised of amounts resulting from the purchase accounting adjustments associated with the acquisition of United States Filter Corporation by Veolia in 1997 and reflected, or “pushed-down,” in the consolidated financial statements, and, to a lesser extent, amounts resulting from acquisitions since the date of the Veolia acquisition.

Net Income (Loss). As a result of the foregoing, we reported a net loss of $418.7 million for the year ended December 31, 2002, compared to $26.2 million of net income for the year ended December 31, 2001. Excluding the cumulative effect of a change in accounting principle in 2002 and the goodwill amortization in 2001, net income decreased $10.9 million to $40.3 million in the 2002 period from $51.2 million in the 2001 period.

Liquidity and Capital Resources

     Prior to November 2002, we participated in the centralized cash management program of our former parent, United States Filter Corporation, whereby all of our cash receipts were remitted to United States Filter Corporation and substantially all of our cash disbursements were funded by United States Filter Corporation. As a result of the Acquisition and our separation from United States Filter Corporation, we no longer participate in such program. Historically, our primary cash requirements were to fund our operations, working capital and capital expenditures. Following the Acquisition, our primary cash requirements are to make the interest and principal payments on our debt and to fund our operations, working capital and capital expenditures. We expect to fund these needs principally from cash flow from operations and, if necessary, borrowings under the revolving credit portion of our senior credit facility. In addition, since the Acquisition was structured as an asset acquisition, we will be able to deduct for tax purposes, on a straight-line basis over 15 years, the related goodwill. We expect that this amortization will result in significant cash tax savings.

     Net working capital is comprised of current assets, excluding cash and cash equivalents, minus current liabilities. We had net working capital of $115.2 million at December 31, 2003 compared to net working capital of $105.1 million at December 31, 2002. The increase in net working capital is primarily attributable to increased sales volume in the fourth quarter of 2003.

     Net cash provided by operating activities for the years ended December 31, 2003, 2002 (combined) and 2001 was $37.0 million, $95.3 million, and $209.4 million, respectively. The change in net cash provided by operating activities in 2003 compared to 2002 (combined) was primarily attributable to an approximate $32.3 million and $33.8 million decrease in cash flows from trade accounts receivable and trade accounts payable and accrued expenses, respectively. The decrease in net cash provided by operating activities in 2002 (combined) compared to 2001 was primarily attributable to the change in our accounts receivables related to the implementation in December 2001 of the accounts receivable securitization facility, which accounted for $140.0 million of net cash provided by operating activities in 2001. Excluding the effect of the securitization facility, the increase in 2002 (combined) was due to cash provided by trade accounts payable of $27.4 million.

     Net cash used in investing activities for the years ended December 31, 2003, 2002 (combined) and 2001 was $4.4 million, $664.0 million and $0.3 million, respectively. Net cash used in investing activities for the period ended December 31, 2003 reflected the post-closing cash adjustment of $3.1 million paid to United States Filter Corporation, related to the level of our working capital at the time of closing of the Acquisition. Net cash used in investing activities for the year ended December 31, 2002 (combined) reflected the cash purchase price of the Acquisition of $643.8 million and the one operating acquisition we completed in 2002 for a net consideration of $19.6 million. Capital expenditures for the years ended December 31, 2003, 2002 (combined) and 2001 were $2.0 million and $1.5 million and $1.4 million, respectively.

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     Net cash provided by (used in) financing activities for the years ended December 31, 2003, 2002 (combined), and 2001 was ($53.8) million, $600.6 million, and ($205.1) million, respectively. Net cash used in financing activities in the 2003 period reflects $10.0 million in principal payments on the term loan and a dividend distribution of $39.3 million. The 2003 period also reflects a $1.0 million cash equity investment in Holdings, by one of our and Holdings’ directors, who had not made an investment in Holdings at the time the Acquisition was consummated. Holdings made a concurrent $1.0 million capital contribution to us. The net cash provided by financing activities for the year ended December 31, 2002 (combined), excluding the $644.7 million provided to fund the Acquisition, resulted in net cash used in financing activities of $44.1 million. The $44.1 million reflects the excess of funds transferred to our former parent, United States Filter Corporation, through the cash management program over investments by, and expenditures funded by, United States Filter Corporation during the period January 1 to November 21, 2002.

     In December 2003, we amended our senior credit facility in connection with a dividend paid to the stockholders of Holdings. The amendment permits us to pay a dividend to Holdings from time to time, contingent upon meeting certain financial covenants and ratios. In addition, the aggregate amount of dividends paid pursuant to this amendment may not exceed $110.0 million in total, and may not exceed $45.0 million for the year ended December 31, 2003 and $40.0 million for any year thereafter, providing that any amount not paid in the year for which it is permitted may be carried over to any succeeding year. In connection with the amendment, we paid and recorded as interest expense approximately $2.3 million in financing fees.

