UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

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 þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 þ

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

     The aggregate value of the common stock held by non-affiliates of the registrant as of June 30, 2004 (based upon the book value per share of the common stock) was $0.00.

     As of March 2, 2005, the registrant had 100 shares of common stock outstanding.

     Documents Incorporated by Reference: None

NATIONAL WATERWORKS, INC.

FORM 10-K

TABLE OF CONTENTS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

     This report contains forward-looking statements such as statements regarding our future growth and profitability, growth strategy and trends in the industry in which we operate. Forward-looking statements are only predictions and are not guarantees of performance, and include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” or similar expressions. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions, including the factors set forth under the caption “Risk Factors” in Item 7 of this report, many of which are beyond our control. We believe our forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on our current assumptions and expectations. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

ITEM 1. BUSINESS

General

     We are a leading distributor of water and wastewater transmission products in the United States. We distribute a full line of products including pipe, fittings, valves, meters, fire hydrants, service and repair products and other components that are used to transport clean water and wastewater between reservoirs and treatment plants and residential and commercial locations. 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 135 branches in 36 states, we sell directly to municipalities and to contractors who serve municipalities and also perform residential, commercial and industrial waterworks projects. In addition to significant customer and geographic diversification, we estimate that our net sales are divided approximately evenly between publicly-funded and privately-funded projects.

     In 2004, we purchased products from approximately 3,500 suppliers and sold to over 26,000 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, expertise and infrastructure (including a large, local sales force) to service the broad customer base directly. Additionally, 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 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 2004, over 80% of our purchases

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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 and new branch openings, as well as through selected strategic acquisitions. Since the beginning of 2000, we have opened or acquired 16 new branches, while closing or consolidating 21 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 have expanded our branch network, we have 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 16 to 30 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.

     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 our managers’ strong industry and local expertise, they are empowered to manage their own customer relationships, sales force and 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 pricing guidelines and working capital management;
	•	support our branches with services such as IT, credit, human resources, finance, accounting and legal;
	•	negotiate preferred vendor purchasing programs;
	•	provide tools that support value-added customer services;
	•	provide training and operational support; and
	•	help branches meet their goals by transferring best practices and providing other management assistance.

     Branch Operations. A branch’s organization varies depending on its size. Our branches averaged over $11 million of net sales in 2004. 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 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 36% of our net sales in 2004. 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, fire hydrants and service and repair products. We also offer other complementary products for waterworks construction and maintenance/repair. Typically, our gross margin percentages on pipe products are lower than our gross margin percentages for other product lines.

     Pipe. Piping products are our primary waterworks product and generate the greatest portion of our net sales, approximately 44% in 2004. 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 (PVC), ductile iron, copper, polyethylene and high-density polyethylene (HDPE). PVC and ductile iron are the most commonly used types of pipe 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. In 2004, fittings accounted for 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 2004, valves accounted for approximately 11% of our net sales.

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Besides an array of standard valves, we also distribute backflow preventers, which primarily prevent reverse flow of liquid in the water system.

     Meters and Fire Hydrants. In 2004, meters and fire hydrants accounted for approximately 8% and 6% of our net sales, respectively. 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. Fire hydrants are critical to firefighting activities and the protection of public safety.

     Service and Repair Products. Our service and repair products include water cut-off devices, clamps, and other products. In 2004, these products accounted for approximately 6% of our net sales. Local availability and timely delivery of these products are critical to meeting customer needs because many of these products are used for emergency repairs.

     Other Products. We offer other complementary products that are necessary for water and wastewater systems or allow us to be a full product supplier to our customers. These products accounted for approximately 10% of our net sales in 2004. 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:

	•	reducing their inventory cost;
	•	expediting the completion of the project through the timely and coordinated delivery of the necessary waterworks products; and
	•	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 media (on-line, fax, email, electronic data interchange 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. These sectors are affected by different macroeconomic variables, which we believe reduces our exposure to adverse conditions in any particular sector. In 2004, we served approximately 9,000 municipal customers and 17,500 contractor and industrial/other customers. During 2004, over 80% of our net sales were to customers who purchased products from us in each of the last three years. We have established long-term relationships with the majority of our customers, but no single customer accounted for more than 1% of our net sales during 2004. Additionally, the largest of our regions accounted for approximately 22% of our net sales during 2004.