     In August 2003 we amended our senior credit facility in connection with the refinancing of the outstanding term loan portion thereof. The amendment, among other things, provided for lower applicable margins for both Eurodollar rate and base rate term loans under the refinanced facility. In addition the minimum Eurodollar rate of 2.50% for term loans that existed prior to the amendment was removed. The amendment also permits us to issue, without the consent of lenders under the senior credit facility, an incremental $50.0 million of credit facilities in addition to the $50.0 million permitted prior to the amendment, contingent upon meeting certain covenants. In connection with the amendment, we paid approximately $6.0 million of financing fees, including a $4.9 million call premium. The call premium was recorded as deferred financing fees with the remaining finance fees recorded as interest expense.

     Our senior credit facility, as amended, consists of a $250.0 million term loan facility, of which $240.0 million was outstanding at December 31, 2003, and a $75.0 million revolving credit facility. No amount was outstanding under the revolving credit facility at December 31, 2003, but approximately $3.8 million of the availability under the facility was used to support outstanding letters of credit. The borrowings under the revolving credit facility will be available until its maturity to fund our working capital requirements, capital expenditures and other general corporate needs. The revolving credit facility will mature on November 22, 2008 and will have no scheduled amortization or commitment reductions. The term loan facility will mature on November 22, 2009 and has quarterly scheduled amortization payments of $3.75 million in 2004 and 2005, $5.0 million in 2006 and $6.25 million in 2007 and 2008, with the balance of the facility to be repaid quarterly during 2009. In addition, commencing with the year ended December 31, 2003, we are required to make annual mandatory prepayments of the term loans under the senior credit facility in an amount equal to 75% of Excess Cash Flow, as defined in our senior credit facility, and determined generally as the amount by which our operating cash flow exceeds the sum of our capital expenditures (including in respect of permitted acquisitions), repayments of indebtedness and certain other amounts, or, 50% of Excess Cash Flow if our ratio of consolidated total debt to consolidated EBITDA as of the last day of the fiscal year is not greater than 4:0 to 1:0. The term loans are also subject to mandatory prepayments in an amount equal to (i) 75% of the net proceeds from certain equity issuances (or 50% if we meet the foregoing leverage ratio); (ii) 100% of the net cash proceeds of certain debt issuances; and (iii) 100% of the net cash proceeds of certain asset sales or other dispositions of property, in each case subject to certain exceptions. Borrowings under the term loan portion and revolving credit facility bear interest at a variable rate based on, at our option, the Eurodollar rate plus an applicable margin, or a base rate plus a margin. The base rate is the higher of the prime rate or the federal funds rate plus 0.5%. At December 31, 2003 and 2002, the interest rate on the term loan was 3.92% and 6.5% per annum, respectively. Our senior credit facility permits us to issue up to an additional $100.0 million of credit facilities without the consent of the lenders thereunder, so long as no default or event of default under the senior credit facility has

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occurred or would occur after giving effect to such issuance and certain other conditions are satisfied, including pro forma compliance with certain leverage ratios.

     Our $200.0 million aggregate principal amount of senior subordinated notes due 2012 bear interest at 10.50% per annum, with interest due semi-annually on June 1 and December 1 of each year. Interest payments on the senior subordinated notes and required principal and interest payments on borrowings under our senior credit facility have substantially increased our liquidity requirements. We may, from time to time, purchase senior subordinated notes in the open market or on privately negotiated transactions.

     The senior credit facility and the indenture governing the senior subordinated notes impose certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell our assets and engage in certain other activities. Our senior credit facility also requires that we satisfy leverage and interest coverage ratios and contains a capital expenditures limitation. We were in compliance with all covenants at December 31, 2003 and 2002. Indebtedness under the senior credit facility is secured by substantially all of our and Holdings’ assets, including our real and personal property, inventory, accounts receivable, intellectual property and other intangibles. In addition, the senior credit facility is secured by the stock and substantially all of the assets of our future domestic subsidiaries, if any. We do not currently have any subsidiaries.

     Our ability to pay principal and interest on our indebtedness and to satisfy our other obligations will depend upon, among other things:

•

our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and

•

the future availability of borrowings under our senior credit facility or any successor facility, the availability of which depends or may depend on, among other things, our complying with the covenants in our senior credit facility.

     We believe that, based on our current levels of operations, our cash flow from operations, together with available borrowings under the senior credit facility, will be adequate for at least the next few years to make scheduled amortization and interest payments on our indebtedness and to fund anticipated capital expenditures and for working capital requirements. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under the senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

Related Party Transactions

     In January 2003, one of our and Holdings’ directors, who had not made an investment in Holdings at the time of the Acquisition, made a $1.0 million cash equity investment in Holdings in exchange for the issuance of shares of common stock of Holdings. Holdings made a concurrent $1.0 million capital contribution to us. The investment was made at the same price per share as the original investment made by our principal equity sponsors and management on November 22, 2002.

     For a description of certain related party transactions with our sponsors, their affiliates and Holdings, see “Item 13. Certain Relationships and Related Transactions.”

Recent Accounting Pronouncements

     See Note 2 of the Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

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Risk Factors

     You should carefully consider the risk factors set forth below as well as the other information contained in this report. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations. Any of the following risks could materially adversely affect our business, financial condition or results of operations.

Downturns in the water and wastewater transmission products industry have in the past, and may in the future result in a decrease in our revenues and operating results through reduced sales of our products to our contractor and municipal customers.

     The water and wastewater transmission products industry is affected by changes in economic conditions, including national, regional and local slowdowns in construction activity and the amount spent by municipalities on waterworks infrastructure. Many of our products are distributed to waterworks contractors in connection with residential, commercial, and industrial construction projects. New housing starts serve as an indicator of the level of activity in the residential housing market and are influenced by interest rates, availability of financing, housing affordability, unemployment rates, demographic trends, gross domestic product and consumer confidence. Historically, new housing starts have decreased during economic slowdowns. The level of activity in the commercial and industrial construction markets depends on the general economic outlook, corporate profitability, interest rates and existing plant capacity utilization. Economic downturns in any of our regional markets could reduce the level of construction activity, and thus our level of sales, in that region. In addition, water and wastewater transmission products sales are subject to the availability of funding for municipal waterworks projects and reduced municipal funding could adversely affect our sales. In general, factors such as trends in the construction industry, changes in municipal spending or other factors that influence waterworks transmission products sales are not within our control and, as a result, may cause a decrease in our sales and operating results and our financial condition to deteriorate.

The sale of water and wastewater transmission products is subject to seasonal and weather-related fluctuations which makes our operating results subject to quarterly or annual fluctuations.

     The sale of water and wastewater transmission products is subject to seasonal and weather-related fluctuations. Coincident with annual construction seasonality, our net sales are typically higher during the second and third calendar quarters and lower during the first and fourth calendar quarters due to reduced construction activity during the winter. Adverse weather conditions in our markets may also decrease the level of construction activity and therefore our sales. As a result of these factors, our sales and operating results may be subject to quarterly or annual fluctuations.

Competition from our existing and new competitors could result in reduced sales and profitability and a decrease in our market share.

     The markets in which we compete are highly competitive and fragmented, with numerous regional and local participants. Two national competitors are divisions or subsidiaries of companies that have significantly greater financial, marketing and other resources than we do. We compete with a large number of distributors and a limited number of manufacturers who sell directly to larger customers within our customer base. In addition, smaller, local waterworks products distributors could form a distribution cooperative to compete more effectively against larger, national waterworks product distributors. The principal methods of competition include offering prompt local service, fulfillment capability, local knowledge, breadth of product and service offerings and price. If we are unable to compete effectively on these and other factors, our inability could cause us to lose market share or sales, the loss of either of which could result in a decrease in our operating results and profitability.

     In addition, a portion of our sales is from contracts with municipalities. These contracts are often awarded and renewed through periodic competitive bidding. We may not be successful in obtaining or renewing these contracts. Our inability to

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replace a significant number of contracts lost through competitive bidding processes with other revenue sources within a reasonable time could be harmful to our business and financial performance.

If we cannot successfully implement our business strategy, our business, results of operations and potential for growth will be adversely affected.

     Our ability to achieve our business and financial objectives is subject to a variety of factors, many of which are beyond our control. For example, our business strategy contemplates that existing customers will buy additional products from us in the future and that we will gain new customers by leveraging our product, information and materials management capabilities in order to improve our customer’s efficiency and reduce their administrative costs. Our business strategy further contemplates a growth in sales through branch openings in contiguous markets and through selective acquisitions of local and regional waterworks distributors in attractive and growing markets. Similarly, we believe our revenues will increase as municipalities currently face significant needs to replace and upgrade their water infrastructures. If our assumptions regarding these trends and the needs of our customers prove to be incorrect, we may not be successful in implementing our strategy. In addition, the implementation of our strategy may not improve our operating results. We may decide to alter or discontinue aspects of our business strategy and may adopt alternative or additional strategies due to business or competitive factors or factors not currently expected, such as unforeseen costs and expenses or events beyond our control. Any failure to successfully implement our business strategy may result in a decrease in our revenues, operating margins and results of operations and could limit or cause us to forego opportunities for growth.

We may not be able to complete any future acquisitions, which could restrict our ability to grow our business; and if we fail to successfully integrate any future acquisitions into our operations, our operating costs could increase and our operating margins, operating results and profitability may decrease.