Suppliers and Preferred Vendor Programs

     We purchase products from approximately 3,500 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 and purchase from both national suppliers and local or regional suppliers, which allows our branch managers to customize their product offering for their local markets. Our largest supplier accounted for approximately $168 million, or 13%, of product purchases in 2004. 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, more reliable deliveries and better purchasing terms. Our preferred vendor programs typically include volume purchase incentives and other benefits, including cash discounts and extended payment terms. Approximately 130 of our suppliers have attained preferred vendor status and we continue to establish or enhance these relationships with new and existing suppliers. In 2004, we purchased over 80% of our products from these preferred vendors.

Marketing and Sales

     We have over 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 low turnover rates 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 who 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 additional depth to our customer relationships and a pool of talent for future outside sales representatives.

     Accounts Receivable. We proactively manage our accounts receivable with customers. We maintain detailed, up-to-date credit history and receivables information on over 26,000 customers and conduct extensive credit checks on new

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customers. Since the beginning of 2002, on average, less than 8% of accounts receivable have been outstanding more 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 for 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 branches operate within credit guidelines. 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.

Management Information Systems

     Our IT system is critical to our success and we believe it provides us an important competitive advantage. We have developed a single infrastructure that integrates our customer service, management, operational and financial functions in a reliable, flexible and user-friendly 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:

	•	access product pricing and availability and place orders, including using their own product numbers which are automatically converted to our product numbers;
	•	access order information (including status, delivery schedule and past invoices);
	•	release products for delivery;
	•	access account-specific catalogs, including account-specific pricing and past preferences; and
	•	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:

	•	integrate price-supported product databases into a contractor’s estimating system;
	•	provide access to our own estimating system; or
	•	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, a customer 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:

	•	nationwide and local real-time control of pricing for sales and purchases, including for individual customers;
	•	the ability to monitor individual customer profitability and accounts receivable, including preset credit limits;
	•	better inventory management and sharing across branches;
	•	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 is used to generate management reports that track key metrics for each region, branch and customer. This 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 we test our preparedness and contingency plan yearly. Such measures include automatic re-establishment of a branch’s connection to the system if the connection 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 22% of our 2004 net sales, and is susceptible to price fluctuations. Our purchase price of PVC pipe averaged $0.54, $0.41 and $0.36 per pound for the years ended December 31, 2004, 2003 and 2002 (combined), respectively.

     We believe that we take minimal raw material price risk, based on our high inventory turns, sales shipped directly from manufacturers to customers, our 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, 2004, we had approximately 1,500 employees, of which approximately 225 were in managerial positions, 275 were in sales positions and 1,000 were in warehouse/delivery and general administrative positions. Eleven of our employees at three branches were unionized pursuant to collective bargaining agreements that expire in December 2006 and July 2009. We believe that we have good relationships with our employees and experience 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.

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.

     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 waste. We are currently not aware of circumstances where a

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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, 2004, 69 lawsuits remained outstanding. Total defense and settlement costs paid in these settled actions through December 31, 2004 by U.S. Filter have been approximately $2.8 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 through 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.

Available Information

Our Internet website address is www.nationalwaterworks.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.

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ITEM 2. PROPERTIES

We lease 107 of our branch facilities and own the remaining 28. Our branch 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     There is no established trading market for our common stock. As of March 2, 2005, one hundred percent of our stock was held by our parent, National Waterworks Holdings, Inc. (“Holdings”). In 2004 and 2003, we paid dividends aggregating $31.4 million and $39.3 million, respectively, in respect of our outstanding common stock.

     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:

•

National Waterworks as of December 31, 2004, 2003 and 2002, for the years ended December 31, 2004 and 2003, and for the period from November 22, 2002 to December 31, 2002. This information was derived from our audited financial statements; and

•

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

     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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(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.

(3) 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.

(4) 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 (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. 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. (“U.S. Filter”)) 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, 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.

     We generate revenue by distributing a full line of products including pipe, fittings, valves, meters, fire hydrants, service and repair products and other components that are used to transport clean water and wastewater between reservoirs and treatment plants and residential and commercial locations. 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 135 branches in 36 states, we sell to municipalities and to contractors who serve municipalities and also perform residential, commercial and industrial waterworks projects. In addition to significant customer and geographic diversification, our 2004 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 2004 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 2004, our cash and cash equivalents decreased $2.8 million. This change resulted primarily from the generation of $61.4 million in cash flow from operating activities, offset by $31.4 million of dividend payments, $30.0 million of principal payments on our long-term borrowings, $2.0 million of acquisition costs related to the purchase of Midstate Utility Supply, Inc. and $0.8 million of net capital expenditures.

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Factors Affecting Our Business

     PVC Pipe Pricing. The price of PVC pipe is volatile due to supply and demand dynamics in the PVC pipe and PVC resin markets. Volatility in these markets can cause fluctuations in our revenues and related gross profit dollars. PVC pipe products accounted for approximately 22% and 21% of our net sales for the years ended December 31, 2004 and 2003, respectively. Our purchase price of PVC pipe averaged $0.54, $0.41 and $0.36 per pound for the years ended December 31, 2004, 2003 and 2002 (combined), respectively, with our 2004 PVC purchase price ranging from a quarterly average of $0.46 to $0.58 per pound. In periods of higher PVC pipe pricing, assuming constant sales volumes, our net sales of PVC pipe would be higher as the same volume of pipe sales generates higher revenue. Conversely, in periods of lower PVC pipe prices, assuming constant sales volumes, our net sales of PVC pipe would be lower as the same volume of PVC pipe sales generates lower revenue. We may also experience a decline in the volume of PVC pipe sales, with an offsetting increase in the volume of ductile iron pipe sales, in periods of higher PVC pipe pricing and stable ductile iron pipe pricing, as our customers can substitute ductile iron pipe for PVC pipe in certain applications. PVC pipe accounts for approximately one-half of our pipe sales. As a result of this interchangeability, pricing of ductile iron pipe tends to move in the same direction as the pricing of PVC pipe but in a less volatile fashion. Consequently, we can experience a change in product mix between PVC pipe and ductile iron pipe as the prices of these products fluctuate.

     The impact of PVC pipe pricing also impacts our gross profit dollars. Historically, excluding competitive forces, we generally have been able to maintain our gross profit percentage on a given volume of PVC pipe sales, even when PVC pipe prices have fluctuated, as we have been able to pass through a majority of the increase or decrease in PVC pipe prices to our customers. Further, the impact of PVC price changes is minimized because we sell the majority of our PVC pipe utilizing direct shipments from suppliers and target and achieve high turnover for PVC pipe sales out of our inventory.

     Demand Fluctuations. Our sales are also affected by regional and local changes in commercial and residential construction activity and the level of municipal waterworks spending. The level of activity in the commercial construction market depends on the general economic outlook, corporate profitability, interest rates and existing plant capacity utilization. The level of activity in the residential construction market depends on new housing starts, which are influenced by interest rates, availability of financing, housing affordability, unemployment rates, demographic trends, gross domestic product and consumer confidence. Changing economic conditions in our markets could affect the level of construction activity and, consequently, our net sales. In addition, water and wastewater transmission products sales are subject to the level of waterworks spending by municipalities. We believe municipal spending is a function of the amount of repair and improvements required for existing systems, which are functions of the age of the infrastructure, weather and construction-related damage, the level of maintenance spending, the water infrastructure needs of the municipality relative to other spending needs and the availability of municipal, state or Federal funds for waterworks projects.

     Seasonality. Given the seasonal nature of construction activity in many regions of the United States, our results of operations and working capital, including our accounts receivable, inventory and accounts payable, fluctuate during the year. We believe that our significant operations in more mild southern climates moderate the impact of our seasonality. Historically, consistent with annual construction seasonality, our net sales are typically higher during our second and third quarters as compared to the first and fourth quarters. In addition, we typically generate cash from a reduction in net working capital in the fourth quarter of each year and utilize cash from operations to fund increases in net working capital in the first and second quarter of each year.

     Other important factors that could affect our results of operations are set forth elsewhere in this Item 7.

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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 generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our 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. Our senior management team 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. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the financial statements.

     Allowance for Doubtful Accounts. Since the beginning of 2002, 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 creditworthiness. 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 2002, 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 carrying value of our inventory is adjusted monthly based on a review of slow moving inventories, as well as other factors such as adjustments from physical inventory counts. Significant unusual events are accounted for as a reduction of the carrying value of our inventory when appropriate. To the extent future events impact the salability of our products, additional adjustments to the carrying value of our inventory may be required.

     Goodwill and Long-Lived Assets. We review the carrying value of our goodwill for impairment at least annually by comparing the estimated fair value of each of our six reporting units to its carrying value. If the carrying value of a reporting unit exceeds its estimated fair value, 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.