     We have historically used acquisitions as a means of expanding our business. Since the beginning of 2000, we have completed two acquisitions of water and wastewater transmission products distributors. We may not be able to identify and complete additional acquisitions in the future, and our failure to identify and complete acquisitions could restrict our ability to grow our business. In addition, we may require additional debt or equity financing for future acquisitions. Such financing may not be available on favorable terms, if at all. In addition, if we do not successfully integrate acquisitions, we may not realize anticipated operating advantages and cost savings which would reduce our operating margins, operating results and profitability. The acquisition and integration of companies involves a number of risks, including:

•

use of available cash or borrowings under our senior credit facility to consummate the acquisition;

•

demands on management related to the increase in our size after an acquisition;

•

the diversion of management’s attention from existing operations to the integration of acquired companies;

•

difficulties in the assimilation and retention of employees; and

•

potential adverse effects on our operating results.

     We may not be able to maintain the levels of operating efficiency that acquired companies achieved separately. Successful integration of acquired operations will depend upon our ability to manage those operations and to eliminate redundant and excess costs. We may not be able to achieve the cost savings and other benefits that we would hope to achieve from acquisitions, which could cause our financial condition to deteriorate or result in an increase in our expenses or a reduction in our operating margins, thereby reducing our operating results and profitability.

We depend on our senior management and the loss of any member of the team could adversely affect our business or financial results.

     Our operations are dependent on the continued efforts of our senior management. We have entered into various

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agreements and compensation arrangements with our senior executives designed to encourage their retention, including with Harry Hornish as President and Chief Executive Officer, Mechelle Slaughter as Chief Financial Officer and Terry Howell as Chief Information Officer. Each member of our senior management team has substantial experience and expertise in our industry and has made significant contributions to our growth and success. Members of our senior management may resign in the future, and the loss of their services could limit our ability to grow our business and cause disruptions in our operations and our financial results to suffer.

Failure to retain and attract qualified branch managers and sales persons could limit our growth and negatively impact our operations.

     Our business results depend largely upon our branch managers and sales personnel and their experience, knowledge of local market dynamics and specifications and long-standing customer relationships. Our inability to retain or hire qualified branch managers or sales persons at economically reasonable compensation levels would restrict our ability to grow our business, limit our ability to continue to successfully operate our business and result in lower operating results and profitability.

Our cost of PVC pipe is volatile and increases in the cost of PVC pipe or unexpected PVC pipe shortages cause affect our operating results to decrease.

     The cost of the PVC pipe that we distribute can fluctuate due to supply and demand dynamics in the PVC pipe and PVC resin markets. PVC pipe sales accounted for approximately 21% of our net sales in 2003. Significant fluctuations in these markets may adversely affect our results of operations and cause volatility in our operating performance. While in the past we have been able to pass through the majority of the price changes in PVC pipe to our customers, our inability to do so in the future could cause our results of operations to be reduced.

Loss of key suppliers or reduced product availability could decrease sales and earnings.

     Our 10 largest suppliers in 2003 accounted for approximately 59% of our purchases and our single largest supplier accounted for approximately 13% of our purchases. The loss of any of these suppliers or a reduction in supplier participation in our preferred vendor programs could result in a decrease in our sales, operating results and earnings by decreasing the availability of products to us, which could limit our ability to satisfy our customers’ product needs. Such reduced product availability could put us at a competitive disadvantage.

Reduction in product availability could decrease our sales and earnings and put us at a competitive disadvantage.

     Particular products or product lines may not be available to us, or available in quantities sufficient to meet our customer demand. A substantial decrease in the availability of these products or product lines could result in a decrease in our sales, operating results and earnings as we might not be able to satisfy our customer’s product needs. Such reduced product availability could put us at a competitive disadvantage.

We rely on our IT systems to manage numerous aspects of our business and customer and supplier relationships and a disruption of these systems could adversely affect our business.

     Our IT system is an integral part of our business and growth strategies, and a serious disruption of our IT system could significantly limit our ability to manage and operate our business efficiently which in turn could cause our business and competitive position to suffer and cause our results of operations to be reduced. We depend on our IT system to process orders, track credit risk and manage inventory and accounts receivable collections. Our system also allows us to efficiently purchase products from our suppliers and ship products to our customers on a timely basis, maintain cost-effective operations and provide superior service to our customers. While we have contingency plans in place in case of an emergency, we cannot assure you that the plans will allow us to continue to operate at our current level of efficiency.

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Our sales are predominately on credit and an inability to collect trade account receivables on a timely basis would reduce our operating results and cash flow and cause our financial condition to deteriorate.

     Substantially all of our net sales are credit sales made primarily to contractors, whose ability to pay depends in part on the economic strength of the construction industry in their areas, or municipalities, whose ability to pay depends in part on their local waterworks-related and tax revenues. Future downturns in the regional or local economies that we serve, including reductions in the revenue base of municipalities or the weak financial performance of our customers, could lessen our ability to collect trade accounts receivable on a timely basis and in turn cause our results of operations and cash flow to be reduced and our financial condition to deteriorate.

The development of alternatives to water and wastewater transmission products distributors in the supply chain could cause a decrease in our sales and operating results and limit our ability to grow our business.