     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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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, 2002 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. Upon completion of the Acquisition, we recorded goodwill of $465.7 million, which was reduced by $9.6 million during 2003 as a result of post-

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closing purchase price adjustments. 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, 2004 Compared to Year Ended December 31, 2003

Net Sales. Net sales for the year ended December 31, 2004 increased $241.0 million, or 18.8%, to $1,522.1 million from $1,281.1 million for the year ended December 31, 2003. The increase reflects the combined effects of a $10.5 million increase in net sales from our acquisition of Midstate Utility Supply, Inc., a regional waterworks distribution company operating in Oklahoma, which we acquired on February 9, 2004, and a $230.5 million increase in net sales of our historical operations. A portion of the increase was attributable to a $76.5 million increase in net sales of PVC pipe, primarily resulting from the pass through of higher PVC pipe prices in 2004 and, to a lesser extent, increased sales volume. The remaining increase resulted primarily from the pass through of price increases on most of our other major product lines and increased volume due to continued favorable economic conditions.

Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2004 increased $199.5 million, or 19.7%, to $1,212.6 million from $1,013.1 million for the year ended December 31, 2003. 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 $71.9 million and increased volume in all other product categories. Additionally the increase reflects the effect of an $8.9 million increase in cost of goods sold associated with sales resulting from our acquisition of Midstate Utility Supply, Inc. As a percentage of net sales, cost of goods sold increased to 79.7% in 2004 compared to 79.1% in 2003.

Gross Profit. As a result of the foregoing, gross profit for the year ended December 31, 2004 increased $41.5 million, or 15.5%, to $309.5 million from $268.0 million for the year ended December 31, 2003. Our gross profit margin decreased to 20.3% in 2004 compared to 20.9% in 2003 as a result of the foregoing factors.

Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2004 increased $19.3 million, or 11.5%, to $186.5 million from $167.2 million for the year ended December 31, 2003. This increase is primarily related to the sales volume increases discussed above and $1.1 million of additional expenses resulting from our acquisition of Midstate Utility Supply, Inc. As a percentage of net sales, selling, general and administrative expenses were 12.2% in 2004 compared to 13.1% in 2003.

Depreciation and Amortization. Depreciation and amortization expenses for the year ended December 31, 2004 were $2.4 million, compared to $2.6 million for the year ended December 31, 2003. Depreciation includes depreciation of property and equipment.

Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2004 increased $22.4 million, or 22.8%, to $120.7 million from $98.3 million for the year ended December 31, 2003. As a percentage of net sales, operating income increased to 8.0% in 2004 compared to 7.6% in 2003.

Interest Expense, Net. Interest expense, net for the year ended December 31, 2004, was $35.1 million, compared to $41.3 million for the year ended December 31, 2003. The decrease resulted primarily from more favorable interest rates on our term loan in 2004, as compared to 2003, additional interest expense recorded in 2003 related to two amendments to our senior credit facility and reductions in the principal balance of our term loan throughout 2003 and 2004.

Income Taxes. Our effective income tax rate for the year ended December 31, 2004 was approximately 40.4% compared to 40.9% for the year ended December 31, 2003.

Net Income (Loss). As a result of the foregoing, net income for the year ended December 31, 2004 increased $17.6 million to $51.2 million compared to $33.6 million for the year ended December 31, 2003.

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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 cost 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, 2002 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 $128.1 million, or 11.1%, to $1,281.1 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 $122.1 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 $99.3 million, or 10.9%, to $1,013.1 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 79.1% 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. The increase 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 20.9% 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 on Accounts Receivable Securitization. Loss on 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. Concurrent with the Acquisition, 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 and equipment.

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 7.6% in 2003 from 6.8% in 2002.

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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.

Liquidity and Capital Resources

     Net working capital is comprised of current assets, excluding cash and cash equivalents, minus current liabilities. We had net working capital of $125.1 million at December 31, 2004 compared to net working capital of $115.2 million at December 31, 2003. The increase in net working capital is primarily attributable to increased working capital requirements from higher sales volume in the fourth quarter of 2004 compared to 2003.

     Net cash provided by operating activities for the years ended December 31, 2004, 2003 and 2002 (combined) was $61.4 million, $37.0 million and $95.3 million, respectively. The change in net cash provided by operating activities in 2004 compared to 2003 was primarily attributable to a $17.6 million increase in net income and a $72.5 million greater increase in trade accounts payable and other accrued expenses in 2004 as compared to 2003, partially offset by a $23.8 million greater increase in trade accounts receivable and a $36.1 million greater increase in inventory in 2004 as compared to 2003. 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 greater decrease in cash flows from trade accounts receivable and trade accounts payable and accrued expenses, respectively.

     Net cash used in investing activities for the years ended December 31, 2004, 2003 and 2002 (combined) was $2.8 million, $4.4 million and $664.0 million, respectively. Net cash used in investing activities for the year ended December 31, 2004 included the $2.0 million acquisition of Midstate Utility Supply, Inc., $1.4 million of capital expenditures and $0.6 million of proceeds from sales of property and equipment. Net cash used in investing activities for the year ended December 31, 2003 included the post-closing purchase price adjustment of $3.2 million paid to United States Filter Corporation related to the level of our working capital at the time of closing of the Acquisition, $2.0 million of capital expenditures and $0.8 million of proceeds from sales of property and equipment. Net cash used in investing activities for the year ended December 31, 2002 (combined) included the cash purchase price of the Acquisition of $643.8 million, the $19.6 million acquisition of Utility Piping Systems, Inc., capital expenditures of $1.5 million and proceeds from sales of property and equipment of $0.9 million.

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     Net cash provided by (used in) financing activities for the years ended December 31, 2004, 2003 and 2002 (combined), was ($61.4) million, ($53.8) million and $600.6 million, respectively. Net cash used in financing activities in 2004 reflects dividend distributions of $31.4 million to our parent, National Waterworks Holdings, Inc. (“Holdings”), $15.0 million in principal payments on our term loan and a $15.0 million optional prepayment of our term loan. Net cash used in financing activities in 2003 reflects dividend distributions of $39.3 million to Holdings and $10.0 million in principal payments on the term loan. 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 net proceeds of $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, 2002 to November 21, 2002.

     On October 29, 2004, Holdings issued $250.0 million of unsecured senior notes for the purpose of returning capital to its existing equity holders. These notes, which bear interest at 12.5%, mature January 1, 2014 and provide for quarterly interest payments with payment in kind provisions, as defined in the underlying indenture, at Holdings’ option. In connection therewith, we executed a Third Amendment to our senior credit facility on October 26, 2004. This amendment, among other things, provides for reduced pricing on the term loan and increases the amount of limited dividends and distributions we can pay to Holdings. Though not obligated to do so, we anticipate paying such dividends and distributions to Holdings to service the interest payments on its senior subordinated notes. The reduced pricing included a reduction in the applicable margin of the term loan with a step-down provision upon our achieving certain financial ratios. Based on the satisfaction of certain financial covenants and ratios and other conditions, the aggregate amount of dividends that can be paid to Holdings refreshed to an aggregate of $125.0 million on January 1, 2005. The $40.0 million per-fiscal-year restriction, with the provision that any amount not paid in the fiscal year for which it is permitted may be carried over to any succeeding fiscal year, remains unchanged.

     In October 2004, we amended our senior credit facility in connection with the issuance by Holdings of $250.0 million of senior subordinated notes, the proceeds of which were used to return capital to its existing equity holders. This amendment, among other things, provides for reduced pricing on the term loan facility and increases the amount of limited dividends and distributions we can pay to Holdings. Though not obligated to do so, we may pay such dividends and distributions to Holdings to service the interest payments on its senior subordinated notes. The reduced pricing included a reduction in the applicable margin of the term loan facility with a step-down provision upon our achieving certain financial ratios. Based on the satisfaction of certain financial covenants and ratios and other conditions, the aggregate amount of dividends that can be paid to Holdings refreshed to an aggregate of $125.0 million on January 1, 2005. The $40.0 million per-fiscal-year restriction, with the provision that any amount not paid in the fiscal year for which it is permitted may be carried over to any succeeding fiscal year, remains unchanged.

     Our senior credit facility, as amended, consists of a $250.0 million term loan facility, of which $210.0 million was outstanding at December 31, 2004 and a $75.0 million revolving credit facility. No amount was outstanding under the revolving credit facility at December 31, 2004, but approximately $4.4 million of the availability under the revolving credit 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, we are required to make annual mandatory prepayments of the term loan 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 loan is 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, 2004 and 2003, the interest rate on the term loan was 5.06% and 3.92% 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 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

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substantially increased our liquidity requirements. We may, from time to time, purchase senior subordinated notes in the open market or in 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, 2004. 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.