     Our customers could begin purchasing more of their product needs directly from manufacturers, which could result in decreases in our sales and earnings. Our suppliers could invest in infrastructure to expand their own local sales force and sell more products directly to our customers. In addition, the continued development of the Internet, e-businesses and other alternatives may allow customers to purchase directly from manufacturers or other suppliers. Multiple municipalities may outsource their entire waterworks systems to a single company, thereby increasing such company’s leverage in the marketplace and its ability to buy directly from suppliers. Any future disintermediation from these or other causes may harm our competitive position in the water and wastewater transmission products marketplace and reduce our sales and earnings.

Loss of third-party transportation providers upon whom we depend could increase our costs and cause a disruption in our operations.

     We depend upon third-party transportation providers for delivery of products to our branches, and, to a lesser extent, to our customers. Strikes, slowdowns, transportation disruptions or other conditions in the transportation industry, particularly those impacting United Parcel Service of America, Inc., could increase our costs and disrupt our operations and our ability to service our customers on a timely basis.

Our compliance with environmental and safety requirements may result in increased costs to operate our business.

     We are subject to federal, state and local environmental and occupational health and safety laws and regulations. We cannot assure you that we have been or will be at all times in complete compliance with all such requirements. These requirements are complex and have tended to become more stringent over time. We could become subject to new requirements in the future, or otherwise become subject to environmental liabilities, which could result in increased operating costs resulting in a material effect on our operating results and business.

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We may become subject to asbestos liabilities in the future to the extent we are found to be a successor to U.S. Filter and to the extent U.S. Filter, United States Filter Corporation and Veolia are unable to fulfill their contractual obligations, in which event our financial condition and earnings would deteriorate to the extent we are required to satisfy these asbestos liabilities.

     We could become subject to asbestos liabilities in the future to the extent we are found to be a successor to U.S. Filter and to the extent U.S. Filter, United States Filter Corporation and Veolia are unable to fulfill their contractual obligations as described below. Certain of U.S. Filter’s predecessors distributed or may have distributed cement pipe containing asbestos. Certain of these predecessors are or have been defendants in lawsuits seeking to recover damages for alleged exposure to asbestos in these pipes. The Acquisition was structured as an asset purchase, and we did not assume any existing or future asbestos-related liabilities relating to U.S. Filter or its predecessors. U.S. Filter and United States Filter Corporation retained these liabilities and jointly and severally agreed to indemnify and defend us from and against these liabilities on an unlimited basis with no termination date. In addition, Veolia has guaranteed all obligations of United States Filter Corporation and U.S. Filter under the asset purchase agreement, including the indemnity discussed above, up to an aggregate of $50.0 million for a period ending November 22, 2017. Historically, courts have not held the acquirer of an entity’s assets liable for liabilities that are not assumed as part of the transaction unless the asset buyer is found to be a “successor” to the asset seller.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to certain market risks as part of our on-going business operations. Primary exposure includes changes in interest rates as borrowings under our senior credit facility which bears interest at floating rates based on the London InterBank Offered Rate or the prime rate, in each case plus an applicable borrowing margin. We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally do not affect the fair market value but do impact our earnings and cash flows, assuming other factors are held constant. As of December 31, 2003, we had $200 million principal amount of fixed-rate debt represented by our 10.50% Senior Subordinated Notes due 2012 and $240 million of floating-rate debt represented by borrowings under the term loan portion of the senior credit facility. In addition, up to $75 million of floating rate borrowings are available under the revolving credit portion of the senior credit facility. Based on the amounts outstanding under the term loans, an immediate increase of one percentage point in the applicable interest rate would cause an increase in interest expense of approximately $2.4 million on an annual basis. We may use derivative financial instruments, where appropriate, to manage our interest rate risks. However, as a matter of policy, we will not enter into derivative or other financial investments for trading or speculative purposes. All of our sales are denominated in U.S. dollars; thus our financial results are not subject to foreign currency exchange risks or weak economic conditions in foreign markets.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NATIONAL WATERWORKS, INC.

U.S. FILTER DISTRIBUTION GROUP, INC. AND SUBSIDIARY

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors
National Waterworks, Inc.:

     We have audited the accompanying balance sheets of National Waterworks, Inc. (Successor), a wholly owned subsidiary of National Waterworks Holdings, Inc., as of December 31, 2003 and 2002, and the related statements of operations, stockholder’s equity, and cash flows for the year ended December 31, 2003 and the period of November 22, 2002 through December 31, 2002. We have also audited the accompanying consolidated statements of operations, stockholder’s equity and cash flows of U.S. Filter Distribution Group, Inc. (Predecessor) and subsidiary, a wholly owned subsidiary of United States Filter Corporation, for the period of January 1, 2002 through November 21, 2002 and year ended December 31, 2001. These financial statements are the responsibility of the management of National Waterworks, Inc. and U.S. Filter Distribution Group, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Waterworks, Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the year ended December 31, 2003 and the period of November 22, 2002 through December 31, 2002, and the results of U.S. Filter Distribution Group, Inc. operations and their cash flows for the period of January 1, 2002 through November 21, 2002 and year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 2 to the financial statements, U.S. Filter Distribution Group, Inc. changed its method of accounting for goodwill in 2002.

/s/ KPMG LLP

February 11, 2004
(except note 17 as to which the date is March 2, 2004)
St. Louis, Missouri

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BALANCE SHEETS

See accompanying notes to financial statements.

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STATEMENTS OF OPERATIONS

See accompanying notes to financial statements

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STATEMENTS OF STOCKHOLDER’S EQUITY

See accompanying notes to financial statements.

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STATEMENTS OF CASH FLOWS

See accompanying notes to financial statements.

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NOTES TO FINANCIAL STATEMENTS

NATIONAL WATERWORKS, INC.
As of December 31, 2003 and 2002 and for
the year ended December 31, 2003 and the
period of November 22, 2002 through December 31, 2002

U.S. FILTER DISTRIBUTION GROUP, INC. AND SUBSIDIARY
For the period of January 1, 2002 through November 21, 2002 and
for the year ended December 31, 2001

(1)

Description of Business

     National Waterworks, Inc. (“NWW”, “Company”, or “Successor”), a wholly owned subsidiary of National Waterworks Holdings, Inc. (“Parent”), was incorporated in September 2002 for the purpose of acquiring substantially all of the assets and assuming certain obligations of U.S. Filter Distribution Group, Inc. (“USFDG”, “Predecessor” or the “Group”), a wholly owned subsidiary of United States Filter Corporation (“U.S. Filter”), which is an indirect-wholly owned subsidiary of Veolia Environnement (“Veolia”, formerly Vivendi Environnement S.A.). The acquisition was consummated on November 22, 2002, (see note 3). NWW is a distributor of water and wastewater transmission products including pipe, fittings, valves, meters, service and repair products, fire hydrants and other components that are used to transport clean water and wastewater between reservoirs and treatment plants and residential and commercial locations. NWW has 133 branch locations operating in 35 states. Principal customers served are in the contractor and municipal markets in the United States. Prior to the acquisition, USFDG conducted such business activities.

     As a result of the NWW acquisition, the balance sheets as of December 31, 2003 and 2002, and the statements of operations, stockholder’s equity and cash flows for the year ended December 31, 2003 and for the period from November 22, 2002 through December 31, 2002 represent NWW’s financial position and the results of its operations and cash flows as of those dates and for those periods. The statements of operations, stockholder’s equity and cash flows for the period of January 1, 2002 through November 21, 2002 and for the year ended December 31, 2001 represent USFDG’s consolidated results of their operations and cash flows for those periods.

(2)

Summary of Significant Accounting Policies

(a)

Principles of Consolidation and Basis of Presentation

     The financial statements of USFDG include the financial statements of USFDG and its wholly owned subsidiary, United States Filter Receivables Corporation (“USFRC”), collectively the Group. USFRC was incorporated in 2001 in the state of Delaware. All significant intercompany balances and transactions have been eliminated in consolidation. NWW has no subsidiaries.

(b)

Cash Equivalents

     All highly liquid investments with maturities at date of purchase of three months or less are considered to be cash equivalents.

(c)

Inventories

     Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method for all inventories.

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(d)

Property and Equipment

     Property and equipment are stated at cost. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets as follows:

     Maintenance and repair costs are charged to expense as incurred. Additions, renewals and improvements are capitalized. Upon the sale or retirement of an asset, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized.

(e)

Impairment of Long-Lived Assets Other than Goodwill

     Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or other changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from the asset’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

(f)

Income Taxes

     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

     NWW files a consolidated return with its parent. For the purpose of the financial statements of NWW presented herein, NWW provides for income taxes as if it was a taxable entity filing a separate return.

     The Group filed as part of U.S. Filter’s consolidated Federal income tax return. U.S. Filter implemented certain tax planning strategies and the related impact is not reflected in these separate financial statements of the Group. For the purpose of the consolidated financial statements presented herein, the Group provided for income taxes as if it were a taxable entity filing a separate return.

(g)

Segments of an Enterprise and Related Information

     Management has implemented the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosure about Segments of an Enterprise and Related Information. Management has determined the six geographic regions, to which substantially all income and expenses are allocated for purposes of allocating resources by the chief operating decision maker, meet all of the aggregation criteria of SFAS No. 131, including similar economic characteristics. Accordingly, there is one reportable segment.

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     Products include pipe, fire hydrants, meters, valves, fittings and other complementary products for waterworks construction and maintenance/repair. The following table sets forth net sales by product category (in thousands):

     All revenues are derived from customers domiciled in the United States and there are no long-lived assets located outside of the United States, and no single customer, as defined in SFAS No. 131, represents ten percent or more of revenues for any period presented.