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Contractual Obligations

Contractual obligations at December 31, 2004 are summarized as follows (dollars in thousands):

Recent Accounting Pronouncements

See Note 2 in “Item 8. Financial Statements and Supplementary Data” for a full description of recent accounting pronouncements, including expected dates of adoption and the anticipated effects on our 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, which may cause 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 have. 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 customers’ 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 2002, 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.

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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 agreements and compensation arrangements with our senior executives, including Harry Hornish as President and Chief Executive Officer, Philip Keipp as Vice President and Chief Financial Officer and Terry Howell as Chief Information Officer, designed to encourage their retention. However, we do not have employment agreements with every member of the senior management team. 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, which could cause 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 could adversely impact our operating results.

     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. 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 have an adverse impact on our results of operations.

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

     Our 10 largest suppliers in 2004 accounted for approximately 61% 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 customers’ 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. 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

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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.

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, could 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.

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

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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 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, 2004, we had $200 million principal amount of fixed rate debt represented by our 10.50% Senior Subordinated Notes due 2012 and $210 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 loan, an immediate increase of one percentage point in the applicable interest rate would cause an increase in interest expense of approximately $2.1 million per year. 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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Report of Independent Registered Public Accounting Firm

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, 2004 and 2003, and the related statements of operations, stockholder’s equity and cash flows for the years then ended 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. In connection with our audits of these financial statements, we also have audited financial statement schedule II listed in the Table of Contents at Item 15. These financial statements and financial statement schedule 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 and financial statement schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its operations and its cash flows for the years then ended 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, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

     As discussed in Note 4 to the financial statements, U.S. Filter Distribution Group, Inc. changed its method of accounting for goodwill in 2002.

/s/ KPMG LLP

February 23, 2005
St. Louis, Missouri

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National Waterworks, Inc.

The accompanying notes are an integral part of these financial statements.

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Statements of Operations
(in thousands)

The accompanying notes are an integral part of these financial statements.

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Statements of Stockholder’s Equity
(in thousands, except share information)

The accompanying notes are an integral part of these financial statements.

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Statements of Cash Flows
(in thousands)

The accompanying notes are an integral part of these financial statements.

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NOTES TO FINANCIAL STATEMENTS

NATIONAL WATERWORKS, INC.
As of December 31, 2004 and 2003 and for
the years ended December 31, 2004 and 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

(1) Description of Business

     National Waterworks, Inc. (“NWW” or “Successor”), a wholly owned subsidiary of National Waterworks Holdings, Inc. (“Holdings”), 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” or “Predecessor”), a wholly owned subsidiary of United States Filter Corporation (“USFC”), 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 (sewer) transmission products including pipe, fittings, valves, meters, fire hydrants, service and repair products and other components that are used to transport clean water and wastewater between reservoirs and treatment plants and residential and commercial locations. 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, 2004 and 2003, and the statements of operations, stockholder’s equity and cash flows for the years ended December 31, 2004 and 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 represent USFDG’s consolidated results of operations and cash flows for that period.

(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”). 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. The weighted average cost method is used to determine cost 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 using the straight-line method over the estimated useful lives of the assets as follows:

     Depreciation expense related to leasehold improvements generally is recorded over the remaining life of the lease. 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 using 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 Holdings. For the purpose of these financial statements, NWW provides for income taxes as if it were a taxable entity filing a separate return.

     USFDG filed as part of USFC’s consolidated Federal income tax return. USFC implemented certain tax planning strategies and the related impact is not reflected in these separate financial statements of USFDG. For the purpose of the consolidated financial statements presented herein, USFDG 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 that NWW’s 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, fittings, valves, meters, fire hydrants, service and repair products 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. 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.

(j) Shipping and Handling Costs

     Shipping and handling costs billed to customers are included in net sales. Shipping and handling costs associated with outbound freight are included in cost of goods sold.

(k) Goodwill

     Goodwill represents the excess of the purchase price of acquired businesses over the allocated fair value of the related net assets. NWW 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.

(l) Stock Compensation

     NWW follows SFAS No. 123, Accounting for Stock-Based Compensation, which establishes a fair value-based method of accounting for stock-based compensation plans. In accordance with SFAS No. 123, the fair value of stock-based compensation is recorded as compensation expense over the vesting or performance period with a corresponding increase to additional paid-in capital.

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(m) Recent Accounting Pronouncements

     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. NWW has historically accounted for such consideration as a reduction of cost of goods sold when the vendor rebate is probable and reasonably estimable and based on a systematic and rational allocation of the cash consideration to be received. NWW estimated the adoption of this EITF increased net income by $1.4 million for the year ended December 31, 2003.

     In November 2004, the FASB issued SFAS No. 151, Inventory Costs — An amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. NWW plans to adopt SFAS No. 151 on January 1, 2006. The adoption of SFAS No. 151 is not expected to have a significant impact on NWW’s financial statements.

     In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” Previously, Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. NWW plans to adopt SFAS No. 153 on July 1, 2005. The adoption of SFAS No. 153 is not expected to have a significant impact on NWW’s financial statements.

     In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment: an Amendment of FASB Statements No. 123 and 95 (SFAS No. 123R). SFAS No. 123R requires the recognition in the income statement of the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective for most public companies’ interim or annual periods beginning after June 15, 2005. NWW plans to adopt SFAS No. 123R prospectively on July 1, 2005. The adoption of SFAS No. 123R is not expected to have a significant impact on NWW’s financial statements.

(n) Reclassifications

     Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net income (loss) for any of the periods presented.

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(3) Acquisitions and Divestitures

     On February 9, 2004, NWW acquired substantially all of the assets and certain liabilities of Midstate Utility Supply, Inc. for an aggregate purchase price of approximately $2.0 million. This acquisition was accounted for as a purchase under SFAS No. 141, Business Combinations. 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 the purchase price resulted in the recognition of approximately $1.1 million of goodwill. As this acquisition is immaterial to the financial statements, pro forma results of operations are not presented.

     On November 22, 2002, NWW acquired substantially all of the assets and certain liabilities of USFDG. 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, NWW 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 was 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.

     On March 29, 2002, USFDG 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. As this acquisition is immaterial to USFDG’s consolidated financial statements, pro forma results of operations are not presented.

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(4) Goodwill

     The changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2003, are as follows (in thousands):

     During 2003, NWW 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 USFDG, NWW adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, which requires goodwill be tested for impairment on an annual basis at the reporting unit level. NWW identified and assigned goodwill to its six reporting units as described in note 2. NWW reviewed goodwill for impairment at the beginning of fourth quarter 2004 and 2003. Based on the results of these impairment tests, NWW determined there was no impairment of goodwill to any of the reporting units.

     In accordance with SFAS No. 142, effective January 1, 2002, USFDG completed the transition assessment of whether there was an indication that goodwill was impaired and concluded that it was probable that goodwill assigned to its reporting units was impaired. The fair value of USFDG’s reporting units was estimated using, among other factors, the sales price included in the sale agreement by USFC and USFDG to sell substantially all of USFDG’s assets, net of certain liabilities, for a cash purchase price of $620.0 million. USFDG’s management estimated an impairment loss of approximately $459.0 million. The goodwill impairment loss was reported as a cumulative effect of a change in accounting principle.

(5) Allocations and Other Services

     USFDG participated in certain services provided by USFC, as described below:

(a) Cash Management

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

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(b) Allocations

     The statement of operations for the period of January 1, 2002 through November 21, 2002 includes all direct costs of USFDG as well as $45.1 million of corporate costs allocated by USFC. Allocated costs include general liability insurance, workers’ compensation insurance, employee health and dental insurance, 401(k) plan matching contributions, legal fees, income taxes and certain other costs. In the opinion of management, these allocations were made on a basis believed to be reasonable based on USFDG operating 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 USFDG if it had operated as a stand-alone entity.

(6) Property and Equipment

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

(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 $15.6 million and $14.6 million for years ended December 31, 2004 and 2003, respectively, and $1.2 million and $12.6 million for the period of November 22, 2002 through December 31, 2002 and the period of January 1, 2002 through November 21, 2002, respectively.

     Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2004 are (in thousands):

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(8) Long-Term Debt

     Long-term debt at December 31, 2004 and 2003 consists of the following (in thousands):

     In November 2002, NWW issued $200.0 million principal amount of 10.5% Senior Subordinated Notes pursuant to Rule 144A of the Securities Act of 1933. Before December 1, 2005, 35% of the Senior Subordinated Notes can be redeemed with net cash proceeds of certain equity offerings at a redemption price of 110.50%. In addition, prior to December 1, 2007, all or a portion of the notes may be redeemed at a price equal to 100% of the principal amount plus a make whole premium. On or after December 1 of the years indicated, NWW may redeem the notes at the following redemption prices (expressed in percentages): 105.25% in 2007, 103.50% in 2008, 101.75% in 2009, and 100% in 2010 and thereafter.