(h)

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

(i)

Revenue Recognition

     Revenue on sales is recognized when products are shipped and the customer takes ownership and assumes risk of loss. Shipping and handling costs incurred are included as a component of cost of goods sold.

(j)

Goodwill

     Goodwill represents the excess of the purchase price for an acquired business over the allocated fair value of the related net assets. Through 2001, goodwill was amortized on a straight-line basis over a 40-year life. The carrying value of goodwill was reviewed for impairment at the enterprise level, in connection with impaired long-lived assets, whenever events or changes in circumstances indicated that the carrying amount of the acquired assets may not be recoverable. If the sum of the estimated future cash flows (undiscounted) expected to result from the use and eventual disposition of an asset was less than the carrying amount of the asset, an impairment loss was recognized. Measurement of an impairment loss was based on the fair value of the asset. For enterprise level goodwill, fair value was determined using a discounted cash flows approach.

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with the SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. On July 1, 2001, the Group adopted the provisions of SFAS No. 141 and certain provisions of SFAS No. 142 as required for goodwill and intangible assets resulting from business combinations after June 30, 2001, which had no effect on the Group’s

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consolidated financial statements.

     The Group adopted the remaining provisions of SFAS No. 142 as of January 1, 2002 and no longer amortized goodwill related to business combinations consummated before July 1, 2001. As of the date of adoption, the Group had unamortized goodwill in the amount of $933.4 million, all of which was subject to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill that will no longer be amortized was $25.0 million for the year ended December 31, 2001. As described in Note 4, an impairment loss of approximately $459.0 million was recognized under the transitional provisions of SFAS No. 142 as of January 1, 2002.

     Effective with the acquisition of the Group, the Company adopted the provisions of SFAS No. 141 and No. 142. In accordance with SFAS No. 142, the Company reviews goodwill for impairment annually at the beginning of the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

(k)

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities that have legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 as of January 1, 2003 did not have a significant impact on our financial condition or results of operations.

     In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for disposal activities initiated after December 31, 2002. This Statement nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to the date of the commitment of an exit plan. The adoption of SFAS No. 146 as of January 1, 2003 did not have a significant impact on our financial condition or results of operations.

     In November 2002, the EITF reached consensus on Issue 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. The consensus was reached that cash consideration received by a customer from a vendor is presumed to be a reduction of the prices of the vendor’s products or services and should be treated as a reduction of cost of sales when recognized in the customer’s income statement. This presumption can be overcome if the consideration can be shown to represent either a payment for assets or services delivered to the vendor or a reimbursement of costs incurred by the reseller to sell the vendor’s products. It also reached consensus on when a customer should recognize a rebate or refund that is payable only if the customer completes a specified level of purchases. Recognition should occur when the rebate or refund is probable and reasonably estimable and should be based on a systematic and rational method. The Company has historically accounted for such consideration as a reduction of cost of sales when the vendor rebate is probable and reasonably estimable and based on a systematic and rational allocation of the cash consideration to be received. The Company estimated the adoption of this EITF increased net income by $1.4 million for the year ended December 31, 2003.

     In January 2003, the FASB issued Statement SFAS No.148, Accounting for Stock-Based Compensation — Transition and Disclosure. This statement amends FASB SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The adoption of SFAS 148 had no impact on the Company’s financial statements.

     In April 2003 the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative

42

instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. In general, SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. As the Company does not currently have any derivative financials instruments, the adoption of SFAS No. 149 had no impact on the Company’s financial statements.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As the Company does not have any of these financial instruments, the adoption of SFAS No. 150 had no impact on the Company’s financial statements.

(3)

Acquisitions and Divestitures

     On November 22, 2002, NWW acquired substantially all of the assets and certain liabilities of the Group. The acquisition was accounted for as a business combination under SFAS No. 141 and as a taxable transaction for federal and state income tax purposes.

     The aggregate purchase price, prior to post-closing purchase price adjustments, was $643.8 million. In addition, NWW incurred $15.3 million in financing fees of which $12.8 million was capitalized as deferred financing fees and $2.5 million expensed as interest expense. During 2003, the Company recorded additional deferred financing fees of $8.9 million which were initially considered direct costs of the acquisition. These fees will be amortized over the remaining life of the related debt.

     The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed as of the date of acquisition (in thousands):

     The goodwill acquired is deductible for income tax purposes.

     Current assets includes a $13.0 million inventory valuation adjustment pursuant to SFAS No. 141 of which $4.0 million and $9.0 million has been recognized as an increase in cost of goods sold for the year ended December 31, 2003 and the period of November 22, 2002 through December 31, 2002, respectively.

     The acquisition agreement provided for a post-closing purchase price adjustment based on working capital at the closing date. The purchase price adjustment was finalized and resulted in an additional cash payment of $3.1 million paid in the first quarter of 2003. The $3.1 million payment was recorded as an adjustment to goodwill.