     In November 2002, NWW entered into a financing agreement with a syndicate of lenders under which NWW borrowed $250.0 million under a term loan bearing an interest rate of LIBOR (floor of 2.5%) plus 4.0% or alternatively Prime plus 3.0%. The spread decreases upon attaining certain financial targets and ratios. The financing agreement allows for additional revolver borrowings through November 22, 2008 in the amount of $75.0 million. The revolver had an interest rate of LIBOR (floor 2.5%) plus 3% or alternatively Prime plus 2%. NWW has the option to elect 30, 60, 90, or 180 day interest periods and must pay an annual commitment fee of 1/2 of 1% on the unused portion of the commitment. The spread and commitment fee decrease based on attaining certain financial targets and ratios. The agreement allows NWW to utilize up to $35.0 million of the $75.0 million revolver borrowings for letters of credit, bearing an interest rate of 3% and upfront fees of .25%. NWW utilized $4.4 million and $3.8 million of the revolver borrowings to cover outstanding letters of credit at December 31, 2004 and 2003, respectively. The $75.0 million revolver capacity was reduced accordingly at these dates.

     In August 2003, NWW amended the 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 LIBOR rate and Prime rate term loan under the refinanced facility. In addition, the minimum LIBOR rate of 2.50% for the term loan that existed prior to the amendment was removed. The amendment also permits NWW 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. The remaining financing fees were charged to interest expense.

     In December 2003, NWW executed a Second Amendment to the senior credit facility in connection with a dividend paid to the shareholders of Holdings. The amendment permits NWW to pay a dividend to Holdings from time to time, contingent upon meeting certain financial covenants and ratios. In addition, the aggregate amount of

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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, provided 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, NWW paid approximately $2.3 million in financing fees which were charged to interest expense.

     The financing agreement and the indenture related to the senior subordinated notes contain various covenants including limitations on additional indebtedness, restricted payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition, the financing agreement requires NWW to satisfy certain financial covenants, including leverage and interest coverage ratios and capital expenditure limitations. NWW was in compliance with all of the covenants of the financing agreement and the indenture at December 31, 2004 and 2003.

     The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2004 are (in thousands):

     In addition, NWW is required to repay the term loan under the financing agreement in an amount equal to 75% of excess cash flow (as defined in the financing agreement) each fiscal year and with 100% of the net proceeds of certain asset dispositions and debt issuances and 75% of the net proceeds of certain equity issuances. The prepayment percentages with respect to excess cash flow and equity issuances were reduced to 50% after December 31, 2003 based on NWW’s attainment of certain financial ratios. NWW made an optional prepayment of $15.0 million in December 2004 related to the year ended December 31, 2004. NWW was not required to make an excess cash flow payment for the year ended December 31, 2003.

     On October 29, 2004, Holdings issued $250.0 million of unsecured senior notes for the purpose of returning capital to its existing equity holders. These notes, which bear interest at 12.5%, mature January 1, 2014 and provide for quarterly interest payments with payment in kind provisions, as defined in the underlying indenture, at Holdings’ option. In connection therewith, NWW executed a Third Amendment to its senior credit facility on October 26, 2004. This amendment, among other things, provides for reduced pricing on the term loan and increases the amount of limited dividends and distributions that may be paid to Holdings. Though not obligated to do so, NWW anticipates paying such dividends and distributions to Holdings to service the interest payments on its senior subordinated notes. The reduced pricing includes a reduction in the applicable margin of the term loan with a step-down provision upon NWW achieving certain financial ratios. Based on the satisfaction of certain financial covenants and ratios and other conditions, the aggregate amount of dividends that can be paid to Holdings refreshed to an aggregate of $125.0 million on January 1, 2005. The $40.0 million per-fiscal-year restriction, with the provision that any amount not paid in the fiscal year for which it is permitted may be carried over to any succeeding fiscal year, remains unchanged.

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(9) Income Taxes

     Income tax expense (benefit) attributable to income (loss) from continuing operations for each of the periods presented consists of the following (in thousands):