     The pro forma results of operations for 2002 (in thousands) as though the business combination had been completed as of January 1, 2002 would have resulted in revenue of $1,153,018 and net income of $25,259.

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On March 29, 2002 the Group acquired substantially all of the assets and certain liabilities of Utility Piping Systems, Inc. for an aggregate purchase price of $19.6 million. This acquisition was accounted for by the purchase method, and accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair values as of the date of acquisition. The allocation of purchase price resulted in approximately $14.3 million of goodwill acquired.

     On May 31, 2001, the Group acquired substantially all of the assets and certain liabilities of Utility Supply Division of North American Pipe Corporation (NAPCO) for an aggregate purchase price of $2.7 million. This acquisition was accounted for by the purchase method, and accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair values as of the date of acquisition. The allocation of purchase price resulted in approximately $0.4 million of goodwill acquired, which was being amortized over 40 years through January 1, 2002, the date of the adoption of SFAS No. 142.

     As these acquisitions are immaterial to the Group’s consolidated financial statements, pro forma results of operations are not presented.

     On January 1, 2001, the Group sold certain assets and liabilities acquired in 1997 for an aggregate sale price of $3.7 million. The carrying values of the assets divested, including goodwill, and liabilities disposed were approximately $4.1 million and $0.4 million, respectively.

(4)

Goodwill

     The changes in the carrying amount of goodwill for the year ended December 31, 2003 are as follows (in thousands):

     During 2003, the Company recorded additional deferred financing fees of $8.9 million that will be amortized over the remaining life of the related debt. Also, additional deferred tax assets of $3.9 million were recorded based on management’s best estimate of the acquired assets that will ultimately be accepted by the taxing authorities.

     Effective with the acquisition of the Group, the Company adopted the provisions of SFAS No. 142 which requires goodwill be tested for impairment on an annual basis at the reporting unit level. The Company identified and assigned goodwill to its six reporting units as described in note 2. As part of this review, a third party independent appraiser assessed the fair value of the reporting units utilizing a combination of discounted cash flows and market approaches. The Company reviewed goodwill for impairment at the beginning of fourth quarter 2003. Based on the results of the impairment test, the Company determined there was no impairment of goodwill to any of the reporting units.

     In accordance with SFAS No. 142, the Group completed the transition assessment of whether there was an indication that goodwill was impaired at January 1, 2002 and concluded that it was probable that goodwill assigned to its reporting units was impaired. The fair value of the Group’s reporting units was estimated using, among other factors, the sales price included in the sale agreement by U.S. Filter and USFDG to sell substantially all of the Group’s assets, net of certain liabilities, for a cash purchase price of $620.0 million. The Group’s management

44

estimated an impairment loss of approximately $459.0 million. The goodwill impairment was reported as a cumulative effect of a change in accounting principle.

     Amortization expense related to goodwill was $25.0 million for the year ended December 31, 2001. The following table reconciles previously reported net income as if the provision of SFAS No. 142 were in effect in 2001 (in thousands):

(5)

Allocations and Other Services

     The Group participated in certain services provided by U.S. Filter as described below:

(a)

Cash Management

     Prior to November 2002, the Group participated in U.S. Filter’s centralized cash management system and, as such, the Group’s cash funding requirements including interest and tax obligations were met by U.S. Filter, and cash received by the Group was transferred to U.S. Filter on a daily basis.

(b)

Allocations

     The statements of operations for the period of January 1, 2002 through November 21, 2002 and year ended December 31, 2001 include all direct costs of the Group as well as certain corporate costs directly identified with the Group and allocated to the Group by U.S. Filter. The Group was allocated $45.1 million and $52.0 million for the period of January 1, 2002 through November 21, 2002 and year ended December 31, 2001, respectively. Allocated costs included general liability insurance, worker’s compensation insurance, employee health and dental insurance, 401(k) plan matching expense, legal fees, income taxes, and certain other costs. These costs were allocated to the Group based on information specifically identified with the activities of the Group and were settled through intercompany transactions. In the opinion of Group’s management, these allocations were made on a basis which is believed to be reasonable for the Group as it operated within the structure of a larger parent organization. However, the allocations are not necessarily indicative of the level of expenses which might have been incurred by the Group if it had operated as a stand-alone entity.

(6)

Property and Equipment

     Property and equipment consists of the following (in thousands):

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(7)

Leases

     NWW has certain noncancelable operating leases primarily for transportation equipment and office space. These leases generally contain automatic renewal options until terminated by either party and require the lessee to pay all executory costs such as maintenance and insurance. Rental expense for operating leases was $14.6 million, $1.2 million, $12.6 million, and $13.5 million for the year ended December 31, 2003, the period of November 22, 2002 through December 31, 2002, the period of January 1, 2002 through November 21, 2002, and year ended December 31, 2001, respectively.

     Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2003 are (in thousands):

(8)

Long-Term Debt

     Long-term debt at December 31, 2003 consists of the following (in thousands):